Interim 2013 ITV plc Earnings Presentation
Jul 30, 2013 AM EDT
ITV.L - ITV PLC
Interim 2013 ITV plc Earnings Presentation
Jul 30, 2013 / 07:30AM GMT
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Corporate Participants
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* Archie Norman
ITV plc - Chairman
* Adam Crozier
ITV plc - Chief Executive
* Ian Griffiths
ITV plc - Finance Director
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Conference Call Participants
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* Laurie Davison
Deutsche Bank - Analyst
* Filippo lo Franco
JPMorgan - Analyst
* Ian Whittaker
Liberum Capital - Analyst
* Adrien de Saint-Hilaire
Exane BNP Paribas - Analyst
* Tom Singlehurst
Citigroup - Analyst
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Presentation
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Archie Norman, ITV plc - Chairman [1]
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Right, good morning, everybody. Slightly, the ranks seem to be slightly thinner today than perhaps in previous periods. That hopefully reflects the fact that the results are very much on track. And I think the one thing you'll see today in -- you'll see in Adam's presentation is the changing shape of ITV. There's probably more color on that than we've seen before. But look, it is a little bit earlier than usual. I apologize for that. And of course it's now in August.
We would like to keep the presentation and the questions reasonably brisk. I know you've all got other things to do. That may prove to be an aspiration too far, but we'll see. Adam's going to introduce it, Ian is going to go through the results in detail, and then we'll take briefly some questions and answers.
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Adam Crozier, ITV plc - Chief Executive [2]
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Thanks, Archie. Morning, everyone. Thank you, as Archie said, for taking the time to join us this morning.
I thought, as is traditional with ITV presentations, just to get everyone in the mood, we might show you a short video of some of the great programs that have driven our performance so far this year and some things to look forward to later in the year, given just how central programs are to our strategy at ITV. So if we could run the tape, that would be terrific. Thank you.
(Video playing).
Good. Right, here we are. The agenda for today, as Archie said, I'm going to just introduce things and go through some of the financial highlights for the year. Ian is then going to take us through those results in detail, and then I'll come back and do a strategic and operating review as well as giving you a bit of an outlook for the rest of the year.
Just worth saying very quickly, we're in the middle of the fourth year of the Transformation Plan, as you know, and we remain committed to our strategy. It's delivering real sustainable improvements in operational performance and results. And the four consistent priorities that we've had from the start of the plan remain, and really the focus for us is on executing and delivering those priorities.
You'll have seen from our announcements earlier today that executing that strategy continues to deliver strong results and a rebalancing of ITV. External revenues up 1% to GBP1.144b, despite the expected 3% fall in advertising.
Advertising in quarter one, for those who are interested, as you know, was plus 5% in quarter two, at minus 11%, and in quarter three, which we'll talk about more a bit later, plus 9%. So broadly flat, actually, across the first nine months of the year, very much as you know we anticipated. We talked a lot earlier in the year about it being a mirror image of last year and about the market being broadly flat.
Non-NAR revenues, though, strongly up, 11% or GBP54m to GBP568m, very much driven by Online, Pay and Interactive and strong growth in ITV Studios.
And revenue growth, alongside very strong cost management, has driven profit growth at all levels of the business, whilst of course we continue to invest behind our strategic priorities. So, Studios revenues up very strongly, 26% to GBP63m. Broadcast side, despite that fall in advertising, up 7% to GBP228m, and the Group up 11% to GBP291m. And strong growth at the adjusted profit before tax level, and of course flowing through into adjusted EPS, up 15% to 5.3p.
And the Board have proposed an interim dividend of 1.1p, which is up 38%, roughly one-third of the dividend for the year and certainly reflects the Board's confidence in our ongoing growth and cash generation. And we will continue to balance the need to invest for future growth with capital discipline.
If I was summing up the first-half performance, before Ian gets into the detail, I think the key points for me are first of all that we have an improving onscreen performance. ITV Family share of viewing and ITV Family SOCI are both up 1%, and obviously we have easier comparators of the third quarter still to come from last year.
Revenue growth and double-digit profit growth in what is still, has been today a tough advertising market, which again shows the benefit of rebalancing the business, which is a key part of our strategy.
In terms of that rebalancing, strong growth, as I said, in Online, Pay and Interactive, where we've had 19% revenue growth. Building our production strength and scale organically and through acquisitions. 11% revenue growth in ITV Studios. The organic growth there was about 5% in there and if you remember, that's against very tough first-half comparators. Last year our first-half organic growth was 34% and we managed to grow a further 5% on that, so a strong performance there from ITV Studios. And our non-NAR revenue at the half-year was about 43% of total revenue, which compares to around 40% at the same period last year.
We've very much got improving margins across Broadcast and Studios. The Broadcast margin has gone up from 23% to 25%, Studios margin from 14% to 16%. We're getting higher margins, obviously, coming though on our Online, Pay and Interactive part of Broadcast, and we've got the benefits of owning the IP on the content that travels around the world as opposed to being a production house for hire. So, very strong margins on Studios. And of course, overall cost control throughout the Company, where we are on track to deliver the GBP20m of savings that we identified earlier in the year.
Cash Ian will talk quite a bit about, but I think it's fair to say the business now understands how to consistently manage cash right across the business. Again, very strong profit to cash conversion in the first half, around 100%. And indeed our free cash flow was up 22%, so a very good performance there. And we continue to work to improve the efficiency of the balance sheet and to reduce interest costs.
And finally, on the interim dividend, as I mentioned earlier, up 38%. And again, just for the avoidance of doubt, the Board remains committed to a progressive dividend policy.
So I'm now going to ask Ian to go through the 2013 results for the first half in some detail, and then I'll come back and take you through a strategic and operating review. Thank you.
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Ian Griffiths, ITV plc - Finance Director [3]
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Thanks, Adam. Good morning, everyone.
As you've just heard, the highlights show another strong set of results. Top line growth again driven by non-advertising revenues. Continued improvement in margins through tight cost control. Double-digit profit growth, EBITA, PBT and EPS. And strong profit to cash conversion and increased return to shareholders through the improved ordinary dividend.
In terms of revenue, we've delivered growth in external revenues despite a 3% decline in advertising. This shows the benefits of a more balanced business. Studios is again a key driver of our growth, up 11%. This is a combination of good organic performance and the acquisitions coming through as planned. And we continue to deliver strong growth in new revenue streams in Broadcast and Online. More detail in a minute, but this shows the top line can grow even with no help from advertising.
Looking at advertising, previously we've talked about advertising being volatile, both month to month and across key categories. But when it's all added up, it's always been broadly flat. Arguably, as the chart shows, little has changed. The monthly variations still remain. If anything, they're exacerbated by the timing of the sporting events. So even though we're down 3% for the first six months, we're now expecting to be broadly flat by the end of September.
This is very much how we expected the shape of the year to come through. It was likely to be a mirror image of 2012. To date, we think we're slightly behind the overall TV market, but we expect this gap to close due to the strength of the autumn schedule and the share deals we've done.
By category, we continue to see growth in highly competitive or technology led sectors. Some key categories are showing little year-on-year change, but there are bigger variations by subcategory; for example, in retail where the big supermarkets are spending slightly more, the high street and fashion retailers a bit less. Finance and autos are largely male targeted and suffer when compared to last year's Euro comps. Some of this, especially in autos, has come back in Q3.
Travel and leisure remains a strong category, in particular the interactive adverts around sports. Telecoms has been a bit weak, but again it seems the mobile and platform operators have phased spend into Q3. The publishing and broadcasting increase is mainly around the launch of new product such as Sky Now.
In summary, there's been no major change in the underlying advertising market trends and the year is turning out broadly as we expected.
Looking at non-advertising revenues, they continue to grow strongly as we rebalance the business. 43% of total revenue is now non-NAR, compared to 40% last year. The 11% growth includes a GBP24m contribution from our Studios acquisitions, GBP8m in the UK, all off ITV, GBP16m international. This revenue from the acquisitions is mainly So in the UK and Gurney in the US.
The recent deals, The Garden, High Noon, Thinkfactory and Big Talk, which we completed last week, will add to the second half, so that over the full year we expect the acquisitions to add around GBP100m of new revenue, roughly GBP30m in the UK, all off ITV, and GBP70m internationally, mainly the US.
The organic growth of Studios was good, 5%, which compares to 34% delivered last year when program deliveries were very first-half weighted. The outlook on Studios, where we have over 90% of target 2013 revenue committed, gives us confidence that this good organic growth will continue and the acquisitions will come through to plan.
In addition, our new revenues in Broadcast continue to grow strongly. Online, Pay and Interactive revenues are up GBP9m or 19%. Online is growing strongly, driven by continued growth in video views, up 17%, and the high demand from advertisers is seeing the CPM being maintained at around GBP25.
VoD viewing is moving away from the PC, and the growth is now coming from mobile and the Player being available on more platforms such as Samsung, YouView and Sky. Our Pay revenues are up largely due to the new deal with Virgin. And our new direct-to-consumer revenues, including premieres and the new ad-free app, are making encouraging progress but remain relatively small.
Our other Broadcast revenues are also showing good increases, not least sponsorship and brand extension revenues. Our deal with Morrisons around Saturday Night Takeaway and tour ticket sales in the Big Reunion are new revenues we were not previously exploiting. And because these new revenues are often contractually committed, we have a high degree of confidence they'll continue to show good growth for the full year.
In profit terms, we've delivered GBP291m of adjusted EBITA, up 11%, with margins improving by 2% to 25%. The fast-growing, high-margin non-NAR revenues are converting nicely into increased profit. There are some timing benefits from the phasing investments, which will be more H2 weighted, and there are also some one-off benefits from operational savings in Online and not having the Pay Player launch costs we had last year. We've delivered GBP12m of cost savings and remain on track for the full-year target of GBP20m.
The other profit movements relate to NAR and program spend. The GBP24m red bar represents the 3% decline in NAR discussed earlier. Offsetting this, the NPB program spend is lower than last year by GBP17m. This is a combination of no euros and some of our sports rights savings coming through, being partially offset by reinvestment into the schedule.
We have GBP22m or 9% more spend on drama and entertainment on the main channel and GBP7m investment in new content for ITV2, such as Plebs, Magaluf Weekender and the Big Reunion, all of which has helped the improved viewing performance, the main channel being flat year on year and with growth for the overall family. So with a continued upside from new revenue streams and tight cost controls, there's good conversion of revenue to increased profits and improved margins.
Quickly looking at the divisions, the Broadcast summary is simple; advertising down 3%, strong growth from the high-margin new revenue streams, coupled with tight cost control on overheads and the NPB, so profits are up 7% to GBP228m, margins improving by 2% to 25%. Another set of results where we're growing profit with no help from advertising.
Looking at Studios, all parts of the business have started the year well and the acquisitions are enhancing the growth and so far delivering to plan. UK productions are up 12%, mainly through increased supply to ITV. Organic UK revenues are up 7% and the growth is in key genre. We made 10 hours more drama for ITV and nearly 20 hours more entertainment. Key dramas include Mr. Selfridge, Marple and Poirot. And in entertainment we delivered the new Saturday Night Takeaway and more episodes of the increasingly popular The Chase. Off ITV revenues increased, helped by the So acquisition. Channel Four cancelled The Coach Trip, but this was offset by new revenues from the Graham Norton Show.
Our international revenues are up 16%, benefiting from the Gurney acquisition. The US did continue to grow organically -- it's up 4% -- despite losing daytime hours on Kyle and Bill Cunningham. This growth and a good performance in Germany has helped offset the loss of some key shows in Australia. GE, our distribution business, delivered 3% revenue growth, largely due to Mr. Selfridge.
Overall, the continued focus on production efficiencies and some phasing of development into H2 has helped deliver the improved margin. This has been a good performance by ITV Studios. And as I said, the outlook for the rest of the year is for continued strong growth.
And back to the Group level, this all adds up to a strong set of results and 11% growth in EBITA. Interest costs are GBP11m lower, due to the various bond buybacks we've done. This year, we've repaid some of the 2019 loan and bought back 25% of the convertible. If there are opportunities to further improve the balance sheet, we'll consider them if we think they are a good use of our cash.
Adjusted PBT is GBP270m, up 16%. And with tax at 23%, similar to last year, the net effect is a 15% increase in adjusted EPS to 5.3p. There's a 10% increase in statutory EPS, which is lower than the adjusted numbers, primarily due to the GBP44m loss on bond buybacks. This earnings performance and confidence in future cash and growth in the future has led to the Board increasing ordinary dividend to 1.1p, up 38%. We'd expect the interim to be roughly a third of the full-year dividend.
It's worth noting that all prior-year numbers have been restated for changes to pension accounting under IAS 19R. The adjusted prior-year numbers are impacted by the grand sum of GBP2m, to reflect last year's first-half costs of pension administration. It'll be GBP7m on a full-year basis.
Moving on, our cash generation remains strong, 100% profit to cash conversion for the six months and just under that on a rolling full-year basis. Managing working capital remains the priority. As the chart shows, this strong cash flow has been invested. GBP100m of cash has been used to reduce expensive debt. There's GBP80m of pension deficit funding. We pay all of this in the first half. GBP227m of dividends, returning cash to shareholders. GBP58m invested in acquiring our London premises. And GBP54m for an investment in our international content acquisitions.
These deals all have contingent consideration or earn-outs based on the future performance. To reach the maximum payout, which is a further GBP175m on the acquisitions done to date, the businesses have to continue to deliver really strong growth. These additional payments will impact future years' cash flows, so we treat the potential payment as if it were debt.
And looking at the balance sheet, even after all this investment, we do continue to have a strong balance sheet and remain highly cash generative. Our free cash flow, i.e. after tax, interest and pensions, is up 22% to GBP164m. Adjusted net debt of GBP1.1b, including pensions, lease commitments and future acquisition consideration, is around 2 times EBITDA, slightly higher than yearend but still very manageable.
It's also worth noting that the acquisition of our London site reduced our lease commitments by over GBP80m. There are no material debt repayments due in the coming years. And our cash payments to the pension scheme, spread over the next 10 to 15 years, were agreed with the trustees last year.
The pension deficit has come down to GBP476m, from GBP551m at the yearend. This is mainly a result of the cash deficit payments we've made. Discount rates have improved slightly, which helps, but this has been offset by higher inflation.
All of this means that financially we remain in a healthy position, which continues to be reflected in our improved credit rating. We're now investment grade with two out of the three agencies.
Finally, just to update the planning assumptions for the rest of the year, the key message is that what we said earlier in the year holds true today. The NPB will be as previously discussed, around GBP980m. Cost savings are on track for GBP20m. Investment may be slightly lower than GBP20m, but it's only slightly. There are savings on the interest line from the various debt buybacks. The full-year interest cost will be around GBP27m to GBP28m, a saving of GBP7m on previous guidance and GBP16m on last year. The tax rate will be within our planning range of 22% to 24%. CapEx is on track and the interim dividend will be roughly a third of the full year.
So, in summary, things are going to plan and we've delivered a set of results that put us in good shape for the rest of the year.
Thank you. Hand you back to Adam.
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Adam Crozier, ITV plc - Chief Executive [4]
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Thanks, Ian. So I'd just like to spend a few minutes giving you an update and some color, if you like, behind our operational performance in the last six months, also, I think, this morning, a bit more of a feel for and understanding of the reshaping and the growth within ITV Studios itself, particularly given the M&A activity over the last 12 months and also, as I said before, give you a view on the outlook for the remainder of the year.
So the strategy, as we said, remains in place. If we look at the first priority, relentless focus on cost efficiency, and we keep -- on a daily, weekly basis, look to simplify our operating structures and to drive out complexity. We continue to do that. I had a couple of questions from people this morning, the GBP20m savings we identified always did include the regional news savings that we'll be able to make following Ofcom's recent approval. So that will allow us to get on with those changes later this year. Strong performance on cash conversion, cash generation, as Ian said.
Very much still focusing on driving value from our integrated producer/broadcaster model. It's great that we are able to showcase our great ITV Studios content on our channels and platforms. That allows us to create the track record to sell them around the world. Clearly that helps improve ITV Studios' margins, as we own the IP that travels as opposed to producing other people's programs. Owning IP also maximizes the higher revenues in Online and Interactive and Pay for the Broadcast business, because it means less pay aways to third parties on fewer programs, so that helps there. And we continue to work to build value.
Improving creative, commercial and management talent. We continue to bring good people into the business and to develop the great people that we have. The rebrand was a big deal for us in January this year. The emphasis was very much on putting ITV at the heart of popular culture, building a modern media brand that can really connect with viewers and customers. We rolled out a new identity for all our channels, our entire online estate and all our production businesses in the UK and the US literally on one day in January, very successfully. And there's certainly been, in the brand health tracking that we do with YouGov, a real significant change in the way the ITV brand is seen, and I think that's a very positive thing for us.
Looking to priority two, maximizing audience and revenue share from our existing business. I think the first thing to say, it's also worth starting with, is that there are very strong fundamentals that continue to underpin our free-to-air business. Viewing is stabilized at around four hours a day. In fact, people are watching 27 minutes more television today than they did 10 years ago, so if anything people are watching more television.
Catch-up viewing is around the 10% level. Video on demand, which you hear a lot of hype about, is about 1.2% viewing. And actually, the truth is that catch-up and video on demand with things like connected TVs, the lines between the two really are blurring a bit. They're becoming the same thing over time, and indeed the rate of growth of those seems to be slowing a bit. And television advertising as a percentage of total advertising, in 2010 it was 27.5%; in 2012 it was 28%. So television advertising itself is also standing up pretty well. So good, strong fundamentals.
We've got an increasingly, as I hope you saw from the tape there, strong and rich schedule on our channels, some great dramas like Broadchurch and Selfridge and Endeavor and Foyle's War. Lots of new entertainment, which as you know we were a little bit behind on last year, Saturday Night Takeaway, Splash, Britain's Got Talent, Catchphrase, Champions League, news and soaps all performing well. And the good thing about all those programs that I mentioned that have driven the great performance is they're all returning programs for next year as well, so it gives us a strength as we go forwards.
ITV 2 and 3, not just the two biggest digital channels but actually still our digital channels are growing well with share of viewing up over 4%.
I think very importantly, we've improved our share of viewing and SOCI performance. The ITV main channel at the half-year was flat. Actually, it's positive today but it was flat at the half-year. And the family share of viewing and SOCI were both up 1%.
Just to give you a feel for other broadcasters, the BBC family of channels was down 2%, the Channel Four family of channels down 2%, actually, Channel Four itself down 12%, Channel Five family down 3%, UK TV family down 3%, Sky flat to marginally positive. So, actually, from a competitive point of view, we really have improved our position. And obviously we do have those Olympic comparators and Paralympic comparators to come, which give us a weaker look at last year and therefore hopefully a positive view this year.
Advertising, I know -- just to talk about fragmentation, rather, first of all. We now account for around 99.8% of all commercial programs, over 5m viewers. Actually, what that really means is that there was one program on one other broadcaster that delivered over 5m. So, really, increasingly we are the scale player in this market. And actually, if you go down to even 3m viewers, we're over 96% of all programs over 3m viewers, so a really strong position in the market.
Advertising, we were down in the first half, as we fully expected, and I think trailed quite openly, around 3%. Quarter three will be up around 9%. Just to break that down for you a little bit, July plus 12%, August plus 20%, and September is still a little bit early but looking broadly flat. And although we were behind, as Ian said, the market in the first half, again we fully expected that because of the football tournament moving and the money shifting last year from the third quarter to the second. Of course, we've got the opposite happening this year and we're catching up that position fast.
Quarter three driven, as Ian said, by cars, by telecoms, government, believe it or not, food, supermarkets, publishing and broadcasting. So, actually, it's a whole range of clients spending more in that period, rather than I think has been the speculation about it being entirely just driven by various things happening in telecoms and broadcasting.
Then lastly, we have been maximizing the value of our airtime through sponsorship, interactivity and brand extensions. Lots of what we would call total value deals going on, which we've spoken about a lot. Morrisons not just sponsoring Takeaway, but there's lots of in-store branding, branded meals being sold, and it did TV ads with Ant and Dec in them, so a real total value proposition there. Big Reunion, two very successful tours sold out. That's a new kind of revenue for us. A deal with Netplay, a three-year deal to provide overnight gaming services on ITV bringing in revenue. And of course all the work we're doing with Shazam and interactive ads for brands such as Ariel, James Bond and Barclaycard. So, lots of interesting things going on in terms of developing those new revenue streams.
Priority three, drive new revenue streams across multiple platforms. We continue to improve the distribution and the quality of ITV Player across 15 platforms now. YouView continues to build momentum. It's the fastest growing TV service in the UK. It's now connected into over 0.5m homes. ITV Player app has now being downloaded more than 9m times, which is a 30% increase year on year. And there's plenty of potential for further deals, margin-enhancing third-party deals, particularly on the Android platform where up until now we've merely been on Samsung. And we'll look to develop that out over a number of other platforms over the next few months.
Long form video requests up 17% to 276m, very much driven by mobile viewing as opposed to PCs and Macs, but also a little bit increasingly by connected TV sets.
Strong on demand from advertisers for online advertising, and that's certainly helped hold up the rates. They're still around GBP25 CPM. And it's important that we keep doing more deals, because we want to increase the inventory that's available to us rather than adding more ads into the inventory that we have. That makes for a better experience for viewers. It also makes for a better experience for advertisers, because it allows them to stand out more.
Pay, we did our new Virgin deal, which means that we now have the HD pay channels on Virgin as well, not just on Sky. Increased catch-up as well. And part of that deal allows us now to carry advertising on Virgin, and indeed we're also now going to have advertising on the catch-up on Sky. Both of those will start in early 2014, initially as stitched in advertising, and probably in around 18 months in terms of dynamic advertising being served as well. The issue is with their technology, as opposed to ours, to enable us to do that. But advertising on those platforms from early 2014.
We continue to develop and trial lots of pay opportunities online. We've been allowing people to rent episodes of full series on PC and Mac on our Pay Player. We've also allowed them to watch premieres in terms of dramas, Scott and Bailey, Plebs, Law and Order, just to see what people are and aren't prepared to pay for. We're trialing ad free subscriptions on Apple, just started a few weeks ago. And over the course of the autumn, we'll also be testing download to own. So at this stage just really testing lots of different things, to see what people are and aren't prepared to pay for.
Still a lot of second screen interactivity and engagement with viewers and advertisers. That's a key area, really, to help us build a database for the future for more targeted opportunities. And overall, as Ian said, really strong growth in Online, Pay and Interactive, with revenues up 19%.
So I'd just like to spend a bit of time looking at the content side and our fourth priority of building a strong international content business. Obviously, we have made really good progress in the first half of the year. And in summary what's there is, first of all, there continues to be really strong demand for high-quality content, and that's both from broadcasters and indeed from new digital platforms.
Obviously, what we're doing is investing heavily in creating a healthy creative pipeline with a particular focus on the genres that travel around the world. ITV Studios, as you know, is delivering strong growth across all three divisions, with profits up 26% to GBP63m.
We're building on that strong organic growth with strategic acquisitions and partnerships, in the UK, The Garden and Big Talk in the first half and the USA High Noon and Thinkfactory. And we're strengthening our international distribution business, both through ITV content and indeed third-party content as well. And just looking at that pipeline, there is some really good stuff coming through the pipeline, both in terms of commissions and recommissions.
And in fact, entertainment, which was a focus for us over the last few months, is now our fastest-growing genre internationally, with entertainment hours up internationally by about 9%. So we've started to get that part of the pipeline moving, which, as you know, was a focus for us.
Some big entertainment shows coming through, like Take on the Twisters, Big Star, Little Star, Stepping Out, Tricked, Pressure Pad for the BBC, some great drama, Breathless, Shetland for the BBC, Psychopath Next Door for Sky, The Widower for ITV, and we're now in productions for the launch of Thunderbirds in 2015, which is a big focus for us.
But what I wanted to do now was just take a look at each of those issues in a little bit more detail, starting with an analysis of the global market and trends, if I can get the machine to work. There we go. So the global market, our estimate of the market is that the global market is worth around $50b. And obviously, as you can see from the top pie chart, the two key creative markets really are the US and the UK in terms of for original programming.
When you look at specifically the US market, clearly, the largest portion of that, 76%, is really made up by the connected major studios, if you like, and around 24% of the market, around $3b, is produced independently from those major studios. And indeed, all of the players, be it independent or indeed the studios themselves, are increasingly looking to work with other partners on co-productions. So Mr. Selfridge, if you like, recently we announced that we're doing that with PBS, and as you know, in the past we've done major dramas with ABC and NBC and others, so a lot of collaboration and co-funding going on behind the scenes as well.
In terms of looking at the key trends within that market, I think, first of all, broadcast markets, as you can see from all the new different politics coming in, are increasingly competitive, and so people want great content to enable them to stand out. Broadcasters continue internationally to want to derisk their schedules by buying programs that have a proven track record.
It's undoubtedly true that some of the big worldwide entertainment brands still dominate, things like Idol and X Factor and Got Talent. And whilst they may have shaded a little bit over the last few years, they're still very important and still have a lot of life left in those.
There's been a massive resurgence of drama and comedy drama internationally, particularly in the US. And what goes alongside that, actually, has been a rise in the demand for reality programs, and that's partly for people balancing out their schedules. Dramas are obviously very expensive, reality shows much more cost effective. And indeed, the sweet spot is if you can have a program like Duck Dynasty that delivers drama-sized audiences but for a reality-sized budget. So that's a fantastic opportunity for broadcasters, when you can get that right.
The pay TV market worldwide is maturing, and what's interesting is that increasingly they want to have their own original programming for their channels, rather than just buying programs from other broadcasters. And the growth in digital platforms is also providing huge opportunities, and indeed they want a lot of archive programming, obviously, but what they also want is what I would call billboard programming, brand-defining programs, as you saw recently with Netflix and House of Cards.
And I think what's interesting is that the digital platforms got there much quicker than the pay operators in realizing that however much archive programming they had, they still needed some channel-defining or brand-defining programming of their own, and again, that's creating increased demand for those kind of programs.
Worth remembering, people always look at the positive of the growth in digital, which of course is terrific. Alongside that there has clearly been a declining DVD market, as people have watched more of those box sets or films or what have you online, rather than the traditional method of buying DVDs itself. And there's no doubt, as I said earlier, the two creative markets have been the UK and the US.
And within this global market, I think we have a very clear strategy, and that is to invest in a strong, healthy creative pipeline in the key creative markets. Our model is that we're not trying to be everywhere. We're trying to really focus on the key creative markets that create IP and therefore allow us to own IP that travels.
So that engine, if you look, right in the center there, is the UK and the US and our distribution arm, GE. We've got some emerging creative markets in the Nordics, which you can all see from your own experience of television, and indeed Israel, where we have a new joint venture with Reshet, where there's a lot of programs starting to come out of Israel, particularly into the US market, and indeed the new venture we set up there already has its first pilot for CBS in the US.
And we're also using, beginning to use, the US as a base into South America, which is an interesting market for us. And then, of course, you have the big local production markets of Germany, France and Australia, where we can earn good margins.
We also operate in Studios, in ITV Studios, a really increasingly variable cost model. The people that we tend to employ permanently are those that are creating the IP, and we increasingly work with freelancers who come in right across the world when we have a commission to make the program, and then we don't carry the cost in between the commissions. And of course, owning IP allows us to reap the benefit of that in terms of margins when those programs flow around the world.
So that gives us a good, strong model that is behind the growth that we have. And it's about developing those hit programs, pushing them out, either to our local production hubs to be remade or sold as finished programs and formats around the world. And where we're now at is we're now able to leverage that increased position in the marketplace.
So we're the number-one commercial producer in the UK, given the creative renewal we've gone through. We are now a top-five independent in the US market, and GE is one of the top-three European distributors. So we've got a good, strong position allied to our integrated producer/broadcaster model that allows us to create those track records for programs, so a strong model and performance there.
As we said earlier, pursuing this strategy has been driving positive momentum and results across ITV Studios and continues to do so. And of course, in this area we have quite strong visibility going forward as well, and it's allowed us to improve our market share. So growth across the piece, from 2010 to 2012, of 29% in terms of revenue, 32% in terms of profit, and you can see on the box on the right how that growth is continuing this year, the UK plus 12%, International plus 16%, GE plus 3%, profits up 26%, and indeed a margin improvement, as Ian said, from 14% to 16%.
Having that strong organic growth has allowed us to be extremely selective when looking at acquisition opportunities to enhance our growth. And we are very clear when we look at opportunities what qualities we are looking for in a partner, and we're also very clear of the value that we can add.
So when we're looking at an acquisition opportunity, just to give you some idea of what we look at, it's are they in one of these key creative markets that's creating the IP as opposed to buying the IP. Not just the strength of the management team, which of course is really important, but the strength of the second tier of the management team, thinking about the future. Are they in the key genres that travel? Importantly, even within that, what is the quality of the program slate and indeed the age of the program slate? Are they at the beginning of their life cycle or the end of their life cycle?
What's the quality of the development pipeline? If you remember, with ITV Studios, when we started, one of the issues was there was no development pipeline to speak of, and therefore it took us a while to wind that back up. Do they own IP? Do they have the potential to generate IP? What's the trajectory and the life stage of the business itself? And then, of course, we apply pretty strict financial criteria.
Of course, what we can add on the flipside is that we have very strong relationships with major broadcasters and platforms all round the world, and that's very helpful for many of the companies that we've been buying. We can add leverage in terms of the commercial deals that we do. We started working with each of them on improving their commercial deals in terms of getting hold of the right talent to appear in programs and the management of that talent, rights ownership and exploitation.
We can invest in their creative development, which of course is very important for growth for the future. And of course, we have a very strong international distribution arm, which almost all of these companies lack, and we can add value in those areas as well, I hope, in terms of overall strength of business management.
So those criteria help us choose who to work with, and equally they've often led us to turn down a number of opportunities, including things like O3 and Nice in Scandinavia.
Moving on, and -- there we go. Applying this criteria has also allowed us, as I said, to create some successful partnerships and acquisitions over the last 12 months or so, and it's allowed us to build our capabilities creatively, strategically and financially.
So in the UK we bought So Television, The Garden and Big Talk, which if you think back to the criteria we set, they very much enhance our key strategic genres that travel. They've got strong brands and very good development pipelines and very good management teams, strong creative reputations and the ability to create global formats. And as Ian said, they've also been very good in the UK for growing our business off ITV. They are almost predominantly working with Channel 4, Sky and the BBC.
In the rest of the world, we had some acquisitions in the Nordics, earlier, as you know, in these emerging creative markets and our partnership in Israel. Each of those businesses with young, exceptionally talented creative people, and they're very much at an early stage of their life cycle and we think that's a good, positive thing for us.
In the US, Gurney, High Noon and Thinkfactory, building strength and scale in the most important market, very strong creative talent with very good program brands, highly demanded by networks and cable companies. And I think it's a rapidly growing -- they're in rapidly growing genres as well, so very positive opportunity there. And as Ian said, we expect the revenue contribution from these acquisitions in 2013 alone to be around GBP100m, about GBP30m of which in the UK and GBP70m in the US.
Because it's so important, just looking at the US specifically for a second, it's the number one creative market. It's been a big focus for us. We had, between 2010 and 2012, very strong organic growth there, about 33% organic growth over that period in the US, and then we've added those three acquisitions in on top.
And to give you a feel for the emerging business in the US, if we pro formaed an estimate, assuming all the acquisitions that were made in 2012 and '13 were actually made on January 1, 2012, it would effectively mean that we've tripled the size of the business since 2010 in terms of revenue. And on the right-hand side there, you can see the impact on the scale of the business in the UK in terms of number of shows, up 540%, number of networks, up 386%, the number of hours, up 655%, so the US business going through quite a transformation there. And effectively it means that we will end up over the next year with around 10% of the independent market, so we're a major top-five player in the US now.
The US acquisitions themselves have been made for a total combined initial cash consideration of GBP64m, with multiples, as you know, ranging from 6 to 8 versus what was predominant in the industry of 10 to 12 a few years ago. I think they're much more realistic prices.
They're all done on structured earn-outs that don't put all our capital at risk on day one. They very much align the incentives for ITV and the management team as the business grows. It also locks in talent by doing it that way. And at the very least, the different deals on all of them, there has to be at least 25%-plus compound annual growth rate for them to even to get close to the cap. So, plenty of encouragement there to grow those businesses over time.
So I hope that gives you a bit of a feel for what we've been doing in ITV Studios, and I'm happy to take any questions on that later.
I just wanted to finish with a quick summary of where we are. I talked earlier about where we were at the half-year, improving onscreen performance. I think we're on track for a positive year this year on that [side]. We've got those easier third-quarter comps and a very, very strong, as you saw on the tape, autumn schedule, lots of familiar, big returning programs.
In terms of advertising, third quarter, we think at the moment our estimate is about plus 9%. Quarter four in 2012, just to remind you, was minus 0.6%, so that's the comparator we have coming up. I think it would be absolutely fair to say, just in terms of the quality comment about the market, that it's panned out pretty much exactly as we expected, that mirror image, as we talked about. You can take your own view of the fourth quarter.
I think there is no doubt that in talking to, as always, around 100 CEOs and marketing directors across any quarter, generally speaking, I think the fear of the downside has largely diluted now. I think you can see in things like the IPA Bellwether survey, which looks at the top 300 companies in the UK, I think that said that people were the most positive that they had been since third quarter 2007. And I think there is also a lot of pressure on companies and increasing pressure on companies to grow the top line, not just profit levels, most of which would normally suggest the need to invest behind brands.
So I think, generally speaking, things are a bit more positive. I would have to say that I don't think that has yet absolutely translated into a different behavior, as Ian said earlier, in the marketplace. I think the change in the third quarter is more to do with the shifting money around the year versus last year, and I think therefore it's a question of when you think the more positive behavior will translate through. But I think we remain cautious, and I think we've been right to be that way so far, but I think undoubtedly it's more positive than it has been over the last three or four years.
I think in terms of further progress in rebalancing ITV, I think we're increasingly well positioned to take advantage of the demand for great content, for high-quality content from broadcasters and platforms, and indeed from the changing consumer behavior. And therefore, I think we do expect to see double-digit revenue growth on both our Studios side and our Online, Pay and Interactive side across the year.
Improving margins at the half-year; we do expect to see improved full year-on-year margins as well. And financially, I think we have increasingly an efficient balance sheet and a robust balance sheet and strong cash flows to support continued investment in growth and indeed shareholder returns.
That was all we wanted to say this morning. Thank you again for your time. And as always, Ian and I are very happy to take any questions that you might have. Thank you very much.
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Questions and Answers
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Archie Norman, ITV plc - Chairman [1]
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Okay. We'll just take a few questions, if we can. Just remind you, if you could just say who you are, and if we could take one question at a time, that would be great. Yes, far away.
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Laurie Davison, Deutsche Bank - Analyst [2]
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Thank you. It's Laurie Davison from Deutsche Bank. First question was just on your organic growth in Studios. You mentioned plus 5% for the first half. What is the actual number on external sales, because clearly that includes presumably some increase in -- or disproportionate increase in ITV internal commissions?
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Ian Griffiths, ITV plc - Finance Director [3]
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We don't look at it that way, Laurie. We look at the whole Studios business all joined up. We've given the UK number, which is up 7%. We gave a very strong steer to the international business of 16% was in mix, because the US is growing strongly, Germany is growing. That's offsetting Australia coming down. And the GE number is all organic. We don't tend to -- when we look at our growth rates, we don't split the internal, external. We don't look at it that way.
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Adam Crozier, ITV plc - Chief Executive [4]
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(Inaudible) I touched on there. If you remember, last year was incredibly front loaded. The first-half growth in Studios was 34%, full-year growth was 16%, so it was very much focused on the first half. So the 5% organic growth on that 34% I think is a very good performance, actually.
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Laurie Davison, Deutsche Bank - Analyst [5]
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Can you give us any steer for what you think that organic growth number would look like for the full year?
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Adam Crozier, ITV plc - Chief Executive [6]
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I think we've given more than enough by giving you the steer on the acquisitions, as well the GBP100m coming from acquisitions across the year. We'd be getting into the detail, effectively giving you a full-year number if we do that as well.
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Laurie Davison, Deutsche Bank - Analyst [7]
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And second question -- that will be it -- is just on the online video side. You mentioned the CPM is still holding up around GBP25, the loading presumably still slightly lighter in online versus linear. What's the kind of advertising yield difference between if we just took a typical 30-minute long-form program linear versus online? And do you have any sense of what your advertising share is in online video now?
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Adam Crozier, ITV plc - Chief Executive [8]
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I'm not sure we do have a sense of the share online. I think you'd be reasonably safe to say it's probably in line with what we receive in terms of advertising. Certainly, that would be our anecdotal evidence. And obviously our share has increased over the last two or three years, because originally we weren't on very many platforms. Whereas now I think we're very competitive online, I don't think we were three years ago.
The CPMs are about GBP25. Just to give you the comparison, as you know, on an adult cost-per-1,000 basis, let's call it GBP5. So part of that rate is the fact that we do limit the amount of advertising there. That allows the advertisers to stand out more online, and it also allows for a better viewer experience, because I think people are less tolerant of advertising online than perhaps they are on the television, and therefore I think it's better to have fewer online.
That's why it's important we keep increasing the amount of inventory we have. And that switch from early next year of being able to have advertising on Virgin and on Sky, which of course are two of our biggest online platforms, will make quite a difference to us in advertising terms. And I'd say initially that will be stitched in advertising. Eventually, in 18 months or so, it'll be dynamic advertising. So that should create the extra inventory alongside the other deals that we'd hope to do over the next 12 to 18 months, as well, with other platforms to keep growing the amount of inventory but keep allowing the advertising to stand out and therefore justify the premiums that we charge online.
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Laurie Davison, Deutsche Bank - Analyst [9]
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But net/net, is a long-form program worth more in advertising than a linear program?
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Adam Crozier, ITV plc - Chief Executive [10]
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No. Obviously, in absolute terms, linear is much more beneficial to us in terms of advertising revenue, but of course the margins online are extremely strong for us, and that's certainly very helpful from a margin point of view.
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Laurie Davison, Deutsche Bank - Analyst [11]
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Great. Thank you.
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Archie Norman, ITV plc - Chairman [12]
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If you could pass the microphone to your left, to make things efficient.
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Filippo lo Franco, JPMorgan - Analyst [13]
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Hi. It's Filippo lo Franco with JPMorgan. Good morning, everyone. I have two questions, please. The first one is on the content. When I look at the performance of ITV Studios and they compare with other competitors, particularly FreemantleMedia, comparable, or maybe the competitor, I can see that you have a real momentum. And I know that there are some differences between the two business models. Could you please remind us why you are doing better than them, and what are the main differences of the business model?
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Adam Crozier, ITV plc - Chief Executive [14]
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Yes. Well, I think we have very good margins in ITV Studios. I think I've said to many of you before, they could be even better, but we choose to invest very heavily in our development pipeline, to make sure that we have a constant supply of new ideas and new programs coming through that pipeline, because all programs, most programs, have a shelf life, and eventually they fall off the edge. Not the things like Coronation Street and other things, but many programs do. And it's important to have that fresh flow of programs and give them time to develop.
The other important thing is that by developing those ideas and owning those ideas and the IP that goes with that, we then get the benefit of that when they go around the world. And from a margin point of view, that's extremely beneficial to us.
If you compare us with Freemantle, because you mentioned them, not to say that our model is better or worse than theirs; it's just different from theirs. By and large, Freemantle rely on the big brands like Idol and X Factor and Got Talent, but of course they don't own the IP to those shows. They are a production house who makes those shows for a given margin.
So their margins by and large are much lower than ITV Studios, and it's to do with the amount of IP that you own and indeed the mix and type of content. We also have a lot more drama, which travels very well, as you know, and again, that can be margin enhancing for those better dramas. So they're just very different businesses, in the end. Although everyone would think all content businesses are the same, the reality is they are not, and I think that puts us in a very strong position.
But it is important to keep investing in that pipeline, to ensure that we don't end up in the situation that ITV Studios was a few years ago, where it didn't do that and actually gradually everything sort of dried up. And that's really what's driving the performance and that connection with ITV, the broadcast side, which allows us to showcase that great work.
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Filippo lo Franco, JPMorgan - Analyst [15]
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And the second question is on the retransmission fees. There have been several articles in the newspaper about the possibility that we can have the same thing. You already have some retransmission fees from HD. It is more the question of, going forward, where we are, if you have any talks and so on?
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Adam Crozier, ITV plc - Chief Executive [16]
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Well, in many ways, the balls roll in because we have retransmission fees for things like HD channels. We have it for online content. And we have been very clear and upfront that we would in the future expect to see retransmission fees. Actually, if you turn the argument around the other way, it's almost impossible to justify why people wouldn't pay you for that content.
That's not to have a go at what went before. These rules came into play because there was a need to get competitive platforms up and running, and therefore the PSBs paid the other platforms to carry the content and that allowed them to get up and running. But they're now of a strength they don't need that benefit.
If you look at most countries in the world, retransmission fees are paid. People like News Corp, to pick one, Liberty, to pick another completely randomly, quite happily pay retransmission fees in the States and other countries. I think there's a government paper out today, which I don't know what's in it, but I suspect will at least go the first stage of saying that we shouldn't pay. And then the next stage is to suggest that, of course, they should pay us.
I still think that that will take a couple of years because, as you all know, regulatory change is quite slow. But I think it's very important not just to us but to Channel 4, and indeed I think potentially to the BBC in the future, as well, as a potential funding of the BBC.
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Filippo lo Franco, JPMorgan - Analyst [17]
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And just to be clear, we are talking about the PSB channel, because ITV2, 3 and 4, you're already getting paid for HD.
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Adam Crozier, ITV plc - Chief Executive [18]
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Yes, absolutely. And yes, for PSB channels, yes, but it will take time.
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Archie Norman, ITV plc - Chairman [19]
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Okay. Can we -- we need to crack on. Thank you. Yes, just quickly, and then we'll move, go back.
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Ian Whittaker, Liberum Capital - Analyst [20]
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Good morning. It's Ian Whittaker from Liberum. First question, apologies if I'm being a bit thick on this, but if you're minus 3% in the first half and you're plus 9% in September -- or sorry, plus 9% in Q3, shouldn't mathematically you be better than flat for the first nine months, or is the weighting that much towards the first half?
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Ian Griffiths, ITV plc - Finance Director [21]
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Well, it's more the fact that July and August are relatively small months, and they've been the key months that have driven the growth, as Adam said, with July and August up 12% and 20%, so that's what's behind that.
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Ian Whittaker, Liberum Capital - Analyst [22]
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Okay, but just thinking with September, with Q3 September's quite an important month, so September does have some weighting. So, again, mathematically, it would seem as though it should be a little bit better than flat.
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Ian Griffiths, ITV plc - Finance Director [23]
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Well, September, the number we've said, our expectation is September will be in itself pretty flat.
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Ian Whittaker, Liberum Capital - Analyst [24]
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For the second question, just on cash conversion, you're 100% in the first half. Are there any reasons why in the second half of the year that cash conversion rate should come down?
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Ian Griffiths, ITV plc - Finance Director [25]
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There's no major change in the working capital that we expect in the second half of the year. The one thing that we could have, which we talked about this before, which is a good use of our working capital, is if we have dramas in the pipeline where we're making for delivery in 2014, that will sit in our working capital. We see that as a good use of cash. But other than that, I don't expect any major change in the working capital trends.
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Archie Norman, ITV plc - Chairman [26]
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Okay, go here. Yes, back here. Well, it's saving you time, really.
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Adrien de Saint-Hilaire, Exane BNP Paribas - Analyst [27]
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Hi. Morning, everyone. It's Adrien from Exane BNP Paribas. So I've got a few questions, please. The first is on broadcasting and entertainment, especially Online, Pay and Interactive. I think, Adam and Ian, last year you were telling us that Online, Pay and Interactive had broken even. So shall we assume that this year in H1, actually, the EBITA in absolute of this business is GBP12m?
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Ian Griffiths, ITV plc - Finance Director [28]
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I wouldn't make that assumption, but Online, Pay and Interactive is a profitable part of our broadcast business now.
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Adrien de Saint-Hilaire, Exane BNP Paribas - Analyst [29]
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Okay, cool. And secondly, in terms of share of broadcasts, you're down 100 bps in H1, as expected. How much market share gains would you expect in H2, given all you've said before?
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Adam Crozier, ITV plc - Chief Executive [30]
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Well, I think we fully expected to be behind the mark. We were ahead at the first quarter and we said don't get too excited about that, because we fully expect to be behind, given the switch out of the football tournament. We will catch up a fair bit of that over the course of the summer, and of course in September last year Channel 4 had the Paralympics, this year don't, so you'll see a swing around there, and then a very strong autumn. So we should be back to the right position by the end of the year. And of course all of the deals are done on an annual share basis, not any particular month at any given time.
What's helpful, of course, coming up over the next couple of years is we have the Football World Cup next year, and then of course we have exclusive rights to the Rugby World Cup in England the following year. So we've got two years of good, strong tournaments, which always tend to have a positive benefit in terms of absolute amount and indeed share. So, both of those to come. But really, so far this year, it has pretty much panned out, I think, entirely as we expected, actually.
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Adrien de Saint-Hilaire, Exane BNP Paribas - Analyst [31]
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And the last question is around sportscasts. So you've announced a raft of deals, GBP100m according to the Guardian, for the new England package. Could you help us to understand how your overall sports bill will increase or decrease in the years going forward for those new deals?
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Adam Crozier, ITV plc - Chief Executive [32]
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Well, as you know, it's decreased quite a bit, and you're seeing part of the benefit coming through there. We have a very clear idea -- it helps being a commercial player -- of what sports rights are worth to us and what advertising and sponsorship we can generate on the back of those events, so we're able to calculate pretty reasonably what the return on any investment was.
We've got a huge raft of sports rights, Champions League, England competitive and friendlies, Tour de France. We've got Rugby. And all of those rights are important to us. When we looked at the FA ones recently, it's never been a particular secret that the FA Cup itself was a nice-to-have for us, but not something that we wanted to particularly chase. In fact, we only got involved last time around because of some of the problems with Setanta and other things. So we bid what we thought was appropriate for that and it went elsewhere.
But what we did get and was important to get for us was the right to the England friendlies. We'd already secured the rights to all the England competitive matches. So we now have -- we are now effectively the home of England, exclusively, up till 2018. And of course we have the tournaments there, which we share with the BBC in terms of the actual finals themselves. So I think we're in good shape on sport.
Clearly, there's a lot of noise around about BT and Sky. By and large, of course, what they compete for is the pay rights as opposed to the free-to-air rights that we go for. So they're slightly different marketplaces. And so to some extent -- in the end, in a war like that, the only people that really win are the people who own the rights to them. But I think for us it's less of an issue than perhaps it is for Sky, actually.
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Adrien de Saint-Hilaire, Exane BNP Paribas - Analyst [33]
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Okay. Just -- sorry to be picky on this one but --
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Archie Norman, ITV plc - Chairman [34]
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Very quick, all right?
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Adrien de Saint-Hilaire, Exane BNP Paribas - Analyst [35]
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Yes. Is the overall sportscasts going to increase, if you exclude the Football and Rugby World Cup, or is it going to come down going forward?
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Adam Crozier, ITV plc - Chief Executive [36]
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It really is on a case-by-case basis. It genuinely is. Each sport's at a different stage, has different strengths and weaknesses, different people interested in it. I would guess there might be a little bit of inflation generally, but as I said, by and large, that will be more on the pay side than the free-to-air side, so they're slightly different markets.
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Archie Norman, ITV plc - Chairman [37]
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Adam, we're in danger of losing our audience, which is psychologically not great. So I'm just going to take one more question, and we'll stay around for any points you want to raise. Otherwise, yes. The lucky winner.
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Tom Singlehurst, Citigroup - Analyst [38]
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Thank you very much. Thank you. It's Tom here, from Citigroup. Just one question, actually, on the margin for ITV Studios. The 16% in the 1H, obviously a big uplift year on year, but also ahead of what we would typically expect for the full year. Is there a genre driven change to the margin profile of ITV Studios? Is that a sustainable uplift? And specifically, is it linked maybe to the pullback in investment guidance?
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Adam Crozier, ITV plc - Chief Executive [39]
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Ian, do you want to take that?
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Ian Griffiths, ITV plc - Finance Director [40]
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No, it's not linked to the guidance. It's more to do with phasing, actually. A margin on Studios of around 15%, 16% is a good margin for those types of businesses. And the 16% didn't have as much investment in the creative pipeline as last year's first half, so we've got a kick up there. We'll have some of that spend in the second half of the year, but we're very comfortable running the business around 15%, 16%.
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Archie Norman, ITV plc - Chairman [41]
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Okay. Thank you. Look, I apologize if some people feel short-changed, but we'll stay around, and if anybody wants to have a discussion or ask questions later, we'd be delighted. Thank you all for coming. I think it's a strong set of results that I think in many ways speaks for itself. The business is now really changing shape from what we saw three years ago, so it's been a really encouraging first half of the year. Thank you.
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