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ITV PLC (ITV)

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Thursday 29 March, 2012

ITV PLC

Annual Financial Report

RNS Number : 3057A
ITV PLC
29 March 2012
 



Annual Financial Report

 

ITV plc (the 'Company') released its preliminary announcement of annual results for the year ended 31 December 2011 ('Preliminary Announcement') on 2 March 2012. Further to the Preliminary Announcement, the Company can now confirm that the Report and Accounts 2011, Notice of Annual General Meeting and Form of Proxy will be mailed to shareholders on 29 March 2012. The Report and Accounts 2012 are now available on the Company's website at www.itvplc.com/investors

 

Appendix A to this announcement contains the Report and Accounts 2011 in unedited full text for the purposes of compliance with the Disclosure and Transparency Rules. Any page and note references refer to page numbers and notes in the Report and Accounts 2011.

 

Annual General Meeting

The Company's 2012 Annual General Meeting will be held at 11.00 a.m. on Wednesday, 9 May 2012 at The Queen Elizabeth II Conference Centre, Broad Sanctuary, Westminster, London SW1P 3EE.   The Notice of Annual General Meeting and Form of proxy will be available on our website from 29 March 2012.

 

National Storage Mechanism

The following documents have been submitted to the National Storage Mechanism and will shortly be available for inspection at: http://www.Hemscott.com/nsm.do

 

·      Notice of 2012 Annual General Meeting

·      Form of Proxy for 2012 Annual General Meeting

·      Notification of availability of documents and information

 

 

 

 

ITV plc

Tel: 020 7157 3000

 

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                      0207 157 3709 or 07799 071509

 

 

Website: www.itv.com; investor information: www.itvplc.com

 

 

 

 

ITV plc Annual Report and Accounts

for the year ended 31 December 2011

 

 

Transforming ITV

ITV is the largest commercial television network in the UK. It operates a family of channels including ITV1, and delivers content across multiple platforms either directly or via itv.com and ITV Player. ITV Studios produces and sells programmes and formats in the UK and worldwide.

 

In August 2010 we announced our strategy to transform the business over five years, focusing on our four strategic priorities:

 

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

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

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

4 Build a strong international content business

 

Contents

 

Overview

Transforming ITV  

Investor Proposition

Financial Highlights

Chairman's Statement  

 

Directors' Report

 

Chief Executive's Review - Strategy & Operations

Overview  

Performance Dashboard  

Strategic Priority 1

Strategic Priority 2

Strategic Priority 3

Strategic Priority 4

2012 and beyond

 

Performance & Financials

Key Performance Indicators  

Financial and Performance Review  

Risks and Uncertainties  

 

Responsibility  

Responsibility

 

Governance

Board of Directors  

Corporate Governance

Audit Committee Report

Remuneration Report  

Other Governance and Statutory Disclosures  

Statement of Directors' Responsibilities  

 

Financial Statements

Independent Auditor's Report  

Introduction and Table of Contents  

Consolidated Income Statement  

Consolidated Statement of
Comprehensive Income  

Consolidated Statement of Financial Position  

Consolidated Statement of Changes in Equity  

Consolidated Statement of Cash Flows  

Notes to the Accounts  

ITV plc Company Financial Statements  

Shareholder Information

Financial Record

Glossary

 

ITV's Directors' Report

The Directors' Report explains in detail how we have performed this year and sets out a fair review of the business, a balanced and comprehensive analysis of our performance, the use of financial and non-financial key performance indicators to explain how much progress we have made, a description of the principal risks and uncertainties facing the Company, and an indication of likely future developments.

 

The Directors' Report is prepared in line with the relevant provisions of the Companies Act 2006. In preparing the Directors' Report the Company has had regard to the guidance issued by the Accounting Standards Board in its Reporting Statement on narrative reporting. The Directors' Report is intended to provide shareholders with a greater understanding of the Company, of its position in the markets within which it operates, and of its prospects.

 

In setting out the Company's main risks and uncertainties, an indication of likely future developments, and in other content, this report and accounts contains statements which, by their nature, cannot be considered indications of likelihood or certainty. The statements are based on the knowledge and information available at the date of preparation of the Directors' Report, and what are believed to be reasonable judgements. A wide range of factors may cause the actual outcomes and results to differ materially from those contained within, or implied by, these various forward-looking statements. Nor should any of these statements be construed as a profit forecast.

 

Investor Proposition

·    We are now less than two years into our five-year Transformation Plan but our continued revenue growth and improved profits - at a time when the television advertising market is broadly flat - demonstrate that we are performing in line with our strategic objectives.

·    We have made real progress to date but we are aware that there is still much to do. We remain focused on rebalancing the business and are on track to deliver the Transformation Plan.  

·    We will continue to focus on improving the efficiency and performance of ITV, and will increasingly look to content, online and pay as engines of growth both in the UK and internationally, as we invest further in our key strategic priorities.

·    We remain cautious on the television advertising outlook for 2012, but we expect to outperform the market for the full year. Our progress against the Plan and the strength of our results gives the Board confidence to propose a full year dividend of 1.6p.

 

Financial Highlights

Group external revenues £2,140m up 4% driven by non-NAR

Non-NAR revenues £922m up 11%

EBITA before exceptionals £462m up 13%

Adjusted profit before tax £398m up 24%

Adjusted EPS 7.9p up 23%

Net cash/(debt) £45m positive net cash

 

Chairman's Statement

 

Dear Shareholder

Nearly two years ago, after far reaching changes to the Board and leadership of ITV, we outlined a new five year Transformation Plan. The purpose of the plan was to improve the performance of the core UK television broadcast business whilst growing revenues from international content and multi-platform distribution. Rebalancing the business in this way will not only improve returns from the existing free-to-air business but should also deliver revenues and profits which command a higher valuation multiple for ITV shareholders and create a platform for growth.

 

We are now well into the first phase of this strategy and progress is very clearly set out by Adam Crozier in this report. Turnarounds of this kind are never plain sailing and there are challenging problems still to solve.  But the improved financial results are particularly significant in two respects. First, they indicate that 'fixing the basics' in the core business, tightening up on costs and introducing a sharper performance driven culture, is delivering improved margins - there remains untapped potential in the conventional broadcast model. Secondly, the content business under a comprehensively new team has turned a corner and is already showing potential to grow both in the UK and internationally. This reinforces our belief that ITV can use its UK creative base and integrated producer-broadcaster model to build a much larger global content business.

 

Whilst these early results are reassuring, the scale of the task ahead remains considerable. The television landscape both here and abroad is evolving and this year will see public consciousness of online connected television rising as new devices and services are launched. This will afford opportunities for integrated content owners and producer-broadcasters like ITV. But in the long term it will also open up the market to potential new entrants and further fragmentation. Similarly online advertising is occupying an increasing share of the marketing budget. The pace of change is increasing and the way people consume content is evolving faster than ever. Having already embarked on a programme to rebuild our technology and reduce dependence on free-to-air advertising it is imperative that we continue the transformation to create a truly multi-platform content business.

 

Behind the results therefore sits a story of far reaching change. Most importantly this includes changes in people, culture and organisation. At all levels ITV's performance depends on the talent we attract and the motivation, attitude and skills of our people. About half of our leadership group has changed. ITV is a sought after place to work for media professionals and we are confident we can continue to attract creative talent both in the UK and abroad. The organisation is working much more effectively as 'One ITV' and a more performance driven culture is emerging. Historically ITV has been a very 'UK centric' business but in the next phase ITV will become a more international business in which ideas are rapidly networked across the markets in which we operate.

 

Now that the problems we face are being addressed and the balance sheet has been restored we will look for ways of accelerating the strategy. So although our base plan relies on organic growth, if value enhancing acquisition opportunities arise, particularly in international content, we will consider them, albeit based on rigorous strategic and financial criteria.

 

Whilst the Company is focused on annual performance targets we are making investments in people, content and technology for the long term value of the business. Although the Transformation Plan is being delivered against the context of a complex regulatory environment for UK broadcasting, we do not see regulation as a barrier to delivery of the strategy and we have started discussions with Ofcom and the Government about the ITV Channel 3 licences, the current terms of which end in 2014.

 

Since changes made to the Board two years ago we have established a renewed approach to governance and Board process. The Board works as a team committed to the objective of creating long term shareholder value. Our approach is to conduct the Board process in a spirit of openness that encourages forthright debate and constructive rigour.

 

Finally, the enormous strides that have been made in strengthening our balance sheet, the encouraging improvement in profit and our confidence in the Transformation Plan, mean the Board has proposed a final dividend of 1.2p making a total dividend of 1.6p for the year.

 

Archie Norman

 

Chief Executive's Review - Strategy & Operations

 

Overview of results

ITV has produced a strong set of financial results with continued growth in revenue and profitability and further improvement in our balance sheet strength. This was achieved against an unsettled economic backdrop. External revenues were up 4% at £2,140 million in a broadly flat television advertising market. Revenue growth was driven largely by our non-net advertising revenue (non-NAR) which, in line with our strategic priorities, grew significantly, up 11% or £93 million to £922 million.

 

This revenue growth, together with our tight control on costs, has fed through to a 13% increase in EBITA to £462 million, with adjusted EPS up 23% at 7.9p. We delivered £20 million of cost savings, which was in excess of the £15 million target. Our continued focus on cash and costs and our high profit to cash conversion saw us end the year with a positive net cash position of £45 million, having begun the year with net debt of £188 million. This gives us a strong financial base as we invest further in our key strategic priorities. 

 

We have made progress across the business and against virtually all of our key performance indicators in 2011. We saw a solid performance on-screen, with ITV Family share of viewing (SOV) up by 1% in 2011 and the digital channels continuing to show strong growth with SOV up 10%. ITV1 SOV, which benefited from the successful launch of ITV1+1, was down 2%, and ITV Family share of commercial impacts (SOCI) was down 1% but we will continue to work to improve these performances.  

 

Online we have improved the performance of itv.com and ITV Player, we have made our content available on more platforms and, with our recent video on demand (VOD) deals with Sky, Netflix and Lovefilm, we are driving our pay strategy forward. We have also increased long form video views by 44%.

 

ITV Studios, under the new management team, performed strongly both in the UK and internationally. New commissions were up 28% to 111, which has driven the increase in non-NAR revenues. ITV Studios also increased its share of ITV1 output from 53% to 55% as we continue to strengthen the creative relationship between Broadcasting and Studios.

 

Our Vision

We are operating in an evolving and highly competitive digital market in which advances in technology are changing the way in which people consume media. We are transforming our business so that we are able to respond to the challenges of new technologies, changing patterns of user behaviour and new market entrants, while also ensuring that we are in a position to take advantage of the opportunities which the digital environment offers. The combination of our strong channel brands, access to content and commitment to our producer-broadcaster model gives us significant advantages but we are under no illusion about the need to remain focused on the task ahead.

 

Our vision remains to create world class content which we can make famous on our channels, before exploiting its value across multiple platforms, free and pay, in the UK and internationally. Content creation therefore lies at the heart of our Transformation Plan and we are encouraged by the momentum that is building. The high quality of content we produce and the programming we broadcast on our channels has been recognised by many industry awards.

 

We are also encouraged by the prospects for our free-to-air television business given current trends within the market. As we approach the end of analogue switch-off in the UK, the impact of fragmentation on audiences has already largely been felt. The daily average number of minutes of television watched has been rising in the UK in recent years, reaching record levels in 2010, and was broadly flat year-on-year in 2011 at 4 hours 2 minutes.  Live viewing via television sets is still around the same level as it was in 2004, but viewing via other devices is  growing. This suggests that VOD viewing to date has been incremental. 

 

We are less than two years into the Transformation Plan and there are clear signs that we are making good progress against our strategic priorities, but there is still a great deal to do. As we continue to improve the efficiency and performance of ITV, we will also look at further ways to rebalance our revenue streams as we focus on content, pay and online.

 

Awards 2011/12

The high quality of the content we produce and the programming we make famous on our channels has been recognised by many industry awards during 2011, including:

 

·      Three Royal Television Society Awards including X Factor for Best Entertainment Show, Ant & Dec for Best Entertainment Performance (I'm a Celebrity) and the Road to Coronation Street for Best Single Drama.

·      Eight BAFTAs including ITV News at Ten for Best News Coverage, The Cube for Best Entertainment Programme and The Only Way is Essex for the YouTube Audience Award.

·      Four Primetime and one International Emmy Awards including Downton Abbey for Best Mini-series or Movie.

·      Five Broadcast Digital Awards including ITV2 for Best Entertainment Channel and Channel of the Year.

·      Eight National Television Awards including Coronation Street for Best Serial Drama, This Morning for Best Factual Programme and I'm a Celebrity for Best Reality Programme.

·      Terrestrial Channel of the Year Award for ITV1 at the Edinburgh Festival.

 

Performance Dashboard

 

Reporting Progress against our five year Transformation Plan:

 

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

 

Milestones achieved

New senior leadership team delivering

Employee engagement up to 85% (2010: 75%)

Restructuring across ITV driving out waste and complexity

£20m of cost savings

More coordinated rights negotiation and management

Investment in technology

Manchester move to MediaCity under way

Progress in simplifying network arrangements

Pension longevity swap

£339m bond buy-backs

 

Focus for 2012

Focus on delivering the Transformation Plan

Continue to build strength in the team across ITV

Drive out further waste and complexity

Deliver further cost efficiency target of £20m

Strengthen collaborative creative process

Further investment of £25m behind our strategy

Capex of £70-80m as we implement site moves and technology improvements

 

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

 

Milestones achieved

Increased variety and quality within programme budget

Four out of top five new dramas on ITV1

Investment of £10m in brand defining content

Major sports rights deals renegotiated with savings

Successful launch of ITV1+1

ITV1 wins Terrestrial Channel of the Year

ITV2 and ITV3 largest digital channels

ITV Family SOV up 1%

Digital channels growing key audiences

ITV NAR up 1%, outperforming the market

 

Focus for 2012

Maintain ITV Family SOV

ITV programme budget confirmed at c.£1bn for 2012

Outperform the television advertising market

Refresh and enhance channel brands

Continue to invest in brand defining content

Build and develop non-spot advertising revenues

Ongoing implementation of news review

Focus on long running, returnable series

 

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

 

Milestones achieved

Investment in technology infrastructure online

Improved quality and distribution of ITV Player

376m long form video views in 2011, up 44%

9% of VOD viewing in December on mobile

3m downloads of ITV Player App

Online revenues up 21%

Growing engagement with our viewers

ITV2, 3, 4 pay HD channels on Sky performing in line with expectations

New VOD deals with Sky, Netflix and Lovefilm

 

Focus for 2012

Improve ITV Player

Drive online viewing and revenues

Launch ITV Pay Player and pay 'products'

Increase pay VOD deals

Renegotiate existing VOD deals

Development of potential pay channels

Ensure ITV Player available on connected TV sets

Launch YouView

Roll out 'Total Value' exploitation

 

4 Build a strong international content business

 

Milestones achieved

New team in place driving creative renewal

Invested £8m in creative talent and developing new ideas and pilots

111 new commissions in 2011

Developing new partnerships

New dramas being sold successfully internationally

ITV Studios (ITVS) now producing 55% of ITV1 output

ITVS revenues up 10%

ITVS EBITA before exceptional items up £2m to £83m

 

Focus for 2012

Continue to build strength of creative team and talent

Invest in developing and piloting further new ideas

Focus on long running returnable series

ITVS to grow its share of ITV1 original commissions

Target off-ITV and international commissions

Increased focus on international co-productions and roll-out of ITVS formats

Develop and invest in the ITVS international network

 

Strategy In Action

 

Strategic Priority 1 - Create a lean, creatively dynamic and fit-for-purpose organisation

Our people remain key to ITV and to the delivery of the Transformation Plan. Our management team have now been in place for over a year and, together with the wider leadership team, are driving the Transformation Plan forward and continuing to facilitate cultural change at all levels of the business. We are very pleased to see that our employees are embracing the changes, with engagement having risen to 85% in 2011 (2010: 75%). We have also brought our recruitment operation in-house and the team have launched a brand new careers website to ensure we continue to attract and retain the best talent.

 

We have continued to restructure ITV where appropriate to drive out waste and complexity in the business. During 2011 we delivered cost savings of £20 million, ahead of the targeted £15 million. These savings follow on from the £40 million delivered in 2010. We will remain focused on costs to ensure that we have the appropriate cost base across the business and have identified a further £20 million of savings in 2012. Our continued commitment to the tight management of cash and costs has helped us move into a positive net cash position of £45 million at the end of 2011. We have also improved the efficiency of our balance sheet with £339 million of bond buy-backs. We continued our long-term strategy of managing the costs and risks associated with the pension schemes through our longevity swap and an extension to the SDN pension partnership.

 

In 2011 we launched our investment programme in technology in order to make the business fit-for-purpose. We have begun to roll out our desktop refresh, which is aimed at giving all of our people the best tools for the job, and we will continue this refresh throughout 2012. We are now taking steps towards complete digital production for all of our shows by implementing plans for tapeless content. Significant technology projects are being implemented across the organisation - we are aware that they will take time to accomplish but we are confident that they will lead to great improvements to the way in which we operate.

 

We remain committed to our producer-broadcaster model and want to gain maximum benefit from it. The improved rights negotiation and management process which we introduced has strengthened the collaboration between Broadcast and Studios and allows us to secure rights at the best value.

 

The move of the Company's Manchester base from Quay Street to MediaCity is now well under way and will deliver a bespoke, state-of-the-art production facility for Coronation Street as well as providing modern offices for everyone working in Manchester with improved technology. The first move for staff in Manchester into the new site will take place later this year. We will also be moving all staff in Leeds to one site and modernising a number of our regional offices with HD studios. As a result of our investment in technology and property, there is expected to be an increase in capital expenditure in 2012 to £70-£80 million.

 

During 2011, we made progress in simplifying the network structure through the acquisition of Channel Television.

 

Significant progress has been made towards creating a lean, creatively dynamic and fit-for-purpose organisation. This process will be ongoing as we prepare for the next stage in the plan. We continue to look for ways in which we can improve the business and make it work more efficiently.

 

Your questions answered

 

Q. What have been the main achievements in delivering against Priority 1 in 2011?

A. We have been focused on making the business fit-for-purpose, driving out waste and inefficiency and delivering £20 million of cost savings. We have also been changing the culture of the organisation and ensuring that we get the right people working for ITV.

 

Q. What areas is ITV particularly targeting with its investment?

A. We want to give our people the right tools to do their jobs. We have launched a desktop refresh, consolidated our Emmerdale studios in Leeds, and we have begun our investment in moving the Manchester site to MediaCity.

 

Q. How do you measure success?

A. We are driving significant change throughout the organisation and taking our people with us: employee engagement is up to 85% (from 65% in 2009).

 

Q. What's coming up in 2012?

A. We are targeting a further £20 million of cost savings in 2012, we will be continuing to roll out our desktop refresh programme to all areas of the business and we will see the first people moving into our new offices in MediaCity. We will also continue to focus on getting the right people to work for ITV.

 

Strategic Priority 2 - Maximise audience and revenue share from our existing free-to-air broadcast business

Although we delivered significant growth in non-NAR revenues in 2011, we still have a high degree of reliance on advertising revenues. We therefore remain firmly focused on maximising our audience and revenue share from our free-to-air broadcast business.

 

Our performance relative to the market is an important metric for us and this is reflected in our share of broadcast (SOB) - one of our key performance indicators. ITV Family net advertising revenue (NAR) was up 1% in 2011, ahead of the television advertising market for the fourth consecutive year, with SOB increasing from 45.1% to 45.3%. This outperformance was driven by an improved second half performance as advertisers concentrated spend around our autumn schedule of sport, drama and entertainment.

 

In 2011, ITV Family's share of viewing (SOV) was up 1%, driven by the continued strong growth of our digital channels which were up 10%. ITV1 SOV, which benefited from the successful launch of ITV1+1, was down 2% - this is below where we want it to be and we will work to improve performance in 2012.

 

ITV Family share of commercial impacts (SOCI) was down 1% in 2011 with ITV1 Adult SOCI down 4%, although we saw stronger performances from many of our key sub-demographics (Housewives, Adult ABC1s, 16-34s) which have a bearing on the contract rights renewal mechanism. Our digital channels' SOCI was again strong, up 9%.

 

ITV1's on-screen successes in 2011 have included Vera, Marchlands, Scott and Bailey, Strangeways, the Rugby World Cup, Doc Martin, and Downton Abbey, which won a Golden Globe for best mini-series, as well as winning the Christmas ratings battle with a consolidated audience of 12 million. Four of the top five performing new dramas were on ITV1 in 2011 and ITV1 also won the Terrestrial Channel of the Year Award at the Edinburgh Television Festival.

 

Our soaps continued to perform strongly with Emmerdale (average 7.6 million viewers per episode) increasing SOV by 3% during the year, while Coronation Street (9.4 million viewers) was only marginally down (-1%) despite the tough comparative of the 50th anniversary year in 2010.

 

Some of our key shows, including X Factor and I'm a Celebrity, did not perform as well as in 2010, but they remain very important brands for us as they still drive large, diverse audiences, which appeal greatly to advertisers. We remain committed to these programmes and continually look at ways of refreshing them to improve their on-screen performance. ITV1 continues to deliver some of the largest audiences on television. The average X Factor audience across the series was 12.3 million, which made it the largest entertainment format on UK television in 2011, as it has been for three of the last four years. It was also the third most successful series ever of the show in terms of audience.

 

Our digital channels continue to perform very strongly. ITV2 and ITV3 remain the largest digital channels in the UK and saw SOV rise 8% and 11% respectively, while ITV4 saw a 13% rise in SOV making it one of the fastest growing digital channels. ITV2, which won Channel of the Year and Best Entertainment Channel at the Broadcast Digital Awards, has seen particular success with the BAFTA award-winning The Only Way is Essex (TOWIE) and Celebrity Juice, both of which will be returning in 2012. TOWIE averaged 1.8 million viewers (up 21%) across the series while Celebrity Juice averaged 2.2 million viewers (up 12%), with one episode peaking at 3.1 million (14% share) making it the most-watched non-terrestrial programme of the year. We are continuing to invest in brand-defining content for our digital channels with new drama commissions for ITV2 and rights to the French Open, Europa League and the African Cup of Nations for ITV4.

 

Our channel brands are increasingly important in the constantly evolving digital market. Those channels linked to a strong 'mother brand' (ITV, BBC, C4, C5 and Sky) have recorded growth in SOV this year while other independent digital channels have seen a marked 9% decline. To consolidate this strength and build upon it we will be rebranding all of our channels during the second half of 2012 to position them for the challenges and opportunities which lie ahead.

 

In December, Ofcom announced that it would not be referring the advertising trading model to the Competition Commission. While our strategy is not dependent upon regulatory relief, we welcomed this decision as we had always maintained that a lengthy market review, at a time of such rapid change and increasing competition, would not be beneficial for UK consumers or the UK television industry.

 

Television is a long-term business and Peter Fincham and his team continue to make plans for the schedule several years in advance. In 2011, we spent just over £1 billion on programming and we continue to ensure that our programming investment is made as efficiently as possible, while maintaining variety and quality. Our programme budget for 2012 will remain at around £1 billion - we believe this is a sufficient level to provide the breadth, variety and freshness that audiences and advertisers require. We recently secured c.£35 million of savings from 2013 onwards when we renegotiated a number of rights deals including the Champions' League and FA Cup. Some of these savings may be reinvested back into the schedule.

 

We will continue to work at delivering maximum value from our free-to-air business while at the same time building and developing new non-spot advertising revenues.

 

Your questions answered

Q. What have been the main achievements in delivering against Priority 2 in 2011?

A. We had four of the top five performing new dramas on British television, ITV1 won the Terrestrial Channel of the Year award at the Edinburgh Television Festival, our big entertainment shows continued to play to huge audiences on ITV1 and our digital channels continued their strong growth.

Q. What is happening to programming spend in 2012?

A. We will spend around £1 billion on programming in 2012 which will give the schedule the variety and quality we need for our viewers and advertisers. We will also continue to invest in brand defining content for our digital channels.

 

Q. How is ITV benefiting from its producer-broadcaster model?

A. We want our doors to be open to the best ideas from independent producers but we also generate ideas within ITV, where we own the rights - that's extremely good for business. We see that as a growing part of what we do at ITV - it has been over the last couple of years and will continue to be so.

 

Q. How is ITV planning to deliver against this priority in 2012?

A. By continuing to come up with great programme ideas, develop and produce them, retain the rights and then exploit them on different platforms, on different media, in different countries. Above all, it comes back to great content and great programmes in all the genres. If we can do that we'll be in a good place.

 

Strategic Priority 3 - Drive new revenue streams by exploiting content across multiple platforms, free and pay

We are continuing to execute our strategy of developing new revenue streams that are more balanced between pay and free television through building our programme brands and platform offerings. As well as the latest programmes, ITV has a huge archive of content and the technical advances of the digital market have opened up great opportunities for monetising this archive across the many devices on which people now consume content.

 

Online revenues grew by 21% in 2011 to £34 million, which contributed to the 13% growth in non-NAR revenues within Broadcasting and Online to £310 million (2010: £275 million). While this represents encouraging growth we are still aware of the need to build scale within Online. Our challenge is to choose the best monetisation strategy for our content and to continue to innovate, to open up new revenue streams.

 

As part of this strategy, ITV Player is now available on more platforms, including PS3, Android, iOS and Freesat. This improvement in the distribution of ITV's content has driven the 44% growth in long form video views across all platforms to 376 million (2010: 261 million). This is a key performance indicator as we seek to monetise our online traffic.

 

While our pay revenues are still relatively small in the context of ITV, they are derived from an increasing number of sources and our pay strategy is beginning to gain momentum.

 

2011 was the first full year of the pay HD channels ITV2, ITV3 and ITV4 on the Sky platform, and they performed in line with our expectations. In early 2012 we signed archive video on demand (VOD) deals with Lovefilm and Netflix and a VOD and catch up deal with Sky. These are non-exclusive deals which enable us to retain the option of doing similar deals with other parties should opportunities arise. We will also be launching a pay version of ITV Player later this year, which we will start to test internally in the second quarter of 2012. While this is slightly later than originally anticipated, we want to guarantee the quality of the user experience before launching to the public.

 

We are continually looking at ways in which we can develop closer engagement with our viewers in order to provide greater value to advertisers. While we are starting from a small base, we have seen significant increases in audience engagement via the 15.4 million Facebook fans which we have across all of our pages (2010: 7.4 million). We have also now collected 3.6 million contactable email addresses (2010: 1.6 million). These interactions are indicative of the power of the ITV brand and aid the exploitation of our content across multiple platforms as part of our Transformation Plan.

 

Mobile viewing has increased rapidly in 2011, representing 9% of all VOD viewing of ITV content in December, comparable with the BBC iPlayer. This enables us to engage ever more closely with consumers. In the first seven months following its launch the ITV Player app had more than three million downloads.

 

These all represent encouraging trends in our engagement with consumers but our challenge is to monetise the audiences we now have across multiple platforms. We have invested in fixing our online technology platform in 2011 but still have some way to go and the quality and the performance of ITV Player will further improve. We will continue to invest in navigation, ease of use, content and robustness to improve the quality of the overall user experience on our website.

 

The SDN business, which operates one of the six digital terrestrial multiplex licences in the UK that make up Freeview, saw 37% growth in its revenues as a result of the renegotiation of a number of its licences in 2010. This revenue growth will not be repeated in 2011 as this was a one-off increase.

 

In 2011 we announced the first product placement deals in the UK with Nationwide and Nestlé but the market remains very small. We previously highlighted that the new rules which Ofcom implemented would impact our ability to exploit this new revenue stream and this continues to be the case.

 

Your questions answered

Q. What have been the main achievements in delivering against Priority 3 in 2011?

A. We have delivered strong growth in non-NAR of 11% or £93 million. We have reorganised our whole sales team to become much more customer focused. Online revenues are up 21%, while long form views are up 44%, driven by the increased distribution and quality of ITV Player.

 

Q. How is ITV driving new revenue streams?

A. Our strategy is to exploit our content across multiple platforms, both free and pay. We have announced content deals with Netflix and Lovefilm and a content and catch up deal with Sky, exploiting ITV's archive. We will continue to look at pay opportunities across many platforms both in the UK and internationally.

 

Q. How will ITV adapt to the rise of VOD viewing in the way it sells advertising?

A.  The rise of VOD is a huge opportunity for ITV because it is able to combine the mass-market power of the 30-second spot with the interactive, direct response and engagement of the digital platforms. We are introducing more targeted advertising, which we are already working on with a number of key clients, and innovative advertising formats, two of which we have trialled and will launch shortly.

 

Q. How is ITV planning to deliver against this priority in 2012?

A. ITV has the largest marketing platform in the UK and we want to use this to drive revenues both within the UK and internationally. We will be offering a blend of free and paid-for content, available to people at their convenience across multiple platforms.

 

Strategic Priority 4 - Build a strong international content business

Creative renewal lies at the heart of our strategy to build an international content business. 2011 saw a significant increase in our development budget and the number of new pilots created. This contributed to ITV Studios (ITVS) securing 111 new commissions in the year (up 28% compared to 2010), of which 66 were in the UK and 45 were international.

 

The new ITVS management team is now in place and providing the creative leadership needed to transform the internal capability of the business. We have rebuilt our creative team in the UK and internationally with several new appointments, demonstrating that we are able to attract the right talent.

 

Our Studios business has shown particularly strong growth in 2011. Total ITVS revenues grew 10% from £554 million to £612 million, driven primarily by international production. External revenues were up 9% to £320 million. This revenue growth has more than offset the investment made in creative renewal, enabling EBITA before exceptional items to rise £2 million to £83 million during the year.

 

Our new UK commissions for ITV1 include SWAGS (a six-part drama about service wives and girlfriends), Superstar (in collaboration with Lord Andrew Lloyd Webber) which will be screened in 2012, and Mr Selfridge (a ten-part drama about the life of the flamboyant American entrepreneur, Harry Gordon Selfridge) for 2013. We also had ten off-ITV commissions including The Devil's Dinner Party for Sky Atlantic and Dirk Gently for BBC.

 

Our strategy revolves around creating long-running, returnable drama and entertainment formats which travel well internationally, so recommission levels are also a key focus for us. 75 recommissions in the UK, including Vera, Lewis and a celebrity version of The Chase, relative to 57 in 2010, represent positive steps in this area as we build up our pipeline of content.

 

On top of our UK activity, we are beginning to build momentum internationally. Our 45 new international commissions included Bill Cunningham and Buried Treasure in the US, as well as a production deal for a US version of Jeremy Kyle which was sold throughout the US, with Sekretarinnen being commissioned in Germany. We also had 26 international recommissions, including Four Weddings in France and the US and I'm a Celebrity in Germany.

 

We have highlighted the need to have a significant stake in the intellectual property rights of the content we show on our screens, and have made progress in this area in 2011. ITVS produced 1,929 hours of original commissions (2010: 1,740) for the ITV1 network, increasing its share of the network's spend to 55% from 53% in 2010 but we want to grow our share further still.

 

Our strategy is based upon a 'mixed economy' approach to content production: while we want to own more of what is shown on our channels, we are also prepared to enter into partnerships to ensure we are working with the best creative talent. The UK and US remain our main creative engines but we are also investing in growth in our other production hubs (France, Sweden, Australia and Germany), as well as exploring opportunities in other emerging creative markets, as we want to be making and distributing programmes in as many countries as possible.

 

We continue to look at new ways of working with creative talent and have signed a development agreement with an independent production company, The Garden. We have also entered into a joint venture with BAFTA-winning Channel 4 drama commissioners Camilla Campbell and Robert Wulff-Cochrane to establish a new scripted production company, Noho Film and TV, which will begin development on a number of projects in 2012.

 

We have increased our co-production activity as well: in 2011, we co-produced Julian Fellowes' Titanic which has now been sold into 86 countries ahead of its screening in April to coincide with the centenary of the Titanic's disaster; we also co-produced Prime Suspect in the US with Universal Television for NBC, which was sold into 116 countries. In 2012 we will be co-producing Mrs Biggs, a drama about Ronnie Biggs' wife, with Seven Network in Australia.

 

We are making encouraging progress but, given the long lead time involved in production, there is still a lot of work to do to develop scale in our content business on the international stage. We will continue to develop and invest in our international network as we build on the momentum which has been created within ITVS.

 

Your questions answered

Q. What have been the main achievements in delivering against priority 4 in 2011?

A. We now have a completely new Studios management team who are providing the necessary creative leadership to drive the creation of new programming. We have had 111 new commissions and 101 recommissions in the UK and internationally, which represents encouraging momentum.

 

Q.  What changes in management have there been at ITV Studios in 2011?

A. We have new managing directors in both our UK and International studios businesses, some new creative directors, a new finance director and a new HR director.

 

Q. What progress is being made internationally?

A. 45 of our 111 commissions are international including Jeremy Kyle, which has been recommissioned for a second series in the US, our co-production of Titanic, and Prime Suspect, our first venture into US prime time drama.

 

Q.  How is ITV planning to deliver against this priority in 2012?

A. We will continue to invest in pilots, in creative talent and in developing new ideas throughout the ITVS international network as we build up our pipeline of content with our main focus on the UK and US.

 

2012 and beyond

We are less than two years into our five-year Transformation Plan and there is still much to do but we have made good progress and are building momentum. Our aim is to rebalance the business away from a dependency on television advertising revenues. Our non-NAR revenue growth, driven by ITVS, shows that we are making progress against our strategic priorities.

 

The first phase of the plan has been primarily focused on fixing the business. While we relentlessly look for ways to improve the efficiency and performance of ITV, we have put in place a solid foundation for the growth phase of the plan which lies ahead of us. 

 

In 2012 we will look to build on the momentum we have created. In 2011 we invested £28 million in ITVS, Online, technology and our digital channels, and in 2012 we expect to invest a further £25 million.

 

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

In 2012 we will continue to build strength in the team across ITV to drive forward the Transformation Plan. We will look for further ways to improve efficiency and performance, driving out waste and complexity. We have identified a further £20 million of cost savings and planned further improvements in technology - our desktop refresh will continue throughout the year to ensure that our people have the right equipment to do their jobs. Capital expenditure in 2012 is expected to be £70-£80 million as we make these technological improvements and implement our site move from Manchester. We will also continue to build the improved collaborative creative process between Broadcast and Studios to help focus on creating long-running, returnable formats.

 

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

In 2012, we aim to repeat the performance of 2011 by outperforming the television advertising market, as we did in 2011, and hold ITV Family SOV. We will refresh and enhance all of our channel brands and continue to invest in brand defining content as efficiently as possible.

 

Our total programming budget for 2012 will be around £1 billion, of which around £800 million will be spent on the ITV1 NPB, as we work to improve the variety of the schedule across the year. Schedule costs in the first half will increase due to Euro 2012 in June.

 

We will increasingly focus on long-running, returnable series and have a strong schedule for 2012 with returning dramas such as Downton Abbey, Vera, and Scott and Bailey alongside an exciting line-up of new drama including SWAGS, Titanic and Mrs Biggs - many of which are being made by ITVS. A number of ITV's top entertainment shows will be returning in 2012, including X Factor, I'm a Celebrity, Dancing on Ice and Long Lost Family, while we will be screening new shows including Superstar and Fool Britannia.

 

Live top sporting events in 2012 include Euro 2012, Champions League, Europa League, Tour de France and The French Open tennis. We will also continue to implement our ongoing news review.

 

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

We will continue to build scale in our online business, improving the distribution and performance of ITV Player, and driving up online viewing and revenues. We also plan to make ITV Player available on manufacturers' connected television sets and launch YouView. We will expand our pay strategy in 2012, as we launch ITV Pay Player and pay products, renegotiate existing video on demand deals and negotiate new ones, and develop potential pay channels over time. We also plan to roll out our 'Total Value' exploitation under new teams.

 

Build a strong international content business

We will continue to invest in building our creative strength and talent and developing and piloting new ideas. We will further grow ITVS' share of ITV1 network commissions, focusing on long-running, returnable series,  whilst increasing off-ITV commissions both in the UK and internationally. We will increasingly focus on new international co-productions and rolling out ITVS formats but will also look at different ways of working with creative talent. We will develop and invest in our international network through our creative engines, production hubs and emerging creative markets. In time, we may look to make acquisitions but we remain focused initially on growing the business organically.

 

Outlook

Our 2011 financial and operating results demonstrate the progress we are making and the momentum we have built up. We will increasingly look to content, pay and online as engines for growth in the UK and internationally as we invest further in our key strategic priorities. Everyone at ITV remains firmly focused on delivering the Transformation Plan and we remain on track to do so.

 

We will maintain our tight focus on cash management throughout the organisation. With positive net cash of £45 million, ITV is in a strong position financially which gives us the flexibility to invest in the business while making the right decisions for the long-term future of the business. After £339 million of bond buy-backs in 2011 we will continue to look at options for the balance sheet that make economic sense. We are conscious of the uncertain economic environment and the need to maintain flexibility to deliver our strategic priorities.

 

Although ITV Family NAR has started the year better than we expected, it is still down 2% in Q1 and, whilst we expect to outperform the market again in 2012, we remain cautious on the full year outlook for the television advertising market.

 

Adam Crozier

Chief Executive

 

Performance & Financials

 

Key Performance Indicators

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

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

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

4 Build a strong international content business

 

We have defined our Key Performance Indicators (KPIs) to align performance and accountability to the Transformation Plan.

 

These KPIs will be the key measures of success over the life of the Transformation Plan and cover all four strategic priorities.

 

Strategic

Priority

KPI

Performance

 

 

1

2

3

4

 

 

EBITA before exceptional items

This is the key profitability measure used across the whole business. Earnings before interest, tax and amortisation ('EBITA') before exceptional items reflects our performance in a consistent manner and in line with how the business is managed and measured on a day-to-day basis.

2011

2010

Absolute Change

£462m

£408m

£54m

The £54 million improvement is primarily due to 4% external revenue growth, which has been driven by non-NAR revenue, and delivery of cost savings. The cost savings made across the business, both through efficiencies and on the schedule, have funded investment in areas of the business which drive the Transformation Plan.

 


Strategic

Priority

KPI

Performance

1

2

3

4

Adjusted earnings per share

Adjusted earnings per share represents the adjusted profit for the year attributable to equity shareholders.

 

Adjusted profit is defined as profit for the year attributable to equity shareholders before exceptional items, impairment of intangible assets, amortisation of intangible assets acquired through business combinations, financing cost adjustments and prior period and other tax adjustments.

 

It reflects the business performance of the Group in a consistent manner and in line with how the business is managed and measured on a day-to-day basis.

2011

2010

Absolute Change

7.9p

6.4p

1.5p

Adjusted earnings per share has increased to 7.9 pence, a 23% increase, reflecting the improvement in trading discussed above and the reduction in adjusted financing costs.


Strategic Priority

KPI

Performance

 

 

 

 

1

2

3

4

 

 

'Profit to cash' conversion

'Profit to cash' conversion represents the proportion of EBITA before exceptional items converted into a measure of adjusted cash flow (defined as cash generated from operations before exceptional items less cash related to the acquisition of property, plant and equipment and intangible assets).

 

A key priority is to keep tight control on cash and costs and this measure primarily reflects our working capital management and capital expenditure control. As such, it remains ITV's aim to keep this 'profit to cash' conversion as high as possible, and in excess of 90% on a rolling three-year basis.

2011

2010

Absolute Change

103%

127%

(24)%

A 'profit to cash' conversion ratio of over 100% has been achieved for the third successive year, demonstrating the continued focus on working capital management.

While 103% is lower than the past two years, this is still a strong performance and above our 90% rolling three-year target.

 

The total 'profit to cash' conversion over the past three years has been 126%, which has driven the significant net debt reduction over that period.


Strategic Priority

KPI

Performance

 

 

 

 

1

Employee Engagement

To turn ITV into a world class organisation that is lean, creatively dynamic and fit-for-purpose requires high quality people who are engaged in the work that they do, and are committed to the Transformation Plan.

 

Employee engagement measures pride in the work we do, pride in working for ITV and also what we say about our programmes and services.

2011

2010

Absolute Change

85%

75%

10%

The 10% improvement in engagement is an indicator of improved commitment across the Company and of employees embracing the changes arising from the Transformation Plan, which is critical to our success.

 


Strategic Priority

KPI

Performance

 

2

ITV Family Share of Viewing (SOV)

Strategic priority 2 aims to maximise audience share from our existing free-to-air broadcast business, and ITV Family Share of Viewing (SOV) is the clearest indicator of this. ITV Family SOV is ITV's share of the total viewing audience over the year achieved by ITV's family of channels as a proportion of total television viewing, including the BBC family. ITV aims to at least maintain the ITV Family SOV.

2011

2010

Absolute Change

23.1%

22.9%

0.2%

ITV Family SOV has improved by 1% in the year, returning audience share back to the same level as in 2009. A 2% decline in ITV1 audience share has been more than offset by a continued strong performance by the digital channels, which were up 10%.

 

The movement in SOV can be split between viewing performance on each platform and the change in usage of each of these platforms during the year ('platform mix'). Removing the impact of the change in platform mix, 2010's SOV adjusted for the 2011 platform mix was 22.7%.

 

Strategic

 Priority

KPI

Performance

 

 

 

 

 

2

ITV Family Share of Commercial Impacts (SOCI)

Strategic priority 2 aims to maximise audience share from our existing free-to-air broadcast business, and ITV Family Share of Commercial Impacts (SOCI) is another key indicator of this. SOCI is the trading currency in the television advertising market, and since it only covers commercial television it does not include the BBC. This is the share of total UK television commercial impacts which is delivered by ITV's family of channels. An impact is one viewer watching one 30-second commercial. We aim to maximise our SOCI.

2011

2010

Absolute Change

39.5%

39.8%

(0.3)%

ITV Family SOCI was down by 1% year-on-year. ITV1's SOCI was down 4% year-on-year, but this was largely offset by 9% growth across the ITV digital channels.


Strategic Priority

KPI

Performance

 

 

 

2

ITV Family Share of Broadcast (SOB)

ITV's share of UK television advertising revenues is known as its Share of Broadcast (SOB). To maximise revenues from our free-to-air business, which is a key component of strategic priority 2, we aim to continue to maximise our SOB and to outperform the UK television advertising market.

2011

2010

Absolute Change

45.3%

45.1%

0.2%

In 2011, we gained market share once again, increasing our SOB to 45.3% of the total UK television market. This was due to strong performances by both the sales team and on-screen as we continue to deliver the big audiences and brands that are most demanded by advertisers.

 


Strategic Priority

KPI

Performance

 

 

 

 

 

3

Total long form video views

The Transformation Plan looks to drive new revenue streams by exploiting our content across multiple platforms, and long form video views are a key measure of this.

 

Long form video views are a measure of the total number of videos viewed across all platforms (such as itv.com, Virgin and mobile devices).

 

A long form video is a programme that has been broadcast on television and is available to watch online and on demand in its entirety.

2011

2010

Absolute Change

376m

261m

115m

Total long form video views are up 44% year-on-year at 376 million. Views on itv.com and Virgin, the largest components, continue to grow at over 30%, with growth also coming from making our content available on new platforms such as games consoles, smartphones and tablets.

 

Following the launch of our mobile apps in summer 2011, mobile devices now account for around 9% of all long form video views in recent months.

 

 

 

 

Strategic Priority

KPI

Performance

 

3

4

Non-NAR revenues

Non-NAR revenues include all ITV revenues, both internal and external, except net advertising revenues (NAR). Growing non-NAR revenues is key to the Transformation Plan as we aim to rebalance the business away from our reliance on television advertising revenues.

2011

2010

Absolute Change

£922m

£829m

£93m

There has been significant growth in non-NAR revenues in 2011 with an increase of £93 million to £922 million. This is due to a £35 million increase from international productions, a £31 million increase in supply of programming from ITV Studios to Broadcasting & Online, a £16 million increase in SDN external revenues, and a £6 million increase from online advertising.

 






Strategic Priority

KPI

 

 

 

Performance

 

 

4

Number of new commissions for ITV Studios

A key indicator of the creative renewal pipeline is the number of new commissions won. This figure includes programmes shown both on ITV and on other broadcasters, and both in the UK and internationally.

2011

2010

Absolute Change

111

87

24

There was strong growth of 28% in 2011 as creative renewal started to take place. The 111 includes 10 off-ITV commissions in the UK, and 45 international programmes.






Strategic Priority Priority

KPI

Performance

 

 

 

4

Percentage of ITV1 output from ITV Studios

This represents the proportion of the total spend on original commissions on ITV1 transmitted in the year, delivered by ITV Studios. In order to build a strong international content business, ITV Studios needs to increase its supply of programmes to ITV1, where we aim to make them famous and then sell them around the world.

2011

2010

Absolute Change

55%

53%

2%

The percentage of ITV1 output from ITV Studios has increased again in the year to 55%. This improvement has been driven by the delivery of factual and entertainment programmes.

 

Financial and Performance Review

 

We are now in a strong financial position from which to implement the next stage of the transformation plan.

 


2011

£m

2010

£m

Change

£m

Change

%

Net Advertising Revenue ('NAR')

1,510

1,496

14

1

Total non-NAR revenue

922

829

93

11

Total revenue

2,432

2,325

107

5

Internal supply

(292)

(261)

(31)

(12)

Total external revenue

2,140

2,064

76

4






EBITA before exceptional items

462

408

54

13

Adjusted earnings per share

7.9p

6.4p

1.5p

23

Net cash/(debt)

45

(188)

233


 

We have delivered another strong financial performance in 2011. External revenue has grown by 4%, which has been driven by non-NAR revenue, in particular from ITV Studios. This revenue growth, coupled with tight control of costs, has led to 13% growth in EBITA before exceptional items and 23% growth in adjusted EPS.

 

After 'profit to cash' conversion of 103% we now have positive net cash for the first time in seven years, and having bought back £339 million of debt in 2011, the gross debt levels have significantly reduced as well. Continuing this focus on cash and costs has meant that we are now in a strong financial position from which to implement the next stage of the Transformation Plan.

 

In 2011 we have taken further cost out of the business. £20 million of cost savings have been delivered, which is ahead of our £15 million target, and we have kept a tight grip on the schedule costs (the costs of programmes shown on air).

 

The cost savings have been reinvested in areas key to the Transformation Plan. Investment of £28 million was made in 2011 against specific initiatives aligned to the plan: improving the online experience and making the ITV Player available on more platforms; re-energising the creative pipeline by investing in additional creative staff and development of new programmes; more brand defining content for the digital channels; and technology investments to improve efficiency across the business. Despite this investment, we have been able to keep our average headcount flat as we reallocate resources to areas of the business which will drive the strategy.

 

There will be further investment in 2012 of around £25 million, which will be partly funded by new incremental cost savings of £20 million, as we continue to look at ways to improve the efficiency and performance of ITV.

 

The following review focuses on the adjusted results as, in management's view, these show more meaningfully our business performance in a consistent manner and reflect how the business is managed and measured on a daily basis. A reconciliation from the statutory to adjusted results is set out in the earnings per share section.

 

Broadcasting & Online


2011

£m

2010

£m

Change

%

Net Advertising Revenue ('NAR')

1,510

1,496

1

SDN external revenues

59

43

37

Online & On Demand

34

28

21

Other commercial income

217

204

6

Broadcasting & Online
non-NAR revenue

310

275

13

Total Broadcasting & Online revenue

1,820

1,771

3

Total schedule costs

(1,004)

(1,023)

2

Other costs

(437)

(421)

(4)

Total Broadcasting & Online EBITA before exceptional items

379

327

16

 

Total Broadcasting & Online revenue was up 3% with EBITA before exceptional items up 16%. The majority of revenue growth in the Broadcasting & Online division has come from non-NAR revenues, in particular from SDN, Online & On Demand and pay revenues. Total costs have been held flat as cost efficiencies and schedule savings have funded investment in the digital channels and Online & On Demand in line with the strategic priorities.

 

Despite the tough economic environment, our television advertising revenues have increased by 1%, outperforming the rest of the market for the fourth year in a row.

 

Our largest advertising categories of retail, food, and entertainment & leisure all declined in 2011 in the context of a challenging consumer environment, but this was compensated for by strong growth in finance, cars and car dealers, and  telecommunications.

 

Across the wider advertising market, internet advertising has taken share from press, whilst television has remained broadly flat as a proportion of total advertising spend.

 

SDN external revenues increased by 37%, largely due to the full year impact of the new contracts signed in the second half of 2010. Growth of this scale will not be repeated in 2012 as there were no material changes to SDN contracts in 2011.

 

Online & On Demand revenues have increased by £6 million, continuing the growth of recent years which has seen these revenues almost double from £18 million in 2008.

 

Other commercial income includes sponsorship, minority revenues, pay, PRS, media sales and other income. The 6% growth in 2011 has been helped by the new pay revenues from ITV2, 3 and 4 HD on Sky. These pay revenues will increase again in 2012 due to the new deals signed with Sky, Lovefilm and Netflix.

 

Broadcasting & Online costs have been tightly managed. The £19 million decrease in schedule costs is principally due to there being no football World Cup costs in 2011. This has been offset in part by £10 million investment in more brand defining content for the digital channels, supporting their continuing growth in key demographic audiences. Other costs have increased by 4% due to investment and revenue-related costs, such as £7 million investment in Online & On Demand and the launches of ITV1+1 and pay HD channels, offset in part by general efficiency savings.

 

ITV Studios


2011

£m

2010

£m

Change

%

UK Productions

345

318

8

International Productions

141

106

33

Global Entertainment

126

130

(3)

Total Revenue

612

554

10

Total Studios costs

(529)

(473)

(12)

Total EBITA before exceptional items

83

81

2





Sales from ITV Studios to Broadcasting & Online

292

261

12

External Revenue

320

293

9

Total Revenue

612

554

10

 

ITV Studios had a good year with strong revenue growth both in the UK and internationally, driven by increased new commissions.

 

EBITA before exceptional items has increased by £2 million to £83 million, the return from the increased revenues offsetting £8 million of investment. The revenue growth from new commissions has a lower margin on original commission, but as these programmes are recommissioned and sold internationally the margins should rise.

 

UK production revenues have increased by £27 million, largely as a result of an increase in supply to ITV channels, where there has been an increase in the ITV Studios proportion of ITV1 original commissions from 53% in 2010 to 55% in 2011.

 

The number of original hours delivered in the UK has increased by 8%, with most of the growth coming across entertainment and factual. There was also a 13% increase in the number of original drama hours delivered with new dramas such as Vera and Marchlands.

 

International production revenues improved by £35 million. The US and Germany were particularly strong, with the return of Kitchen Nightmares in the US and Ich Bin Ein Star... (I'm a Celebrity) and Der Bulle in Germany. The number of hours produced internationally is up 30%, with the growth occurring in the US and France and across all genres.

 

Due to a challenging environment in Spain we took the decision not to progress our local production operation, ITV Studios Spain. However, we still consider Spain to be an important market for our content and we continue to work with local broadcasters through our distribution business.

 

Revenues in Global Entertainment, our distribution business, were down by £4 million, mainly due to a decline in DVD sales. The UK DVD market remains under pressure and was down 5%.

 

By nature it takes longer for the impact of the creative renewal to feed through into the distribution business, but there are signs of progress. Prime Suspect has now been sold to 116 countries and Titanic, which will air in the spring, has already been sold to 86 countries.

 

Most of the costs of the production business are variable and linked to revenue, hence the increased costs are primarily a function of the improved revenues and more hours being produced. There has also been £8 million investment in new creative talent and in developing the pipeline with more scripts and pilots.

 

The creative renewal process within ITV Studios is beginning to show signs of momentum, as evidenced by the increase in  new commissions, which are up 28% in 2011. However, the lead time between commission, delivery and transmission means it takes time for this momentum to come through into the financial numbers.

 

Net financing costs


2011

£m

2010

£m

Financing costs directly attributable to loans and bonds

(45)

(59)

Cash-related net financing income

8

1

Cash-related financing costs

(37)

(58)

Amortisation of bonds

(13)

(11)

Adjusted financing costs

(50)

(69)

Mark-to-market on swaps and foreign exchange gains

16

5

Imputed pension interest

(5)

(13)

Losses on buy-backs

(39)

(10)

Other net financing income

3

12

Net financing costs

(75)

(75)

 

Adjusted financing costs are £19 million (28%) lower as we continue to make the balance sheet more efficient. Financing costs directly attributable to bonds have reduced due to the benefit of £485 million of bond buy-backs over the last two years, including £339 million in 2011. Cash-related net financing income has increased by £7 million, mainly due to the increased level of cash held and the benefit of receiving a better return through a slightly longer investment horizon.

 

Despite the reduction in adjusted financing costs, statutory net financing costs are flat at £75 million. This is primarily because of £39 million of one-off losses incurred on the buy-backs of certain bonds, in particular that of the 2015 £100 million bond tap which was issued at a substantial discount in 2009. These losses were partially offset by mark-to-market gains and lower imputed pension interest.

 

The mark-to-market gains resulted from a further reduction in implied interest rates during the year. Imputed pension interest has reduced due to the increase in the expected return on assets and a decrease in the interest on liabilities.

 

The adjusted financing costs in 2012 are likely to be broadly flat as the full year benefit from the bond buy-backs carried out in 2011 is likely to be largely offset by a step up in the interest rate on the 2019 loan.

 

Tax

The adjusted tax rate of 23% is lower than the standard tax rate due to the release of overseas prior year provisions (2010: the utilisation of available losses being in excess of normal disallowable costs). The total reported tax charge is £79 million (2010: £16 million).

 

 


2011

£m

2010

£m

Profit before tax as reported

 327

286

Exceptional items (net)

(1)

(19)

Amortisation and impairment of intangible assets*

47

48

Adjustments to net financing costs

25

6

Adjusted profit before tax

398

321

 

 


2011

£m

2010

£m

Tax charge as reported

(79)

(16)

Net charge for exceptional and other items

-

5

Credit in respect of amortisation and impairment of

intangible assets*

(12)

(13)

Charge in respect of adjustments to net financing costs

(7)

(2)

Other tax adjustments

7

(47)

Adjusted tax charge

(91)

(73)

Effective tax rate on adjusted profits

23%

23%

 

*  In respect of intangible assets arising from business combinations.

 

The total reported tax charge of £79 million results in an effective tax rate slightly lower than the statutory rate of tax of 26.5%, for the reasons noted above. The 2010 charge was lower primarily due to the recognition of a deferred tax asset of £68 million in 2010 in respect of tax losses not previously recognised. 

 

Cash tax paid of £68 million arises as a result of a full year of making payments for taxable profits, partially offset by the use of losses and tax treatment of allowable pension contributions.

 

The adjusted rate of tax applied to adjusted profits is lower than the statutory rate. This is the result of the consistent application of our policy to adjust the tax charge for losses utilised in the year to more closely reflect the cash tax paid in the year.

 

Dividend

The Board has proposed a final dividend of 1.2p. With the interim dividend of 0.4p, this gives a total dividend of 1.6p for 2011.

 

The final dividend will be payable on 1 June 2012 to shareholders on the register as at 4 May 2012. The ex-dividend date will be 2 May 2012.

 

The Board is committed to a progressive dividend policy, taking into account the outlook for earnings per share, while balancing the need to invest in the business and to maintain financial prudence against the backdrop of an uncertain economic environment.

 

Earnings per share

Adjusted earnings per share were 7.9 pence (2010: 6.4 pence). Basic earnings per share were 6.4 pence (2010: 6.9 pence).

 

Whilst statutory profit before tax of £327 million (2010: £286 million) has improved, basic earnings per share are lower than 2010 due to the statutory tax charge. The reason for this statutory tax charge increase of £63 million is primarily due to the recognition of a deferred tax asset of £68 million in 2010 in respect of tax losses not previously recognised.

 

Reconciliation between reported and adjusted earnings

 


Reported

£m

Adjustments

£m

Adjusted

£m

EBITA before exceptional items

462

-

462

Exceptional items

1

(1)

-

Amortisation and impairment

(59)

47

(12)

Financing costs

(75)

25

(50)

JVs and Associates

(2)

-

(2)

Profit before tax

327

71

398

Tax

(79)

 (12)

(91)

Profit after tax

248

 59

307

Non-controlling interest

(1)

-

(1)

Earnings

247

59

306





Number of shares (million)

3,883


3,883

Earnings per share (pence)

6.4p


7.9p

 

The adjustments 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 daily basis. The adjustments made are consistent with those made last year and are explained below.

 

Amortisation 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 operations of the business.

 

The tax and net financing costs sections of this review show the adjustments to these balances.

 

Cash flow, working capital management and positive net cash

 

 

Cash flow and working capital management

Cash and working capital management continues to be a key priority. We have generated £474 million of adjusted cash flow from £462 million of EBITA before exceptional items, driven by further improvements in working capital. The 'profit to cash' ratio was 103% for the year, ahead of the KPI target of 90% on a three-year rolling basis.

 


2011

£m

2010

£m

EBITA before exceptional items ('profit')

462

408

Decrease in programme rights and other inventory and distribution rights

-

108

Decrease/(increase) in receivables

52

(8)

Decrease in payables

(34)

(1)

Working capital movement

18

99

Depreciation

26

30

Share-based compensation

11

8

Cash flow generated from operations before exceptional items

517

545

Acquisition of property, plant and equipment and intangible assets

(43)

(28)

Adjusted cash flow

 474

517

'Profit to cash' ratio

    103%

127%

 

The 'profit to cash' ratio is more in line with target this year following the very high conversion rates over the previous two years. Programme rights and other inventory have reduced by over £200 million since 2008, meaning that they are now at more normal levels.

 

Cash spend on acquisition of property, plant and equipment and intangible assets was £43 million (2010: £28 million), as we started to upgrade our technology across the business and invest in future-proofing our soaps, in particular the new site for Coronation Street. This is expected to increase significantly in 2012 to around £70-£80 million due to increased investment in core technology and moving the Manchester site to MediaCity.

 

Positive Net Cash

A £233 million improvement in the year has resulted in a positive net cash position at 31 December 2011 of £45 million (31 December 2010: net debt of £188 million). Total cash has reduced by £59 million in the year to £801 million, as a significant portion of the cash generated from operations has been used to reduce gross debt. This reduction in gross debt has been achieved through £339 million (nominal) of debt buy-backs.

 

Interest paid was lower than 2010 as our adjusted financing costs reduced, but we also had one-off losses on debt buy-backs of £39 million and higher corporation tax payable as we returned to a full year of making payments for taxable profits. We also resumed the payment of dividends.

 

The £16 million of dividend payments represents only the payment of the interim dividend whereas in 2012 we are likely to pay both the 2011 final and the 2012 interim dividends.

 

There is no IFRS definition of net cash/(debt) and our figures represent our measure of this metric, which is consistent with previous years; this can be seen in section 4.1 of the Financial Statements. The major credit rating agencies each adjust our definition of net cash/(debt) in assessing our credit worthiness, taking a wider view of total indebtedness, which each agency views differently. Adjustments include the IAS 19 pension deficit, an imputed level of debt in lieu of operating leases, and adjustments to cash to exclude amounts not considered available for immediate debt repayment or core.

 

Liquidity risk and funding

Strong free cash flow generation in 2011 further strengthened the balance sheet and liquidity position.

 

Financing

Our debt is financed using instruments with a range of maturities. Borrowings at 31 December 2011 (net of currency hedges and secured gilts) are repayable as follows:

 

Amount repayable

£m

Maturity

€188 million Eurobond*

126

June 2014

£154 million Eurobond

154

Oct 2015

£135 million Convertible bond

135

Nov 2016

£250 million Eurobond

250

Jan 2017

£200 million Bank loan

62

March 2019

Finance leases

53

Various

Total repayable

780


 

*  Net of Cross Currency Swaps.

 Net of £138 million (nominal) Gilts secured against the loan.

 

There are no financial covenants on any of our debt and the next scheduled repayment is in June 2014.

 

Debt Structure

During the year we took further steps to improve the efficiency of our balance sheet, where it made economic sense to do so. In 2011 we repurchased £339 million nominal value of bonds comprising all of the £110 million 2013 bonds (at a book loss of £4 million) and £229 million of the 2015 bonds. The repurchase of 2015 bonds was at a book loss of £35 million, which was mainly incurred against repurchasing all £100 million of a tap issue to this series of bonds undertaken in early 2009 at the height of the financial crisis.

 

In addition, during the year a €54 million Eurobond (£47 million book value) matured along with associated cross currency interest rate swaps (book value £63 million), resulting in a net cash inflow of £16 million.

 

These repurchases have smoothed our maturity profile and have ensured that we have no scheduled debt repayments due within two years.

 

Given the improved cash position, some cash deposits are now made over a longer investment horizon; this has improved the returns on our cash balances.

 

We are aware of the inefficiency of the balance sheet and, as noted above, have continued to take steps during the course of the year to help address this. Since October 2009 we have repurchased £662 million (nominal value) of debt.

 

In 2012 we will continue to look at the options for the balance sheet that make economic sense. Any potential course of action will take into account our prudent view of liquidity under an uncertain economic outlook, and ensure that sufficient flexibility is maintained to invest in the business and to deliver the Transformation Plan.

 

Ratings

Our credit ratings continued to improve in 2011. In April, Standard & Poor's upgraded the long-term credit rating from B+ (Stable Outlook) to BB (Stable Outlook) and Moody's Investors Service increased its rating from Ba3 (Stable Outlook) to Ba2 (Stable Outlook). In May, Fitch revised its outlook on our BB rating from Stable to Positive. In August, Moody's Investors Service similarly revised upward the outlook.

 

Despite improvements in the credit ratings from all three agencies over the past two years, we remain sub-investment grade and would require two notch upgrades from each agency in the future in order to restore investment grade. The sub-investment grade status reflects the business' high degree of operational gearing, exposure to the economic cycle, lack of business and geographical diversity and ongoing structural changes in the media industry. We recognise these issues and seek to address them through the Transformation Plan.

 

Pensions

IAS 19 - the accounting deficit

The aggregate IAS 19 deficit on defined benefit schemes at 31 December 2011 was £390 million (31 December 2010: £313 million). The most significant reason for the increase was as a result of the fall in corporate bond yields which are used to value the liabilities, although this was partially offset by a reduction in the rate of market implied inflation. The value of the assets of the ITV Pension Scheme ('the Scheme') increased during the year, driven by a strong performance by the bonds and swaps used for hedging interest and inflation risk. This gain has been reduced by losses in the Scheme's equity portfolio and the impact of the introduction of the longevity swap. 

 

Measures to manage the costs and risks associated with the Scheme

We have a long-term strategy to implement a programme of measures to manage the costs and risks associated with the Scheme, and as part of this strategy two significant steps - a longevity swap and an extension to the SDN pension partnership - were taken during the year to reduce the exposure of our business to legacy pension risk.

 

(i) Longevity Swap

On 22 August 2011 the trustee of the Scheme ('the Trustee') completed a transaction that removes the risk of increases in pension liabilities that would arise if a significant portion of the Scheme's defined benefit pensioner population were to enjoy a longer life than is currently expected. The instrument is known as a longevity swap and it de-risks the future cash flows of the pension scheme.

 

Initial recognition of the swap resulted in a reduction to the Scheme's assets of £65 million, thereby increasing the net IAS 19 pension deficit. The valuation reflects the value of the fixed cash flows the Trustee will make to the counterparty compared to the value of the forecast payments that the counterparty makes to the Trustee based on actual requirements.

 

The swap is included in the valuation of Scheme assets and in the future it will move up or down in value based on changes to actuarial assumptions including mortality, discount rates and inflation. Although the value of the instrument will move, the net cash flows made by the pension scheme in respect of these members are now fixed.

 

Pensions continue to be paid from the Scheme based on actual requirements.

 

(ii) SDN pension partnership extension

On 8 July 2011, the partnership's interest in SDN was increased by a further £50 million, enabled by the increase in the value of the SDN business. As a result of this, the partnership will increase the annual contribution to the Scheme by £3 million to £11 million per annum from 2013 onwards; the 2012 cash contribution will be £10 million. Under the partnership arrangements, we have committed to making a payment to the main section of the Scheme of up to £200 million in 2022 (an increase of £50 million compared to the original agreement made in 2010), if and to the extent that it remains in deficit.

 

Actuarial valuations

Full actuarial valuations are carried out every three years. The latest completed actuarial valuation of Section A of the main defined benefit scheme was carried out as at 1 January 2008 and, on the bases adopted by the Trustee, that Section was in deficit to an amount of £190 million or 9% of the liabilities in that section. An actuarial valuation of Section A is being undertaken as at 1 January 2011.

 

Actuarial valuations of Sections B and C of the main scheme were carried out at 1 January 2010 and on the bases adopted by the Trustees, both were in deficit with a combined deficit of £49 million or 11% of the liabilities in those sections.

 

Given that the timetable for the valuation of Section A of the Scheme was different to that of Sections B and C, in order to increase efficiency and to streamline the processes the Group has agreed with the Trustee that actuarial valuations of all three sections will be undertaken as at 1 January 2011. We are in ongoing discussions with the Trustee regarding the results.

 

Deficit funding contributions

We have agreed with the Trustee the level of contributions to the main section of the Scheme through to the end of 2014.

 

We expect to make deficit funding contributions of £71 million in 2012, £66 million to Section A and £5 million to Sections B and C. Details of how this is constituted can be seen in section 3.6 of the Financial Statements and are summarised below.

 

Expected Pension Contributions in 2012

£m

Section A


Regular deficit funding

35

Additional 2012 deficit funding for Section A*

5

10% of 2011 EBITA before exceptional items over £300 million

16

SDN pension partnership

10


66

Sections B and C


Regular deficit funding

5

Total expected pension contributions in 2012

71

 

* Since there were no initiatives in 2011 which reduced the Scheme's deficit by at least £10 million, compared with the level had such initiatives not been implemented.

 

Assuming no unforeseen circumstances, no further change is currently expected in our committed contributions to Section A of the Scheme before 2015.

 

Ian Griffiths

Group Finance Director

 

Risks and Uncertainties

 

Risk management process

In 2011 ITV continued to develop and review its risk management process. Our approach covers risks at all levels of the organisation and examines business risks on both a top down and bottom up basis. The approach breaks down risks into three core groups:

 

·      High Impact, Low Likelihood (HILL) risks - of low inherent likelihood but where there would be major consequences were the risk to materialise;

·      Strategic risks - would impact the successful execution of the strategy; and

·      Process level risks - embedded into everyday activity within the organisation.

 

The ITV plc Board regularly reviews the risk management framework, its content and its operation. The Board is responsible for establishing a robust and appropriate process, including regularly reviewing the risks themselves. The Audit Committee keeps the effectiveness of the risk management process under review.

 

The Board continues to review the appropriate risk appetite for certain risk types to ensure ITV is carrying an acceptable level of risk.

 

Each strategic risk has been mapped to one of the four key strategic priorities and, where possible, assigned key risk indicators. Where appropriate, the key risk indicators are aligned to our key performance indicators. All  strategic risks are owned by a member of the Management Board. The Management Board has overall responsibility for the content and operation of the risk management framework and performs regular review of both strategic and HILL risks. Process level risks are subject to ongoing review by internal audit.

 

ITV's risk monitoring and mitigation process is embedded in the running and review of the business. While risks are primarily controlled through the risk management process in place, mitigating actions are identified for each of the risks.

 

High Impact, Low Likelihood (HILL) risks

Risk theme

Risk

External Economic

and Political Environment

- There is a major decline in advertising revenues, or a double dip recession, significantly impacting ITV's overall financial performance.

 

- ITV loses its credit status.

 

- There is a collapse:

·              in investment values, leading to a material pension scheme deficit.

·              of the euro impacting European trading and asset prices.

·              of a major bank impacting the availability of credit.

Regulatory Change

or Breach

- There is a major regulatory breach that results in the loss of the Channel 3 licence, or the Channel 3 licence is not renewed in 2014 and no contingency plan is in place to cover that loss.

 

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

 

- There is a significant loss of programme rights.

 

Critical Failure in Delivery Model

- There is a sustained denial of transmission facilities at Technicolor, our third party outsourced provider, or the loss of a major data centre.

 

Significant Physical Incident

- A major incident results in ITV being unable to continue with scheduled broadcasting for a sustained period, or removes a number of the key management team from the business on a long-term or permanent basis.

 

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

Prolonged Cyber Attack

- There is a sustained cyber/viral attack causing prolonged system denial or major reputational damage.

 

Strategic risks

The key strategic risks are those that impact the successful execution of the strategy and as a result require regular Management Board monitoring. All of the strategic risks identified have been mapped to the four strategic priorities of the Transformation Plan and have been grouped by key risk themes.

 

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

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

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

4 Build a strong international content business

 

Risk theme

Risk

Strategic priorities

People

- ITV lacks adequate management capability and creative talent.

 

1 2 3 4

 

 

- ITV employees are not sufficiently engaged in the business.

 

1 2 3 4

 

- The extensive degree of change that the business will undergo will overload a small number of key people.

 

 

1 2 3 4

 

Organisation, structure and process

- The business continues to work in silos, resulting in sub-optimal decisions being made which impacts execution of the strategy.

 

 

1 2 3 4

-  A significant and high profile transmission incident (or high numbers of single point failures) causes significant reputational damage to ITV.

 

 

1 2

 

 

- ITV fails to identify and secure sufficient programme rights.

 

 

2 3 4

- ITV fails to invest in, develop or operate international businesses effectively.

 

 

4

Technology

- Late delivery of the new technology platform, and heavy reliance placed on legacy technologies prior to the project's completion, negatively impacts ITV's ability to achieve its strategic aims. 

 

 

1 2 3

 

 

- Current technological environment and business processes are not sufficient to support the growth in Online services.

 

 

1 3

 

 

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

 

 

1 2 3

 

 

The market

- ITV remains over-reliant on the advertising market and is therefore heavily exposed to the economic cycle.

 

 

 

2 3 4

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

 

 

2

 

- ITV risks losing its advertising unique selling point due to the increasing threat of competition, negatively impacting ITV's Share of Broadcast.

 

 

2 3 4

 

 

 

In 2010 we identified two potential strategic risks - 1) inadequate management information and 2) inadequate infrastructure - which are not included in our 2011/12 risk register. Following improvements in our management information systems we no longer deem this to be a key strategic risk, and the risk of inadequate infrastructure has been encompassed within more specific risks above.

 

Responsibility

 

Creating a responsible future

At ITV, we have a responsibility to both existing and future stakeholders which is taken seriously. As a broadcaster and producer our activities can impact the lives of millions of viewers and users of our services, in addition to affecting the perception of ITV by other stakeholders. Other stakeholders include investors, regulators, talent, suppliers and employees, whose engagement with ITV plays an essential role in the success of our Transformation Plan.

 

During 2011, our responsibility strategy has been revised to align to the Transformation Plan and our four strategic priorities, and to contribute towards long-term industry sustainability. The strategy also aims to mitigate our risks and uncertainties and ensure the Company continues to behave in a responsible manner through specific performance targets. Objectives have been identified by the newly formed Corporate Responsibility Committee and are supported by the Management Board. A new role of Head of Corporate Responsibility has been appointed to roll out the strategy across the Company. They will be responsible for consolidating activity for maximum impact and managing policy around charitable giving, both on and off-screen. This role reports directly into the Group HR Director, who also chairs the Corporate Responsibility Committee, ensuring activity is relevant and integrated into the business.

 

A list of Committee members and their roles at ITV can be found on our Corporate Responsibility website.

 

Priorities

Over the next three years our strategy aims to help to grow our business through strengthening stakeholder pride and loyalty in ITV. Our approach is to utilise our strong presence as a catalyst in the heart of our communities. This will be achieved through the following three priorities:

 

- Investing in drama in our regions

Utilising ITV's brand, expertise and presence to generate long-term sustainability in the creative industry outside of London, by supporting grass-roots talent, skills and production in drama.

 

- Responsible reach

Utilising ITV's unique position as a regional and national broadcaster and the reputation of well-known programmes as a vehicle to engage mass audiences in national campaigns and raise awareness around grass-roots issues.

 

- Operating responsibly

Being seen as a responsible industry leader by demonstrating the link between responsibility and a sustainable future. In particular:

 

·    Utilising external benchmark tools to improve ITV's position and working cross-industry to share best practice;

·    Setting performance targets where feasible and transparency on results;

·    Supporting new and diverse talent and improving access to the industry; and

·    Recognising and rewarding employees' individual contributions and impact on the community and environment.

 

For information demonstrating the impact of our Corporate Responsibility in the year, the drivers resulting in the above priorities, and specific aims and measures around the strategy, please visit our Corporate Responsibility website.

 

Performance summary

The following information summarises the impact that the Company's operations have had on its people, customers, suppliers, community and environment during 2011.

 

People

We have outlined in Priority 1 of the Transformation Plan, as well as in our Risks and Uncertainties section, that attracting and retaining talent is critical to our success. It is therefore in our interest to ensure that we provide the appropriate rewards and opportunities for development so that our people feel engaged with the Company. Insufficient employee engagement has been identified as a potential strategic risk.

 

We have again completed an engagement campaign in 2011, with the members of the Management Board visiting ITV locations and giving employees the opportunity to feed back their thoughts and concerns about the business. This engagement has continued through other forums such as the Company intranet, video booths and regular hard copy newsletters, as well as through briefings between managers and their teams by which employees can understand the financial and economic factors affecting the Company's performance and how their role contributes to the execution of our strategy. Participation in ITV's Employee Engagement Survey increased from 62% to 82% in 2011 while employee engagement has improved from 75% to 85%.

 

We have continued to invest in our people through training programmes for all employees as well as leadership development. 92% of managers benefited from formal training in 2011. The introduction of a new online performance management tool will continue to ensure clarity around capability and objective-setting as well as succession planning. More detailed information around leadership and succession planning can be found in the Governance section.

 

Our package of voluntary benefits, Relish, provides valuable cost savings for employees and also for the Company. Enrolment for 2012 Relish benefits was more popular than ever, with 53% of employees now participating in at least one Relish benefit. All eligible employees earning under £60,001 received a 3% increase in salary in January 2012, as well as an additional one-off award to the value of £250 as part of the annual pay review.

 

As in the previous year, the pay award for 2011 for eligible employees (earning above £60,000) was performance-related. We share the success of ITV through our all-employee annual bonus which paid out in 2011. The Company also operates an all-employee Save As You Earn scheme.

 

 

Diversity

The business case around diversity is compelling as it ensures we attract and retain the best talent. This is achieved through our inclusive Equal Opportunities policy. Our policy reflects the Equality Act 2010 and aims for equality around gender, marital or parental status, race, origin, nationality, religious belief, disability, age, sexual orientation, and gender reassignment. ITV is recognised as a positive employer, holding the 'two-tick' disability symbol and being the only broadcaster to be part of Stonewall's top 100 Workplace Equality Index, for the second year running. ITV participates in major national and industry-specific diversity forums, working as a collective to share best practice and campaign for change.

 

Workplace profile (%)


2011

2010

Female employees

49.4

49.9

Ethnic minority employees

9.1

9.7

Employees with a disability

2.9

2.7

Employees aged over 50

15.0

15.0

Lesbian, gay and bisexual employees

4.9

N/A

 

Percentages based on those who declared relevant information (approximately 75% of workforce).

 

Health and safety

The Health and Safety (H&S) of employees, contractors and visitors at ITV is always a high priority. The significant loss of human life as the result of a major H&S incident has been identified as a specific risk to the organisation. The H&S team continue to use a management system that meets the specific risk profile of the business which is supported by a comprehensive training programme and communicated across the business. Examples of this activity and wider statistics can be found on our Corporate Responsibility website.

 

Health and safety - performance indicators

 

Employee accidents - excluding contractors

2011

2010

Accidents requiring more than three days off work

8

5

Major accidents

2

2

Fatal accidents

0

0

 

Customers

Our key customers are our viewers - across various platforms - our advertisers and other broadcasters.

 

We seek to maximise audience and revenue share from our free-to-air business, as laid out in Priority 2 of our Transformation Plan. To manage the risk around this revenue source, it is essential that we understand our viewers, that we are meeting their expectations and needs as customers and that we deliver maximum value both to them and to advertisers.

 

In 2011 we continued to commission an independent research company to recruit and survey a Vision Panel. The panel is representative of 8,000 adult television viewers. This enables ITV to measure audience reaction to programmes and content on a daily basis and to achieve an in-depth understanding of viewer expectations and preferences. The panel enables ITV to ask further questions about its channels, new ideas and views on broader media issues. Qualitative research is also obtained via focus groups which may target particular demographics to gain insights for programme development.

 

All ITV programmes must comply with the Ofcom Broadcasting Code in relation to their content and scheduling. We observe the 9.00 pm watershed and alert viewers to material that may cause offence. Our in-house compliance team follow detailed compliance procedures, providing advice to commissioners and programme-makers both during production and during the process of reviewing programmes before broadcast. Our in-house viewer services team provide a responsive complaints handling service while viewers can also raise complaints directly with Ofcom. In 2011 Ofcom found 12 breaches of the code compared to six in 2010. We respond to any breach by assessing the causes and implementing any changes required to our practices and processes.

 

We continue to deliver access services across our family of broadcast channels beyond the targets set by Ofcom for subtitling, signing and audio description. On the ITV Player about 80% of programming is now subtitled, and plans to offer audio description and signing are progressing well. Signing continues to be provided by our award-winning in-house facility SignPost which offers online signing services, news, information, entertainment and education in and about sign language. As well as signing provision, SignPost has been recognised for its wider access and community work. Signed Stories, our website with books to see in sign language and subtitles, won a Plain English Campaign Media Award in December 2011 for the clarity and simplicity of all its written content. ITV BabySign won the Best Early Years Digital Content at the 2012 BETT awards. The free website helps parents teach sign language to babies before they are old enough to speak, improving early years communication and bonding.

 

Access services for ITV1 (% of programmes)

 


Ofcom target

ITV 2011

Subtitling

90%

99%

Audio description

10%

20%

Signing

5%

6%

 

For more information on targets, achievements and services visit our Corporate Responsibility website.

 

Suppliers

We conduct business with a large variety of suppliers and endeavour to do business on terms that are considered fair and reasonable. To ensure we trade responsibly, we draw up contracts with suppliers which incorporate industry-standard environmental and H&S standards. It is in the Company's best interest to ensure we have transparent and effective relationships with suppliers, in particular those with whom we work regularly, such as suppliers of outsourced services and key suppliers of programming and broadcasting programme rights. Managing supplier relationships is a key part of our business strategy and is the responsibility of both the commissioning and commercial teams and our central procurement team.

 

We have a variety of suppliers who are key to the business. A number of the Company's major suppliers are involved in the broadcast of ITV's family of channels and include Arqiva, Technicolor, SES Astra and BT. Other key suppliers include those who provide the technology for outside broadcast such as SIS. In 2011 ITV signed an agreement with Irdeto to provide an IT platform for the provision of pay TV capability. ITV has also engaged Mace Group to manage and deliver the move into MediaCity in Manchester.

 

Key suppliers of programming and broadcasting programme rights include ITN, who provide ITV's national news programmes, Fremantle who produce Britain's Got Talent and The X Factor for ITV1, the Football Association, The Rugby Football Union and NBC Universal Studios.

 

Community and Charitable Giving

We hold a unique role within the community due to our ability within the regions to provide sponsorship for, and raise awareness of, causes at a local level. We are proud to carry out this wider social role and contribute towards a sustainable future. However, we balance this against short and medium-term business requirements, such as:

 

·      Connecting audiences to the brand through regional community partnerships and initiatives which generate loyalty to ITV and provide insights to ensure content reflects its audiences;

·      Enhancing reputation by using our air-time influence and reach to make a positive impact on society, as well as raising awareness of some of the positive activities we do for the community; and

·      Attracting and retaining the best talent by ensuring the Company is accessible and supporting the next generation of talent from within the regions.

 

During 2011, our activities have ranged from charitable giving to donations to specific programmes and campaigns. In all, ITV has contributed to £1.5 million in cash (2010: £1.5 million) and £3.4 million in-kind (2010: £5.7 million). In addition through our call to action campaigns, such as Born to Shine, Malaria No More and Text Santa we have raised £6.4 million through text and phone lines. Text Santa was a major new charity initiative, launched as a dedicated on-air appeal over the Christmas period, raising awareness and money for those most vulnerable during the festive period. In all, we raised a total of £4.1 million, which will be split between our nine deserving charities: Carers UK, Crisis, Help the Hospices, Samaritans and WRVS, as well as children's hospital charities Great Ormond Street Hospital Children's Charity, Noah's Ark Appeal, Helping Hand, and Yorkhill Children's Foundation. We hope to repeat this in 2012.

 

ITV takes its role in inspiring and developing young people seriously. Offering programmes for 14 year olds and upwards, we offer structured training and experiences to help create a future sustainable workforce for the industry, with a heavy focus outside of London. As part of our responsibility we focus on improving access to the industry, aiming to remove negative perceptions and barriers around working in media. Particular successes include our Work Inspiration summer programme for 100 young people, Modern Apprenticeships, work experience for students in higher education, and positive action through our Enabling Talent programme for talented individuals with a disability.

 

More information on activity within the community, charitable giving, donations raised and the organisations which we support can be found on our Corporate Responsibility website.

 

It is the Company's policy not to make cash contributions to any political party. However, within the normal activities of the Group's national and regional news-gathering operations there may be occasions when an activity may fall within the broader definition of 'political expenditure' contained within the Companies Act 2006. Shareholder authority for such expenditure was given at the 2011 Annual General Meeting. However, during 2011 the Group made no payments falling within this definition (2010: nil).

 

Environment

Our obligation to operate responsibly includes a consideration of our impact on the environment. Our production activities involve content production both in the studio and on location, and the running of such operations consumes large amounts of energy, producing carbon emissions. Our priority continues to be the reduction of carbon emissions to comply with the Carbon Reduction Commitment - Energy Efficiency Scheme. In 2011 we took another step towards our goal of reducing carbon emissions by 15% by the end of 2012 (from the 2008 baseline), with the aim of reducing our impact on the environment and the amount of carbon credits the Company will have to purchase in summer 2012. This figure will be published on our Corporate Responsibility website. Statistics are outlined opposite.

 

We continue to engage with the investment community regarding our corporate responsibility performance. In 2011 ITV was once again included in the Dow Jones Sustainability World Index.

 

Environmental performance indicators (1)

 


2011

2010

2009

2008

Total CO2 emissions from business travel (tonnes)

4,921

5,774

6,831

5,867

Total CO2 emissions (tonnes)(2)

43,051

44,427

46,383

50,471

Total waste (tonnes)

1,724

1,807

2,195

1,900

Total waste recycled

85%

60%

65%

N/A

Total water use (m3)

81,891

87,017

86,656

93,175

 

(1) UK only, including landlord managed sites, assistance with data completion by Utilyx Ltd (independent energy consultants).

(2) Calculated in accordance with the WRI/WBCSD Greenhouse Gas Protocol methodology.

 

Our focus in 2012 will be to continue to look at new technology which will enable us to reduce carbon emissions, initially within our static production bases, alongside other activities which will contribute to a sustainable future. Narrative around the above performance indicators, our current activity and our planned changes can be found on our Corporate Responsibility website, www.itvplc.com.

 

Contact us at responsibility@itv.com.

 

GOVERNANCE

 

Board of Directors

1. Archie Norman

Chairman

 

Appointment to the Board

1 January 2010

Age 57

Committee membership

Nomination (Chairman), Remuneration

Key areas of prior experience

Business turnaround and overseas investment

External appointments

• Adviser to Wesfarmers Limited (2009)

• Director of Coles Group (2007)

• Chairman, HSS Hire Services Group (2007)

• Founder, Aurigo Management Partners LLP (2006)

• Senior Adviser to Lazard (2003)

• Trustee, Cystic Fibrosis Trust (2009)

• Governor, National Institute of Economic and Social Research (1997)

Previous experience

• Chairman, Energis (2002-2005)

• Member of Parliament (1997-2005), Chief Executive and Deputy Chairman of the Conservative Party (1998-1999); Shadow Minister for Europe (1999-2000); Shadow Secretary of State for Department of Environment, Transport and the Regions (2000-2001); Founder, Policy Exchange (2001)

• Chief Executive (1991-1996) and Chairman (1996-1999), ASDA Group plc

• Finance Director, Kingfisher plc (1986-1991)

• Chairman, Chartwell Land plc (1987-1991)

• Non-executive director of British Rail (1992-1994), Railtrack plc (1994-2000), and Geest plc (1988-1991)

• Partner, McKinsey and Co (1979-1986

Qualifications MA, MBA

 

2. Adam Crozier

Chief Executive

Appointment to the Board

26 April 2010

Age 48

Committee membership

General Purpose

Key areas of prior experience

Business turnaround and change management

External appointments

• Non-executive director of Debenhams plc (2006)

Previous experience:

• Group Chief Executive, Royal Mail Group (2003-2010)

•  Non-executive director of Camelot Group plc (2007-2010)

•  Chief Executive of the Football Association (2000-2002)

•  Joined Saatchi & Saatchi Advertising in 1988,

 Joint Chief Executive (1995-1998)

Qualifications BA

 

3. Ian Griffiths

Group Finance Director

 

Appointment to the Board

9 September 2008

Age 45

Committee membership

General Purpose

Key areas of prior experience

Corporate finance and financial restructuring

External appointments

None

Previous experience

•  Group Finance Director of

 Emap plc (2005-2008)

•  Senior Finance roles held within Emap

 plc including director of financial control

 (2000-2005) and head of finance at Emap

 Business Communications (1995-2000)

•  Manager in audit and corporate finance Ernst & Young (1988-1994)

Qualifications MA, ACA

 

4. Mike Clasper CBE

Senior Independent Director

 

Appointment to the Board

3 January 2006

Age 58

Committee membership

Audit, Nomination, Remuneration

Key areas of prior experience

Business services, logistics and risk management

External appointments

• Chairman of Which? Ltd (2008)

• Chairman of HM Revenue & Customs (2008)

• Governor of RSC (2011)

Previous experience

•  Member of the Investor Board of EMI Group (2007-2008)

•  Operational managing director of Terra Firma (2008)

•  Member of the National Employment Panel (2006-2008)

•  Founder member of the Corporate Leaders Group on Climate Change

•  Chief executive of BAA plc (2003-2006), deputy chief executive of BAA plc (2001-2003)

•  President of Global Home Care, Procter & Gamble (1999-2001)

Chairman of the West London Consortium (2006-2011)

Qualifications MA

 

5. Andy Haste

Non-executive Director

 

Appointment to the Board

11 August 2008

Age 50

Committee membership

Audit, Nomination, Remuneration (Chairman)

Key areas of prior experience

International and emerging markets, change management , restructuring and business turnaround

External appointments

• Group Chief Executive of RSA Insurance Group plc (2003-2011)

Previous experience

•  Chief Executive of AXA Sun Life plc (1999-2003)

•  Director of AXA UK plc (life and pensions) (1999-2003)

•  President and CEO, GE Capital Global Consumer Finance UK, Western Europe and Eastern Europe (1998-1999)

•  CEO, GE Capital Global Consumer Finance UK (1996-1998)

•  President of National Westminster Bank US Consumer Credit Business (1995-1996), senior vice-president and head of US Consumer Loan Products Division (1992-1995)

 

6. Lucy Neville-Rolfe CMG

Non-executive Director

 

Appointment to the Board

3 September 2010

Age 59

Committee membership

Nomination

Key areas of prior experience

International retail, communications, legal and regulatory issues

External appointments

•  Executive Director, Corporate and Legal Affairs, Tesco plc (2006)

•  Deputy Chair, British Retail Consortium (1998)

•  Non-executive director, The Carbon Trust (2008)

•  Member of the Coalition Government's

 Efficiency and Reform Board (2010)

•  Member of China-Britain Business Council (2007),  UK-India Business Council (2008) and Corporate Leaders Group on Climate Change (2006)
• Member of UK Trade and Investment Strategic Advisory Group (2011)

Previous experience

•  Chairman, Dobbies Garden Centres (2007-2011)

•  Group Director of Corporate Affairs (1997-2006) and Company Secretary (2004-2006), Tesco plc

•  Director of Deregulation Unit, BIS (formerly the DTI) and Cabinet Office  (1995-1997)

•  Member of Prime Minister's Policy Unit (1992-1994)

•  Ministry of Agriculture and Fisheries and Food (1973-1992)

Qualifications BA, MA, FCIS

 

7. John Ormerod

Non-executive Director

 

Appointment to the Board

18 January 2008

Age 63

Committee membership

Audit (Chairman), Nomination, Remuneration

Key areas of prior experience

Financial experience, developing strategy and growth

External appointments

•  Non-executive Chairman of Tribal Group plc

 (2010, director from 2009)

•  Senior independent director and chairman  of audit committee at Misys plc (2005)

•  Non-executive director and chairman of audit committee of Gemalto NV (2006) and

 Computacenter plc (2006)

Previous experience

•Trustee of the Design Museum (2006-2012)

•  Non-executive director and chairman of Merlin Claims Services Holdings Limited (2007-2010) 

•  Non-executive director of Negative Equity  Protection Holdings Limited (2007-2009), Millen Group Limited (2007-2009) and  BMS Associates Limited (2004-2008)

•  Member of audit and retail risk control committees and HBOS plc (2004-2008)

•  Trustee of The Roundhouse Trust (2003-2008)

•  Chairman of Walbrook Group (2004-2007)

•  Chairman of audit committee and Transport for London (2004-2006)

•  Practice senior partner, London, Deloitte & Touche (2002-2004)

•  Regional managing partner, UK and Ireland and senior partner, UK, Arthur Andersen (2001-2002)

•  Held various positions within Arthur Andersen from 1970

Qualifications MA, FCA

 

Corporate Governance

 

Dear Shareholder,

The Board of ITV believes that corporate governance is important in ensuring its effectiveness and that of the business. This governance report comprises the following sections:

 

·              How the Board works;

·              Effectiveness;

·              Accountability;

·              Relations with shareholders;

·              Audit Committee Report; and

·              Remuneration Report.

 

The main role of the Board is to work with the executive providing support and advice to complement and enhance the work undertaken. The Board consistently challenges processes, plans and actions to promote continuous and sustained improvement across the business.

 

The Board takes seriously the guidance set out in The UK Corporate Governance Code (the Code). During 2011 ITV plc complied with the requirements of the Code as set out in this report.

 

Archie Norman

Chairman

29 February 2012

 

How the Board works

Our role

The Board as a whole is collectively responsible for delivering the long-term success of the Company by:

 

·    providing entrepreneurial leadership of the Company within a framework of prudent and effective controls which enable risk to be assessed and managed;

·    supporting the executive team to formulate and execute the Company's long-term objectives and strategy, ensuring that the necessary financial and other resources are in place for the Company to meet its objectives, and reviewing management performance; and

·    setting the Company's values and standards and ensuring that its obligations to its shareholders and others are understood and met.

 

There is a schedule of specific matters reserved to the Board for decision which is available on our website at www.itvplc.com.

 

Our meetings

The number of meetings held during the year and attendance of Directors is set out in the table below. An annual schedule of matters the Board wishes to consider at each meeting and at each meeting of its committees is produced. Meetings are normally held at one of the London sites and at least once a year at one of the regional offices. In 2011 the Board met colleagues in Leeds. Board meetings are structured around the following areas:

 

·              operational and functional updates;

·              financial updates;

·              strategy and risk;

·              progress against Transformation Plan priorities;

·              other reporting; and

·              feedback from committees.

 

Senior executives and other colleagues are regularly invited to attend meetings for specific items. In addition to formal Board and Committee meetings the following meetings take place between:

 

·              Board members and Management Board members

·              Chairman and non-executive Directors (the Chief Executive is sometimes invited to attend)

·              SID and non-executive Directors (without the Chairman present)

 

What we have done and what we are planning

Some of the things the Board has focused on during 2011 include:

 

·              News strategy

·              Pensions longevity swap

·              Cash and counterparty limits

·              Technology strategy and governance

·              Regulatory strategy

·              Bond buy-backs and other debt settlement

·              Dividends, future capital structure and other debt management options

 

Some of the things the Board is planning for 2012 include:

 

·              Pay strategy and Total Value proposition

·              International content strategy

·              Broadcasting strategy and brand

·              Further review of news strategy

·              Pensions investment strategy

 

Our Governance structure

Details of membership of the Management Board can be found on our website at www.itvplc.com. The Board has approved a formal framework for approval of expenditure within the Company around this governance framework.

 

Who is on our Board and how we work as a team Composition and appointments

Details of Board membership during 2011 is set out in the table below. There were no changes to the Board during the year.

 

Andy Haste completed three years as a non-executive Director in August 2011. It was agreed that he should serve a further term subject to the Board succession planning framework. Mike Clasper completed six years as a non-executive Director in January 2012 and has been asked by the Board to continue as a Director for a further 12 month period.

 

At the AGM in May 2012 there will be resolutions to re-elect each of the Directors.

 

Non-executive Directors are expected to commit 18 to 20 days per annum to the Company and the Board is satisfied that each of the non-executive Directors commits sufficient time to the business of the Company. An outline of the terms of engagement for the non-executive Directors can be found on our website at www.itvplc.com.

 

Skills and experience

Biographical details for each of the Directors are set out in the Board of Directors section.

 

There are job descriptions in place for each of the Chairman, the Chief Executive, and the Senior Independent Director which have been agreed by the Board.

 

The Board is still of the view that the non-executive Directors are independent in both character and judgement. They constructively challenge and help develop proposals on strategy, scrutinise the performance of management in meeting agreed goals and objectives and monitor the reporting of performance.

 

The Board works well together bringing strong, independent, balanced judgement, knowledge, and experience to the Board's deliberations. Each non-executive Director has appropriate skills and experience that their views carry significant weight in the Board's decision making.

 

Board and Committee membership and attendance at meetings in 2011

 

Attendance in 2011

 





Board

Nomination Committee

Remuneration Committee

Audit Committee


Status

Notes

Date of

appointment

to the Board

9

2

4

8

Mike Clasper

Independent and SID

1

3 January 2006

9

2

4

7

Adam Crozier

Executive


26 April 2010

9

-

-

-

Ian Griffiths

Executive


9 September 2008

9

-

-

-

Andy Haste

Independent

2

11 August 2008

7

2

4

6

Lucy Neville-Rolfe

Independent

3

3 September 2010

8

1

-

-

Archie Norman

Independent

4

1 January 2010

9

2

4

-

John Ormerod

Independent


18 January 2008

9

2

4

8

 

Notes:

1  Missed one audit committee meeting relating to tax issues.

2  Missed two audit committee meetings and two Board meetings due to RSA meetings.

3  Missed one Board meeting and a nomination committee meeting due to a Tesco board meeting.

4  Independent on appointment to the Board.

 

 

Board Committees

The Board has delegated certain responsibilities to its committees. The terms of reference for each committee are reviewed annually and the current versions are available on the Company's website at www.itvplc.com.

 

General Purpose Committee: the Committee is composed of the executive Directors. The Committee meets as required to conduct the Company's business within the clearly defined limits delegated by the Board and subject to those matters reserved to the Board.

 

Remuneration Committee: see the Remuneration Report.

 

Audit Committee: see the Audit Committee Report.

 

Nomination Committee: The Committee is composed of the non-executive Directors.

 

Full details of attendance at Committee meetings can be found in the table above.

 

 

The role of the Nomination Committee is to:

 

·              review the structure, size, and composition of the Board, including skills, knowledge and experience;

·              identify and nominate for Board approval, candidates to fill board vacancies;

·              consider succession planning for Directors and other senior executives; and

·              consider and review any conflicts of interest that may be reported by the Directors.

 

During the year the Committee undertook a review of talent and capability within the business and considered a detailed succession plan.

 

Disclosure Committee: the Committee is composed of certain senior management of the Company. The function of the Committee, in accordance with the Company's Inside Information Policy, is to ensure compliance with continuing obligations under the Disclosure and Transparency Rules and the Listing Rules.

 

Effectiveness

Evaluation

The Board has established a process for the annual evaluation of the performance of the Board, its committees, and individual Directors. The Directors are made aware on appointment that their performance will be subject to an annual evaluation and that a Director would not be put up for re-election at an AGM unless the Chairman has decided that they continue to perform effectively and show commitment to the role.

 

How the evaluation process works

The evaluation is focused around processes, roles and responsibilities, culture, balance of skills and experience, diversity and how the Board works together. In particular the evaluation focuses on how effective they were in assisting the executive in achievement of the Transformation Plan.

 

In view of the relatively new makeup of the Board, for 2011 the evaluation took the form of interviews by the Chairman with each Board member which resulted in some adjustments to the Board agendas and appropriate changes in Board focus and conduct.

 

It is the Board's intention to commission an external board evaluation in 2012/2013.

 

The Committee Chairmen undertook reviews for each Committee.

 

Succession planning and diversity

Board tenure

All Directors are required by the Company's Articles of Association to be elected by shareholders at the first Annual General Meeting (AGM) following their appointment by the Board. Subsequently, all Directors are subject to re-election by shareholders at least every three years. However, all Directors will be submitted for re-election at the AGM in 2012 as recommended by the Code.

 

Succession planning

The Board has agreed a succession planning framework to ensure that:

 

·      Board tenure is appropriate and encourages fresh thinking and new ideas;

·      the Board is sufficiently diverse but most importantly has the appropriate mix of generalist and specialist skills; and

·      Non-executive directors have the appropriate level of independence, from the executive and each other.

 

When planning succession within the Company consideration is given to emergency cover together with medium and long-term succession. There is particular emphasis on growing the internal leadership pipeline and work is in progress on an Executive Development Programme for next generation potential board successors giving them an opportunity to develop their management capability and gain a greater understanding of the business. In addition, a two-year Graduate Programme is being launched to develop junior managers with long-term succession capability. A comprehensive portfolio of development courses and workshops which address common development needs is in place.

 

Diversity

The Board is of the view that diversity within the organisation is integral to achieving our business aims. Reflecting the demographics of our customers is essential to understanding their needs and ensuring our brand, services and products have a wide appeal.

 

The Company's aim is to reflect UK demographics both representationally within the organisation and on-screen. Year-on-year progress has been achieved in working towards this target. Key activity in 2011 included:

 

·      a full employee census which resulted in a 70% completion rate enabling the Company to track recruitment, development, progression and existing minority groups;

·      roll-out of Equality Act workshops and other awareness training to line managers, supervisors and programme makers;

·      implementation of programme portrayal monitoring across 80% of our programmes; and

·      continuation of positive action programmes to attract and support minority talent. 

 

The Company is a member of a number of national and sector specific equality and diversity organisations. In addition, a number of joint industry-wide activities have been undertaken including a senior diversity mentoring programme and Equality Act workshop for independent programme suppliers. The Company is recognised as a positive employer and holds the 'two-tick' disability symbol.

 

Diversity statistics are set out in the Responsibility section.  

 

Induction and continuing professional development

The Company has a policy and programme for induction and continuing professional development of Directors. On appointment, each Director takes part in a comprehensive induction programme where they:

 

·      receive information about the Group in the form of presentations by executives from all parts of the business and on the regulatory environment;

·      meet representatives of the Company's key advisers;

·      receive information about the role of the Board and the matters reserved for its decision, the terms of reference and membership of Board committees and the powers delegated to those committees;

·      receive information about the Company's corporate governance practices and procedures and the latest financial information about the Group; and

·      are advised of their legal and other duties and obligations as a director of a listed company.

 

This is supplemented by visits to key locations, including studios and regional sites, and meetings with key senior executives and with major shareholders where appropriate.

 

During their period in office, the Directors are continually updated on the Group's businesses and the competitive and regulatory environments in which they operate. This is done through:

 

·      board updates and papers which cover at length changes affecting the Group and the market in which it operates;

·      meetings with senior executives across the Group and key advisers;

·      regular updates on changes to the legal and governance requirements of the Group and in relation to their own position as directors; and

·      presentations given at board and committee meetings on business matters and technical update sessions from external advisers where appropriate.

 

The Chairman addresses the development needs of the Board as a whole, with a view to developing its effectiveness. He ensures that the Directors' professional development needs are identified and that they are adequately informed about the Company and their responsibilities as directors.

 

As part of their professional development executive Directors may accept external appointments as non-executive directors of other companies and retain any related fees paid to them. Details of fees received by executive Directors during 2011 can be found in the Remuneration Report.

 

Conflicts of interest

The Board is authorised to approve conflicts. It has delegated the authorisation of conflicts to the Nomination Committee and has adopted a Conflicts of Interest Policy.

 

The policy outlines how conflicts will be dealt with and the process for Directors to follow when notifying the Company of an actual or potential conflict. When deciding whether to authorise a conflict or potential conflict of interest, only those that have no interest in the matter under consideration will be able to take the relevant decision. In addition, the Nomination Committee will be able to impose limits or conditions when giving authorisation where appropriate.

 

The Board has considered in detail the current external appointments of the Directors which may give rise to a situational conflict and has authorised potential conflicts where appropriate.

 

This authorisation can be reviewed at any time but will always be subject to annual review. The Board is confident that these procedures operate effectively.

 

Insurance and indemnities

The Company maintains liability insurance for its Directors and officers which is renewed on an annual basis. The Company has also entered into deeds of indemnity with its Directors. A copy of the indemnity can be found on our website at www.itvplc.com.

 

Accountability

The Board reviews, at least annually, material internal controls including financial, operational, and compliance controls and risk management systems.

 

Risk management

Details of our High Impact Low Likelihood (HILL) and strategic risks and our approach to risk management are set out in the Risks and Uncertainties section.

 

Internal Control

The Board has conducted a review of the effectiveness of the Group's systems of internal controls for the year ended 31 December 2011. In the opinion of the Board, the Company has complied with the internal control requirements of the Code throughout the year, maintaining an ongoing process for identifying, evaluating, and minimising risk. Further information is set out in the Audit Committee Report

 

Going Concern

The going concern statement is set out in Section 1 Basis of Preparation.

 

Relations with shareholders

The Board attaches a high priority to effective communication with shareholders and we have regular and open dialogue with many of our institutional investors. The Board believes that continued engagement with our shareholders is beneficial to both ITV and its stakeholders as it helps to build a greater understanding of investors' views, opinions and concerns. 

 

Adam Crozier, Ian Griffiths and our investor relations team meet with many institutional investors throughout the year to keep them updated on the Company's performance and the Transformation Plan. These range from one-to-one meetings to group presentations including the Full and Interim results and the AGM. Specifically, following the Full year and Interim results one-to-one meetings are held with our largest institutional investors.

 

The Company maintains a programme of engagement with the investment community, including the results presentations, briefings to Brokers and other sales forces and attendance at a small number of investor conferences. Presentations given to the investment community are available to download from the 'Investors' section of our website at www.itvplc.com.

 

We regularly seek feedback on the perception of the Company amongst shareholders and the investor community more broadly via our corporate brokers. Investor comments are fed back to the Board and its Committees regularly.

 

The Company considers annually whether it is appropriate to commission an investor audit. No audit was undertaken in 2011.

 

Private shareholders represent more than 95% of our shareholders and we aim to engage with them regularly. We encourage shareholders to register their email addresses to receive information from us in a timely manner. We have a continuous programme to find lost shareholders and return unclaimed dividends.

 

Annual General Meeting (AGM)

The AGM for 2012 will be held on 9 May 2012 (further details can be found in Other Governance and Statutory Disclosures ). The Notice of Meeting sets out the resolutions being proposed. The Notice, together with any related documents, is made available to shareholders at www.itvplc.com, or is mailed to them, if they have elected to receive hard copies, at least 20 working days before the meeting. Last year all resolutions were passed with votes ranging from 86.94% to 99.92%.

 

The meeting is normally attended by approximately 200 shareholders. Shareholders are invited to meet with the Directors prior to and after the formal proceedings. At the meeting the Chairman and Chief Executive will review the Group's current trading which is followed by a question and answer session. Separate resolutions are proposed on each substantially separate issue and all resolutions are taken on a poll. The level of votes lodged on each resolution is made available on a regulatory information service and on the Company's website at www.itvplc.com as soon as possible after the meeting.

 

Shareholders who are not able to attend the meeting can vote online in advance at www.itvplc.com or by completing and returning a form of proxy.

 

Save in exceptional circumstances, all members of the Board will attend the AGM.

 

Audit Committee Report

 

Dear Shareholder,

On the following pages we set out the Audit Committee's Report for 2011. The report comprises four sections:

 

·              How the Committee works;

·              What we focused on in 2011;

·              Internal Controls; and

·              Our Auditors.

 

Our principal aims have been to ensure the integrity of the financial information provided to our stakeholders and to assist the Board to monitor and evaluate the internal control environment. Strong and effective risk management and control procedures underpin our ability to execute our Transformation Plan and implement our strategy. Good progress has been made and we will continue to monitor progress in particular as we implement new IT systems and seek to build a stronger content business internationally.

 

We have followed closely the public debate on audit, audit regulation and the work of audit committees. We support fully the aims of audit quality; challenging engagement by audit committees; and transparent reporting to stakeholders. We seek to achieve this through the work of this Committee making changes and improvements where required. While we are not yet convinced that a major additional regulatory compliance burden on companies is required to achieve this, we will engage with the current debate and respond appropriately to implement any new requirements.

 

Finally, we note that whilst we are satisfied with the work of our auditors KPMG and recommend their reappointment at the forthcoming AGM, in 2012 we plan to carry out a more thorough review and market appraisal to be considered in formulating the Committee's recommendation for the appointment of auditors at the 2013 AGM.

 

John Ormerod

Chairman, Audit Committee

29 February 2012

 

How the Committee works

Who is on the Committee?

The Committee is comprised entirely of non-executive Directors. The current members are:

 

·              John Ormerod (Chairman)

·              Mike Clasper

·              Andy Haste

 

Full details of attendance at Committee meetings can be found in the table in Corporate Governance.

 

The Committee members have a wide range of business and financial experience between them which enables the  Committee to fulfil its terms of reference in a robust and independent manner. The Committee considers that John Ormerod has recent and relevant financial experience for the purposes of the UK Corporate Governance Code (the Code). Biographical details of the members of the Committee including their qualifications and experience are set out in the Board of Directors section.

 

Members of the senior executive team and other senior management regularly attend meetings at the invitation of the Chairman of the Committee together with the Head of Internal Audit (Deloitte) and the external auditors (KPMG). The Committee as a whole meets privately with the internal and external auditors prior to meetings on a regular basis.

 

In addition, throughout the year the Chairman of the Committee meets informally and has open lines of communication with the Group Finance Director, Head of Internal Audit and the senior engagement team from the external auditors. This group generally meets ahead of each full Audit Committee meeting to prepare and identify key areas for consideration by the Committee.

 

The Committee works to a structured programme of activities with agenda items focused to coincide with key events of the annual financial reporting cycle, together with standing items that the Committee is required to consider regularly under its terms of reference.  The results of the Committee's work are reported to the Board.

 

What is our role?

The role of the Committee includes to:

 

·              monitor the integrity of the published financial information of the Company;

·              review the effectiveness of the internal control and risk management systems;

·              review the arrangements for employees to raise concerns, in confidence, about possible wrongdoing in financial reporting or other matters;

·              monitor and review the effectiveness of the internal audit function;

·              review the quality and effectiveness of the external audit and the procedures and controls designed to ensure auditor independence; and

·              consider and make recommendations to the Board in relation to the appointment, re-appointment, replacement, and remuneration of the Company's external auditors.

 

What we focused on in 2011

In 2011 the Committee met eight times.

 

The Committee receives detailed reports on all key judgements and continues to challenge auditor independence and fees.

 

Some of the key issues we considered during the year include:

 

·              Financial reporting: the Committee reviewed the financial information published by the Company, including the annual financial statements and half year financial report. To assist its review the Committee received reports from management and from the auditors on compliance with accounting standards, key judgements in preparation of the financial statements and compliance of those statements with best practice and laid down disclosure standards. The Committee was pleased at the progress made in clarifying what are often complex explanations and disclosures in the new format 2010 financial statements. The Committee introduced a new process for verifying Interim Management Statements.

 

In considering reports on 2011 the Committee has considered judgements applied in establishing provisions for taxation and pension obligations and accounting for multi-year broadcasting rights. Judgements associated with impairment and the application of the going concern basis were also considered but were less challenging as the Company's operating and financial performance has strengthened.

 

·              Risk management: the Committee continued to consider the process for managing risk within the business. New risk management procedures were implemented in 2011 and the Committee has monitored progress made in embedding these procedures in the management processes.

 

·              Mergers and Acquisitions: as part of the Transformation Plan the Company may wish to undertake mergers or acquisitions.  The Committee reviewed and approved for recommendation to the Board, a reference guide setting out process and controls for any future activity. The Committee will review due diligence analysis for significant transactions.

 

·              Cash and Counterparty limits: the Committee considered cash and counterparty limits in light of the level of cash held, rates that could be earned on the cash and the desire of the Board to maintain maximum liquidity and flexibility. The Committee recommended to the Board proposals for changes to the limits and periods of investment.

 

·              Technology governance: as part of the Transformation Plan the Company is undertaking radical changes to its technology infrastructure. The Committee has focused on reviewing and advising on the governance structures for the various systems and processes. The Committee continued to monitor the implementation of the integrated finance processes and system.

 

·              Bribery and Fraud: the Committee continued to review systems and controls for the prevention of bribery and fraud.  The Committee reviewed a risk assessment and oversaw a project to ensure compliance with the Bribery Act, based on the Ministry of Justice guidance, to ensure that appropriate procedures were in place across the Group. Monitoring reviews are ongoing.

 

Annual Review

We conducted an annual review of our performance as part of the annual board evaluation process.                

 

Internal controls

The Board has overall responsibility for the Group's systems of internal control and for regularly reviewing the effectiveness of those systems. The Committee assists the Board in reviewing the Group's systems of internal control. The primary responsibility for the operation of these systems is delegated to management. Such systems can only provide reasonable and not absolute assurance against material misstatement or loss. Key control procedures are designed to manage rather than eliminate risk and can be summarised as follows:

 

·              Strategy and financial reporting: the strategy is reviewed and approved by the Board. The Group performs a comprehensive annual strategy review and five-year financial planning exercise. The five-year plan feeds into the annual budget cycle. The executive Directors review the detailed budgets, strategies and action plans and the Board approves the overall Group budget as part of its normal responsibilities. The results of operating units are reported monthly, with actual results compared to budget and forecasts and key trends and variances explained and analysed.

 

·              Organisational structure and authorisation procedures:the Group has an established organisational structure with clearly stated lines of responsibility and reporting as shown in the diagram in the Corporate Governance section.   

 

·              Risk assessment and management: management is responsible for identifying the risks facing the business and for establishing controls and procedures to monitor and mitigate those risks.

 

The Board is responsible for establishing a robust risk management process and for regularly reviewing the identified risks. The Committee keeps the effectiveness of the process under regular review. Details on the Company's key risks can be found in Risks and Uncertainties.

 

·              Control environment: financial controls, policies, and procedures are considered as part of the Group's ongoing risk assessment process. These controls are reviewed to ensure risks are identified and the processes and procedures are in accordance with and aligned to the strategy. The internal audit team provides objective assurance as to the effectiveness of the Group's systems of internal control and risk management, reporting to both the Management Board and the Committee.

 

·              Reviewing and monitoring the effectiveness of internal controls:controls are monitored by senior management, internal audit and the Committee. Directors of each business team are required annually to confirm compliance with internal control in their area. Remedial plans are put in place where controls are weak or there are opportunities for improvement. Serious control weaknesses (if any) are reported to the Board and actions taken as appropriate.

 

Our Auditors

Internal Auditors

The Group's internal audit activity is outsourced to Deloitte and report directly to the Committee. The Committee keeps under review the internal audit relationship with Deloitte and the procedures to ensure appropriate independence of the internal audit function is maintained.  In particular, the Committee has approved guidelines in relation to other advisory and consultancy work that Deloitte may undertake for the Company. An evaluation exercise is undertaken annually to review performance.

 

During the year the Committee considered and approved the internal audit plan and reviewed internal audit reports, the actions taken to implement the recommendations made in the reports and the status of progress against previously agreed actions.

 

External Auditors

Independence, objectivity and fees

The Committee regularly monitors the other services being provided to the Group by its external auditor, and has developed a formal policy to ensure this does not impair their independence or objectivity. The policy is reviewed annually and is available in full on the Company's website at www.itvplc.com. The policy is based on the five key principles which underpin the provision of other services by the external auditor. These are that the auditor may not provide a service which:

 

·              places them in a position to audit their own work;

·              creates a mutuality of interest;

·              results in the auditor developing close personal relationships with ITV employees;

·              results in the auditor functioning as a manager or employee of ITV; or

·              puts the auditor in the role of advocate for ITV.

 

The Committee has pre-approved the categories of other services that may be performed by the external auditor and explicitly set out the categories of work that they may not perform. For this purpose auditing the accounts of subsidiaries and associates pursuant to legislation and other services that generally only the auditor can reasonably provide are regarded as audit services.

 

The auditors are eligible for selection to provide non-audit services only to the extent that their skills and experience make them a competitive and most appropriate supplier of these services.  Generally, significant non-audit advisory and consulting assignments for which the auditors are qualified and which do not conflict with the Company's independence guidelines are subject to competitive tenders. There is a significant amount of work that is placed elsewhere that could have been undertaken by the auditors. Approval is required from the Committee Chairman for any engagement of the external auditor where the fee is likely to be in excess of £0.1 million.

 

Other than in exceptional circumstances management and the Committee do not expect non-audit fees to be materially in excess of fees for audit and audit related services. A report on the level of non-audit work provided by the auditor is given to the Committee half yearly.

 

Details of the related audit and other services are set out in Section 2.1 Results for the Year. The significant engagements relate to VAT and corporate tax services, including tax restructuring advice in respect of overseas subsidiaries, and a one off VAT reclaim progressed on behalf of the ITV Pension Scheme.

 

The senior audit partner and the independent reviewing partner serve no more than five years continuously in either role and other key partners serve no longer than seven consecutive years. The Committee monitors the tenure of partners and senior staff as well as former employees working for the Company. The appointment by the Company of former senior employees of the external auditor would require approval of the Committee.

 

Performance

The Committee performs a specific evaluation of the performance of the external auditor annually, through assessment of the results of questionnaires completed by relevant senior management in addition to committee members' own views of auditor performance. The Committee also reviews and discusses with the auditors the reports on KPMG and other major firms issued by the Audit Inspection Unit.

 

The Committee has noted that KPMG have been the Company's auditors since 2004 and while satisfied with their work considers it best practice periodically to undertake a more thorough review and market appraisal.  The Committee plans to carry out such a review in 2012 to be taken into account in formulating the recommendation to the Board for the reappointment of auditors at the 2013 AGM.

 

Reappointment

During the year the Committee considered the performance and audit fees of the external auditor, and the level of non-audit work undertaken, and recommended to the Board that a resolution for the re-appointment of KPMG Audit Plc for a further year as the Company's auditor be proposed to shareholders at the AGM in May 2011. The resolution was passed and KPMG Audit Plc was reappointed for a further year.

 

Approval

The Audit Committee Report was approved by the Board on 29 February 2012 and signed on its behalf by John Ormerod.

 

Remuneration Report

 

Dear Shareholder,

On the following pages we set out the Remuneration Report for 2011.

 

In order to successfully achieve the transformation of ITV into a lean, creatively dynamic and fit-for-purpose organisation, it is essential that executive Directors and senior executives (together the Senior Executive Group) work together as an effective team focused on delivering medium-term shareholder value. As ITV operates in a talent-based market, our creative renewal also depends on attracting and retaining the best people.

 

The Transformation Plan continues to drive those changes needed to deliver a path to sustainable growth in shareholder value over the medium-term.

 

We are using the incentives framework introduced in 2011 to reward delivery of business results and of the Transformation Plan.

 

We believe that the current incentive arrangements continue to support the Transformation Plan by placing an emphasis on the delivery of strategic change, co-operative endeavour and three to five-year outcomes aligned to shareholder value.

 

The Committee would encourage shareholders to note the following:

 

·      a significant proportion of the Senior Executive Group's remuneration is dependent on the achievement of stretching performance conditions that support the creation of shareholder value;

·      we have implemented only modest salary increases for each of the last two years;

·      the Committee believes that the level of bonus payments for 2011 is a fair reflection of the Company performance during the year. It reflects the progress made against the Transformation Plan, reducing ITV's cost base and managing cash and working capital in 2011;

·      the compulsory deferral period for part of the annual bonus is now three years and the Senior Executive Group is encouraged to hold long-term personal investment in ITV to create alignment with the shareholder experience; and

·      benefits awarded to the Senior Executive Group are delivered within the same framework as for other ITV employees.

 

Andy Haste

Chairman, Remuneration Committee

29 February 2012

 

Contents

The report is presented in five sections:

 

·              How the Committee works;

·              Remuneration policy;

·              Delivering remuneration policy;

·              Non-executive Directors; and

·              Detailed audited disclosures.

 

How the Committee works

Who is on the Committee

The Committee is comprised entirely of non-executive Directors. The current members are:

 

·              Andy Haste (Chairman)

·              Mike Clasper

·              Archie Norman

·              John Ormerod

 

Full details of attendance at Committee meetings can be found in the table in Corporate Governance.

 

Who advises the Committee

The Committee obtains advice from various sources in order to ensure it makes informed decisions. During 2011, the Committee undertook a formal review of its independent external advisers. As a result of this process Deloitte LLP were re-appointed. The Committee's main advisers are set out below. Adam Crozier, Chief Executive, is invited to attend the meetings of the Committee as appropriate. No individual is involved in decisions relating to their own remuneration.

 

Adviser

Andy Doyle, Group HR Director

 

Main internal adviser, provides updates on remuneration, employee relations and human resource issues.

Deloitte LLP*

 

 

Independent advisers on remuneration policy and the external remuneration environment.

Hogan Lovells LLP

Share scheme matters.

DLA LLP

Employment advice.

PricewaterhouseCoopers

Salary benchmarking data.

Towers Watson

Executive surveys and  benchmarking data.

 

* Deloitte are signatories to the Code of Conduct in relation to Executive Remuneration
 Consulting in the UK. During the year Deloitte also provided the Group with advice on tax and
 corporate finance, and acted on a consultancy basis to provide internal audit and systems
 support under separate engagement terms.

 

 

What is our role?

The role of the Committee is primarily to:

 

·      review the ongoing appropriateness and relevance of the Group remuneration policy;

·      approve the remuneration policy and strategy for the executive Directors, senior executives making up the Management Board, and other senior executives earning £300,000 or more per annum, together the Senior Executive Group;

·      approve the design of the Company's annual bonus arrangements and long-term incentive plans (LTIPs), including the performance targets that apply for the Senior Executive Group; and

·      determine individual award levels for the Senior Executive Group based on performance against annual bonus targets and long-term incentive performance conditions.

 

The Committee maintains an active dialogue with shareholder representatives.

 

What we did in 2011

The Committee met four times in 2011 and considered the following:

 

·      reviewed base salaries for the Senior Executive Group with effect from 1 January 2011 using the same process as applied to other ITV employees;

·      assessed the annual bonus outcomes and deferred annual bonus awards for 2010;

·      set the business and personal performance targets for 2011 annual bonuses aligned with the business plan for the year and the Transformation Plan;

·      determined the performance targets that would apply to the Performance Share Plan (PSP) awards made in 2011, in line with the approvals received from shareholders;

·      reviewed the Remuneration Report for 2010, prior to its approval by the Board, and adoption by shareholders at the Annual General Meeting in May 2011;

·      agreed remuneration packages for new appointments to the Senior Executive Group and termination arrangements for those individuals within the Senior Executive Group whose employment ceased; and

·      conducted a formal process to review the independent external advisers to the Committee.

 

The Committee reports regularly to the Board on its work.

 

Annual Review

We conducted a review of our performance as part of the annual Board evaluation process.

 

Remuneration policy

The Company operates in the particularly competitive media market. ITV aims to balance the need to attract and retain the high quality talent essential to the Company's success with the need to be cost-effective and to reward exceptional performance. The Committee has developed a remuneration policy which balances these factors, while taking into account prevailing best practice and investor expectations.

 

A significant proportion of the remuneration package is tied to the achievement of stretching performance conditions which align remuneration with our strategy to create shareholder value and deliver the Transformation Plan.

 

The remuneration package is focused on rewarding sustained long-term performance and aligning executives with the shareholder experience.

 

Individuals should be rewarded for success and performance measured over clear timescales. Executives are encouraged to take action in line with the Transformation Plan, using good business management principles and appropriate risk management.

 

Steps are taken to prevent rewards for failure. Termination payments to Directors will only reflect contractual obligations.

 

When developing remuneration policy, the Committee obtains advice from the key advisers outlined above. When determining remuneration for the Senior Executive Group and all employees of ITV, the Committee also considers any relevant environmental, governance and social issues.

 

Key features of the remuneration policy are set out in the table overleaf.

 

Key features of the remuneration policy

 

Element of remuneration

How this supports the strategy

Performance measures

Basic salary

 

 

Recognises the individual's skills and experience and provides a market competitive base salary.

 

·              Reviewed annually from 1 January.

·              Benchmarked against companies of similar size and complexity.




Bonus and Deferred Bonus

 

 

 

 

 

 

 

Rewards performance against financial and non-financial targets, delivering value to shareholders and contributing to the transformation of ITV.

 

 

 

 

 

 

·              60% based on corporate financial targets. See Key Performance Indicators.

·              40% based on individual contributions towards the Transformation Plan.

·              One-third paid in cash.

·              One-third compulsorily deferred and paid in shares after three years.

·              Up to one-third voluntarily deferred and paid in shares after three years, matched by an additional PSP award, with the balance in cash.




Performance Share Plan (PSP)

 

 

Rewards sustained long-term performance, supporting the creation of shareholder value aligned with shareholder interests.

 

·              50% based on cumulative adjusted EPS.

·              25% on Family SOV (platform adjusted).

·              25% on non-NAR growth. 

Measured against demanding targets.  See Key Performance Indicators.




Pension and Benefits

 

Provides a market competitive package and an opportunity for executives to build up an income on retirement.

Benchmarked periodically.

 

 

 

Balance of remuneration

The balance between the fixed and variable elements of the total remuneration package (excluding pension) for executive Directors is shown in the charts below. The charts show the mix at both target and maximum performance levels.

 

The charts also show how the package is made up of a balance between cash pay and shares in ITV, over the short and longer term. Broadly there is a 40:60 mix between fixed and variable remuneration at target performance and a 23:77 mix if maximum performance is delivered. A high proportion of the remuneration package varies with performance.

 

Alignment with shareholders

The Committee continues to recognise the importance of executive Directors becoming shareholders so as to align their interests with other shareholders. Shareholding guidelines are in place, which encourage executive Directors to build up a holding of ITV plc shares, 50% of the requirement within three years of appointment and the remainder within five years as follows:

 


Percentage of base salary

Adam Crozier

200%

Ian Griffiths

150%

 

Other members of the Senior Executive Group are required to hold between 50% and 100% of their salary in line with their individual bonus opportunity.

 

Details of the executive Directors' current personal shareholdings are shown in this section.

 

Delivering remuneration policy

 

Base salary

 

2011


Base salary

from

1 January 2011

Increase at

1 January 2011

Adam Crozier

£798,250

3%

Ian Griffiths

£437,750

3%

 

Market positioning of base salary is approached on an individual basis, and the Committee takes account of robust salary surveys and an individual's skills before reaching its conclusions. The aim is for base salary to be set around market median, whilst recognising the need for an appropriate premium to attract and retain superior talent.

 

Executive Directors' base salaries are reviewed on an annual basis, effective from 1 January, and the same annual review process is applied to the Senior Executive Group as to all other ITV employees. With effect from 1 January 2011 the executive Directors both received a salary increase of 3% in line with overall personal and company-wide performance.

 

2012

Following completion of the 2012 salary review, the Company agreed a salary increase of 3% for all ITV employees earning £60,000 and below, with any increase for those earning £60,001 and above being linked to their performance rating for 2011. The executive Directors both received a salary increase of 2.5% from 1 January 2012 in line with overall personal and company-wide performance.

 

Pension benefits

ITV offers members of the Senior Executive Group a pension benefit in line with that offered to other ITV employees. The majority of the Senior Executive Group are either members of the ITV defined contribution scheme or receive a cash payment equivalent to the employer contribution. No Directors were members of money purchase or defined contribution schemes operated by the Group.

 

The Company made contributions for a personal pension plan to Ian Griffiths with a value of 15% of basic salary. Adam Crozier received a cash payment of 9% of his basic salary in lieu of pension contributions. These payments are included in the emoluments table in this section.

 

Incentives

The incentive framework used in 2011 will continue to be used in 2012. It is based on the following principles:

 

·      simple overall architecture;

·      shareholder aligned incentives: reduced reliance on short-term cash remuneration; increased long-term focus and alignment with the shareholder experience;

·      application of strategic change metrics: linked to both strategy and financial performance;

·      support a culture of accountability: valuing execution and delivery, with a clear commercial focus; and

·      reward sustained performance over an extended period.

 

Executives are required to defer a significant proportion of any annual bonus into shares in order to achieve maximum award levels under long-term incentive awards.

 

Short-term incentives

Annual incentives are provided for the Senior Executive Group through the ITV Annual Bonus Scheme (Bonus) and the Deferred Share Award Plan (DSA). The performance conditions that apply are set on an individual basis and are closely linked to the Company's corporate, financial and strategic priorities.

 

All ITV employees participate in a bonus arrangement which rewards them when ITV is successful.

 

Under the incentive framework the Bonus arrangements for the Senior Executive Group are as follows:

 

·      one-third of any Bonus is paid in cash;

·      one-third of any Bonus is compulsorily deferred into shares for three years under the DSA; and

·      up to one-third of any Bonus may be voluntarily deferred into shares under the DSA for three years. A deferral into shares is matched by an additional award under the PSP. The balance is paid in cash.

 

Maximum Bonus opportunities

 

% of base salary

 

Cash

Compulsory

Deferral

Voluntary

Deferral

 

Total

Adam Crozier

60%

60%

60%

180%

Ian Griffiths

55%

55%

55%

165%

 

For 2012 the maximum Bonus opportunities will remain unchanged for Adam Crozier and Ian Griffiths at 180% and 165% of base salary respectively.

 

2011 Bonus outcomes

Performance targets for the Senior Executive Group in 2011 were set to ensure they support both the Transformation Plan and delivery of key operational outcomes. The Committee ensured that the maximum bonus opportunity could only be achieved for significant outperformance of all corporate, financial and individual bonus outcomes, with on target performance achieving a 60% payout of maximum bonus opportunity.

 

2011 Bonus performance measures

The majority of the bonus opportunity (60%) was based upon the achievement of corporate and financial targets, weighted to the area of the business for which the executive has primary responsibility. For Adam Crozier and Ian Griffiths the targets were set at a corporate level. Across the Senior Executive Group these targets include profit generation, profit to cash conversion, Family SOV (platform adjusted), online targets, revenue targets, content creation targets and delivery of agreed cost savings targets.

 

The remainder of the bonus opportunity (40%) was based upon the contribution that the executive makes toward the overall Transformation Plan through the delivery of specific targets.

 

ITV's financial performance in 2011 has been strong, as outlined in the Performance & Financials section. In light of performance during the year, the following payment levels against corporate financial targets for the executive Directors have been approved:

 

Target

Achieved

Bonus Payout

Profit generation (EBITA before exceptional items)

maximum payment for 110% of budget. See Key Performance Indicators.

103.90%

75.65%

Cash management (profit to cash conversion)

maximum payment for 90% conversion. See Key Performance Indicators.

121.00%

100.00%

 

In addition, Adam Crozier and Ian Griffiths received payout levels of 95% and 90% respectively for performance against 2011 individual targets.

 

2012 Bonus performance targets

The Committee has used a consistent approach to that used for 2011 to set 2012 performance targets and measures which continue to support both the delivery of the Transformation Plan and key operational outcomes. On target performance will result in a payout of 60% of the maximum Bonus opportunity.

 

The maximum Bonus opportunity can only be achieved for significant out-performance of all corporate, financial and individual targets.

 

2012 Bonus performance measures

For Adam Crozier and Ian Griffiths 60% of the Bonus opportunity will be based upon the achievement of corporate and financial targets. The remaining 40% will be based upon the personal contribution they make towards the overall Transformation Plan.

 

Long-term incentives

Performance Share Plan awards

As part of the incentives framework introduced in 2011 to support the delivery of the Transformation Plan, changes were made to the terms of the long-term incentive awards to be made to the Senior Executive Group under the PSP. The same arrangements will be used in 2012.

 

Maximum opportunities

·      aggregate PSP awards, combining core and matching elements, will not exceed 150% of base salary (unchanged from previous maximum);  and

·      if an individual voluntarily defers one-third of their annual Bonus into shares, they will receive a matching award of shares under the PSP (on a 1:1 basis subject to the performance conditions that apply to PSP awards).

 

Performance measures

In order to ensure that executives are only rewarded if value is delivered to shareholders, awards are subject to an initial cumulative adjusted EPS performance gateway. If this gateway is achieved, performance will then be assessed by reference to the following:

 

·      50% on cumulative adjusted EPS. This represents the key financial metric of the business. The cumulative adjusted EPS targets that have been set are considered by the Committee to be appropriately demanding.

·      25% on Family SOV (platform adjusted). This is aligned with the strategic priorities of the business.

·      25% on non-NAR growth and increased internal supply.

 

These are key measures of success over the transformation period as the Company reduces its reliance on spot advertising revenues and generates greater shareholder value from its integrated production and broadcast businesses.

 

Family SOV and non-NAR are both measures of performance that are important to our business as further explained in the Performance & Financials section.

 

Further details of the performance conditions are available in the table below.

 

Outstanding awards from earlier years

The PSP was the only LTIP used to make awards in 2009, 2010 and 2011.

 

The table below outlines the key features and performance conditions of the plan.

 

Save As You Earn

The Company also operates an all-employee Save As You Earn scheme.

 

Summary of long-term incentive plan awards

 


Performance Share Plan 2011 and 2012 (PSP)

Performance Share Plan 2009 and 2010 (PSP)

Award Level

(plan maximum)

150% (Core Award and Matching Award).

150%

Co-investment

requirements

 

An award of up to 60% of base salary may be made as a match on voluntarily deferred bonus.

None

Performance period

Three years.

Three years.

Performance
conditions

A Gateway condition of minimum cumulative adjusted EPS over three years must be reached before any portion of the award vests.

75% TSR

Measured equally against two distinct comparator groups drawn from the FTSE 250 and a specific international industry peer group.


·      50% of an award vests in a range based on cumulative adjusted EPS over three years.

·      25% of an award vests in a range based on Family SOV growth.

·      25% of an award vests in a range based on Non-NAR growth.

 

2011 Award Strategic Targets

Threshold

Maximum

Gateway

21p


Cumulative adjusted EPS

21p

24p

Family SOV growth

Maintain at

2010 levels

2%

Non-NAR growth

5%

10%

 

EPS cumulative years 2011 to 2013.

 

2012 Award Strategic Targets

Threshold

Maximum

Gateway

26.15p


Cumulative adjusted EPS

26.15p

28.76p

Family SOV growth

Maintain at

2011 levels

2%

Non-NAR growth

5%

10%

 

EPS cumulative years 2012 to 2014.

25% STRATEGIC - for awards made in 2009

Measured in equal proportions against two targets:

 

Strategic target

Threshold

Maximum

SOCI (ITV Family)

36.6%

38.5%

EPS Growth

RPI +3%

RPI +5%

 

EPS base year 2008

 

25% STRATEGIC - for awards made in 2010

Measured in equal proportions against two targets:

 

Strategic target

Threshold

Maximum

Family SOV growth

Maintain at

2009 levels

2%

Cumulative adjusted EPS

18p

20p

 

 EPS cumulative years 2010 to 2012

Vesting

50% cumulative adjusted EPS

·      Threshold performance - 30%

·      Maximum performance - 100%

·      Vesting on a straight-line basis in between.

 

50% STRATEGIC

·      Threshold performance - SOV: 50%, non-NAR: 30%

·      Maximum performance - 100%

·      Vesting on a proportionate basis (SOV) and a straight-line basis (non-NAR) between threshold and maximum.

75% TSR

·      Median and below - nil

·      Upper quartile - 100%

·      Vesting on a straight-line basis in between.

 

25% STRATEGIC - for awards made in 2009

·      Threshold performance - 25%

·      Maximum performance - 100%

·      Vesting on a straight-line basis in between.

 

25% STRATEGIC - for awards made in 2010

·      Threshold performance - EPS: 30%, SOV: 50%

·      Maximum performance - 100%

·      Vesting on a proportionate basis in between.

Exercise period

Once vested, awards can be exercised for 12 months; any portion of the award that does not vest or is not exercised will lapse.

Leavers

Standard good leaver provisions apply (broadly relating to compassionate circumstances) and include prorating for service. If a participant ceases to be employed for any other reason, the award will lapse unless determined otherwise.

Change of control

Outstanding awards and options would normally vest and become exercisable on a change of control, subject to the satisfaction of any performance conditions. The proportion that vests may be capped depending on the time elapsed since grant.

 

Service contracts

Executive Directors have service contracts which provide for 12 months' notice on either side. There are no special provisions that apply in the event of a change of control.

 


Date of appointment

Nature of

contract

Notice

period

from

Company

Notice

period

from

Director

Compensation provisions

for early termination

Adam Crozier

26 April 2010

Rolling

12 months

12 months

None

Ian Griffiths

9 Sept 2008

Rolling

12 months

12 months

None

 

Note:

The Company retains the right to terminate employment by making payment in lieu of notice, in which case the executive would be entitled to receive 12 months' salary and benefits (including pension contributions).

 

Executive Directors' non-executive directorships

With specific approval of the Board, executive Directors may accept external appointments as non-executive directors of other companies and retain any related fees paid to them.

 

During the year Adam Crozier retained fees for an external non-executive directorship as set out below:

 

 

Company

2011

£000

Debenhams plc

53

 

Non-executive Directors

Each non-executive Director has a contract of service with the Company, further details of which can be found in the Governance section. Fees paid to the non-executive Directors are determined by the Board based on market information, and in accordance with the restrictions contained within the Company's Articles of Association.

 

Non-executive Directors do not participate in decisions concerning their own fees.

 

The fees are reviewed annually. There is no fee for membership of the Nomination Committee. The basic fee increased by £2,500 to £57,500 with effect from 1 January 2011. It has been agreed that the basic fee will increase by 2.5% to £58,938 from 1 January 2012. The annual fees payable in 2011 were as follows:

 

Non-executive Directors' fees

£

Board member

57,500

Additional fees for:


Senior Independent Director

25,000

Audit Committee Chairman

20,000

Audit Committee member

5,000

Remuneration Committee Chairman

15,000

Remuneration Committee member

5,000

 

Note:

Details of committee membership can be found in the Governance section.

 

Share acquisition policy

The non-executive Directors are required to use 25% of their annual fees, after statutory deductions, to acquire shares in the Company. The shares are purchased quarterly and are held by a nominee on their behalf. The shares release when they retire from the Board. Details of their shareholdings can be found below.

 

Chairman's fee and share award

The Chairman receives an annual fee of £300,000 and no further payment for membership of committees. He also received an award over 400,000 shares for each year (total 1.2 million shares) of his initial three-year appointment term to be released in three tranches over the initial term. The first tranche was released on 23 May 2011, the second tranche on 31 December 2011 and the third tranche will be released on 31 December 2012. He is not required to apply a percentage of his cash fee to acquire shares, as the Committee considers him to be sufficiently aligned with shareholders' interests with his current shareholding.

 

Detailed audited disclosures

The following tables provide details of each of the Directors' emoluments, pension contributions, rights to share options and awards. All of these tables have been audited by KPMG Audit Plc.

 

Aggregate Directors' remuneration

The total amounts of Directors' remuneration for the period from 1 January 2011 to 31 December 2011 were as follows:

 


2011

£000

2010

£000

Emoluments

2,964

3,645

Gains on exercise of share options

-

35

Gains on exercise of restricted share awards

943

137


3,907

3,817

 

Notes:

1  All share related gains are valued pre-tax on date of release to participant.

2  Gains on exercise of restricted share awards includes value of restricted shares awarded to Ian Griffiths in March 2010 and released 50% in 2010, and 50% in 2011. Participants entered into a section 431 election to pay income tax on the value of the awards on the date of grant, so the value of awards released was net of income tax.

3 Further information is contained in the tables below.

 

Directors' emoluments

The Directors' emoluments for the year ended 31 December 2011 are set out in the table below.

 

Name of Director

Status

Basic salary/

Fees

£000

Benefits in

kind2

£000 

Pension 

contributions3

£000 

Short-term

incentives

(cash)4

£000

Total

for the

year ended

31 December

2011

£000

Total

for the

year ended

31 December

2010

£000

Adam Crozier1

Executive

798

20

72

634

1,524

1,179

Ian Griffiths

Executive

438

14

64

312

828

689

Mike Clasper

Non-executive

93

-

-

-

93

90

Andy Haste

Non-executive

78

-

-

-

78

69

Lucy Neville-Rolfe

Non-executive

58

-

-

-

58

18

Archie Norman

Non-executive

300

-

-

-

300

300

John Ormerod

Non-executive

83

-

-

-

83

79

Past directors' emoluments

(for comparative purposes)

-

-

-

-

-

1,221

Total emoluments


1,848

34

136

946

2,964

3,645

 

Notes:

1 The 2011 emoluments shown for Adam Crozier are for the full 12-month period ended 31 December 2011. The emoluments shown for 2010 are for the eight-month period from the date of his appointment on 26 April 2010 to 31 December 2010. For comparative purposes the full 2010 year equivalent would have been approximately £1.268 million.

2 This disclosure includes the cost of private medical insurance and car related benefits.

3 Pension contributions represent payments made into personal pension plans, or cash payments in lieu of pension, and are described further in the pension benefits section above.

4 Short-term incentives:

 - Executive Directors will receive a bonus for 2011 as detailed in the table below and shown in the table above:

 


Percentage of maximum bonus opportunity earned

Total value

of 2011

Bonus

£

Value  paid in cash (shown in the  emoluments table above)

£

Value

compulsorily

deferred into

shares under

the DSA

£

Value

voluntarily

deferred into

shares under

the DSA

£

Adam Crozier

88.26%

1,268,164

634,082

422,721

211,361

Ian Griffiths

86.26%

   623,050

311,525

207,683

103,842

 

Directors' interests in share awards

Information given in the table below is for the period from 1 January 2011 to 31 December 2011.

 

Award date

At
1 January
2011

Awarded
 in year

Released
 in year

Lapsed
 in year

At
31 Dec
2011

Share price
used for
award
(pence)

Exercise price
(pence)

Date of

release

in 2011

Share price
at date of
release
(pence)

Market

value

at date of

release

 (pre-tax

(£)8

Vesting date/
Exercise period

Adam Crozier












Restricted Share Award

26 April 20101

397,272

-

397,272

-

-

     70.48

Nil

26 April (50%)

26 Oct (50%)

74.66

61.90

148,304

122,972

-

Deferred Share Award Plan

8 March 2011 Compulsory Deferral2

-

276,314

-

-

276,314

91.38

Nil

-

-

-

March 2014

8 March 2011 Voluntary

Deferral2

-

276,314

-

-

276,314

91.38

Nil

-

-

-

March 2014

Nil-cost Option Award

26 April 20103

4,115,044

-

-

-

4,115,044

56.5

Nil

-

-

-

 April 2013-

April 2014

Performance Share Award

8 March 2011 Core Award

-

786,196

-

-

786,196

91.38

 Nil

-

-

-

March 2014-

March 2015

8 March 2011 Matching Award

-

276,314

-

-

276,314

91.38

Nil

-

-

-

March 2014-

March 2015

Ian Griffiths

Deferred Share Award Plan

26 March 20104

191,862

-

191,862

-

-

59.89

Nil

31 Dec (100%)

68.15

130,754

-

8 March 2011 Compulsory Deferral2

-

203,478

-

-

203,478

91.38

Nil

-

-

-

8 March 2014

8 March 2011 Voluntary

Deferral2

-

203,478

-

-

203,478

91.38

Nil

-

-

-

8 March 2014

Performance Share Plan

1 June 20095

1,188,812

-

-

-

1,188,812

35.75

Nil

-

-

-

June 2012-

June 2013

26 March 20105

933,820

-

-

-

933,820

56.89

Nil

-

-

-

March 2013-

March 2014

8 March 2011 Core Award

-

431,140

-

-

431,140

91.38

Nil

-

-

-

March 2014-

March 2015

8 March 2011 Matching

 Award

-

203,478

-

-

203,478

91.38

Nil

-

-

-

March 2014-

March 2015

Turnaround Plan6












2 October 2008

3,017,752

-

-

-

3,017,750

42.25

Nil

-

-

-

Dec 2011-

Dec 2012

Archie Norman












Restricted Share Award











17 March 20107

1,200,000

-

800,000

-

400,000

50.17

Nil

23 May (50%)

31 Dec (50%)

68.97

66.33

275,900

265,307

Dec 2012

 

Notes:

1 One-off award made on joining ITV over restricted shares with a value of £420,000 and released in three tranches of 198,636.

2 An award over restricted shares for 2010 performance.

3 An award over nil-cost options subject to the same provisions and performance conditions attaching to the awards made under the PSP in March 2010. 

4 An award over restricted shares. All participants entered into a section 431 election to pay income tax on the value of the awards on the date of grant. No further income tax is  payable on release.

5 The portion of this award subject to TSR will be measured equally against two distinct comparator groups, the constituents of the FTSE 250 index (excluding companies from the basic materials, financial services, oil and gas and industrials industries), and an industry sector specific group of 23 companies: British Sky Broadcasting Group, Scripps Networks, Canal Plus, Telecinco, CBS, Tf1 (Tv.Fse.1), Daily Mail & General Trust, Time Warner, M6-Metropole TV, Trinity Mirror, Mediaset, Viacom Digital, Modern Times Group, Virgin Media, News Corporation, Vivendi, Pearson, WPP Group, Premier AG, Yell Group, Proseiben Sat 1 Pf., Zon Multimedia and RTL Group.

6 The Turnaround Plan (the Plan) was introduced in 2007. No awards have been made under the Plan since 2008. An award in the form of nil-cost options was made to a number of key senior Executives with a maximum value of 550% of the individual's salary. Participants were required to acquire and retain a number of shares with a value up to 100% of annual base salary for the duration of the performance period to 31 December 2011. 75% of the awards were subject to performance over a five-year period. Up to 50% of the award subject to TSR (25% of the total award) was subject to performance over the three-year period to 31 December 2009. This condition was not met, and 25% of the total award lapsed. The balance of the award will be tested once the 2011 final year results have been published and will vest dependent on the performance conditions described below.

TSR: the balance of the award subject to TSR performance measured against a comparator group selected from the FTSE 100 (excluding certain industry sectors that are less relevant as a benchmark of performance). 25% of this portion of the award will vest for median performance and straight-line vesting will occur up to full vesting for upper quartile performance. The comparator companies are: British Airways, British Sky Broadcasting Group, BT Group, Capita Group, Carnival, Compass Group, Diageo, DSG International, Enterprise Inns, Home Retail Group, Intercontinental Hotels Group, Kingfisher, Marks & Spencer Group, Next, Pearson, Reed Elsevier, Thomson Reuters, SABMiller, Scottish & Newcastle, Vodafone Group, WPP and Yell Group.

Strategic performance targets: There are four strategic targets, each having an equal weighting. For achieving threshold performance, 25% of the award relating to each target will vest, with full vesting for achieving the maximum target. In between these points, awards vest on a straight-line basis. SOCI (ITV Family) - threshold 36.6% and maximum 38.5%; Revenue Growth - threshold 2% and maximum 5% per annum; Adjusted EPS - threshold 8p and maximum 12p; Share price - threshold £1.35 and maximum £2.25 measured as an average over any 28-day period within the final three years of the Plan.

 Any portion of the award that does not vest following the publication of the results for the year ended 31 December 2011, or that is not exercised by 31 December 2012, will lapse and the Plan will terminate.

7 One-off award made on joining ITV. The award releases in three tranches of 400,000 shares over the initial three-year appointment term. Whilst held under award, the shares cannot be sold or transferred.

8 The total market  value of gains on share awards released during the year was £943,237 as shown in the Aggregate Directors' remuneration table above.

 

Directors' interests in shares

The figures set out below represent shareholdings in the ordinary share capital of ITV plc beneficially owned by Directors and their family interests.

 

There were no changes in Directors' interests in shares between the end of the financial year and 29 February 2012.

 

Director

 

31 December

2011

31 December

2010

Mike Clasper

85,918

68,693

Adam Crozier

291,139

97,126

Ian Griffiths

640,960

449,098

Andy Haste

65,487

49,261

Lucy Neville-Rolfe

14,161

3,615

Archie Norman

971,584

380,000

John Ormerod

109,960

94,628

 

Share price information

The market price of the ITV plc ordinary shares at 31 December 2011 was 68.15 pence and the range during the year was 51.65 pence (on 12 September 2011) to 93.45 pence (on 2 March 2011).

 

Approval

The Remuneration Report was approved by the Board on 29 February 2012 and signed on its behalf by Andy Haste.

 

Other Governance and Statutory Disclosures

 

Substantial shareholdings

As at 31 December 2011 the Company had received notifications from the following companies and institutions of the voting interests of themselves and their clients in 3% or more of the issued ordinary share capital (carrying rights to vote in all circumstances) of the Company (numbers of shares and percentage interests are as at the notification dates).

 


At 31 December 2011


Shares

%

Sky Holdings Ltd1

291,684,730

7.50

Blackrock, Inc.

194,694,218

5.01

Brandes Investment Partners, L.P. 

194,304,930

4.99

AXA S.A.

170,580,317

4.39

Legal and General Investment Management Ltd 

153,692,144

3.95

 

Notes:

1  Subsidiary of British Sky Broadcasting Group plc.

2  A profile of shareholdings is set out in Shareholder information.

 

Following the year end a notification was received from Black Rock, Inc. that their interest had fallen to 4.98%.

 

Share capital

Issued: At the date of this report there were 3,889,129,751 ordinary shares of 10 pence each in issue, all of which are fully paid up and quoted on the London Stock Exchange. There have been no movements in the authorised and issued share capital of the Company during the year.

 

Rights: The rights attaching to the Company's ordinary shares, as well as the powers of the Company's Directors, are set out in the Company's Articles of Association. Unless expressly specified to the contrary, the Articles may only be amended by special resolution of the shareholders. A copy of the Articles can be obtained from the Company's website at www.itvplc.com or by writing to the Company Secretary.

 

Restrictions: There are no restrictions on the transfer of ordinary shares in the capital of the Company other than those which may be imposed by law from time to time. In accordance with the Disclosure and Transparency rules, certain employees are required to seek approval to deal in ITV shares. The Company is not aware of any agreements between shareholders that may result in restrictions on the transfers of securities and/or voting rights.

 

Purchase of own shares:The Directors have the authority to purchase up to 388.9 million of the Company's ordinary shares. The authority remains valid until the 2012 Annual General Meeting, or 10 August 2012 if earlier.

 

Trusts: The Company has a discretionary trust funded by loans to acquire shares for the potential benefit of employees of the Group. Details of shares held by the trust at 31 December 2011 are set out in Section 4 Capital Structure and Financing Costs. During the year shares have been released from the trust in respect of share schemes for employees. The trust waives the right to dividends payable on those shares held by the trust that are not subject to any share plan operated by the Company where participants are the beneficial but not registered owners of shares.

 

Change of control

No person holds securities in the Company carrying special rights with regard to control of the Company.

 

All of the Company's share schemes contain provisions relating to a change of control. Outstanding awards and options would normally vest and become exercisable on a change of control, subject to the satisfaction of any performance conditions. Certain of the Group's bonds/borrowing facilities have change of control clauses whereby the issuer can require ITV to repay/redeem bonds in the event of a change of control. The Company is not aware of any other significant agreements to which it is party that take effect, alter or terminate upon a change of control of the Company.

 

Creditor payment policy

The Company's policy, in relation to all its suppliers, is to settle the terms of payment when agreeing the terms of the transaction, ensure awareness of the terms and to abide by those terms provided that it is satisfied that the supplier has provided the goods or services in accordance with the agreed terms and conditions. The Company does not follow any code or standard payment practice. The number of days' purchases outstanding for payment by the Company as at 31 December 2011 was nil days (2010: nil).

 

Pensions

The Group operates a pension scheme which provides retirement and death benefits for employees of ITV plc. The ITV Pension Scheme (the Scheme) comprises three sections: A, B and C. Section A includes the defined contribution (DC) section of the Scheme. The DC section is open to new members. The majority of defined benefit (DB) sections were closed to new members in 2002 (with the last section closing on 1 August 2007) but are still open to future accrual.

 

ITV Pension Scheme Limited (the Trustee) manages the DB and DC assets of the Scheme, which are held under trust separately from those of the Group. The Trustee has four Committees: Investment, Audit and Operations, DC and Corporate Affairs. The Corporate Affairs Committee is convened as and when appropriate for dealing with any corporate activities that may arise.

 

The Trustee comprises nine Directors - the Trustee Chairman, together with four directors appointed by the Company and four directors nominated by the members. During 2011, one of the member nominated directors resigned and was replaced by a new director on completion of a selection process.

 

The Trustee board and each Committee have a business plan, which is reviewed and updated on an annual basis, together with the associated budget. The Trustee board also has a risk register, a conflicts of interest policy and a register of interests policy, all of which are reviewed at least annually.

 

Trustee evaluations take place each year and are currently being further developed as part of a Trustee board effectiveness review. The Trustee directors receive regular training throughout the year; a minimum of two days' training is expected to be undertaken. Training requirements are identified by reference to any skills gaps and specific committee roles and training is delivered both by attendance at external courses and with targeted training to support specific agenda items. During 2011, those Trustee directors who had not completed the Pension Regulator's toolkit received training on the Regulator's Trustee Knowledge and Understanding scope guidance to assist with completion of the toolkit.

 

All advisers and suppliers are appointed through a rigorous tender process and are monitored through regular informal review meetings. There is a timetable for completing a formal review of advisers. No formal reviews were undertaken in 2011.

 

Pension Scheme indemnities: Qualifying pension scheme indemnity provisions, as defined in section 235 of the Companies Act 2006, were in force for the financial year ended 31 December 2011 and remain in force for the benefit of each of the Directors of ITV Pension Scheme Limited, a subsidiary of ITV plc. These indemnity provisions cover, to the extent permitted by law, certain losses or liabilities incurred as a director or officer of ITV Pension Scheme Limited.

 

Audit

The Directors who held office at the date of approval of the Directors' Report confirm that, so far as they are each aware, there is no relevant audit information of which the Company's auditor is unaware; and each Director has taken all steps that they ought to have taken as a Director in order to make themselves aware of any relevant audit information and to establish that the Company's auditor is aware of that information.

 

As recommended by the Audit Committee, a resolution for the re-appointment of KPMG Audit Plc as auditor to the Company will be proposed at the 2012 Annual General Meeting.

 

Annual General Meeting

The Annual General Meeting will be held on Wednesday, 9 May 2012 at 11.00 am at the Queen Elizabeth II Conference Centre, Broad Sanctuary, Westminster, London, SW1P 3EE. The Notice of the Annual General Meeting contains an explanation of special business to be considered at the meeting. A copy of the Notice will be available on the Company's website at www.itvplc.com.

 

By order of the Board

 

Andrew Garard 

Company Secretary

29 February 2012

 

ITV plc

The London Television Centre

Upper Ground

London

SE1 9LT

Registered number 4967001

 

Statement of Directors' Responsibilities in Respect of the Annual Report and Financial Statements

The Directors are responsible for preparing the Annual Report and the Group and parent company financial statements in accordance with applicable law and regulations.

 

Company law requires the Directors to prepare Group and parent company financial statements for each financial year. Under that law they are required to prepare the Group financial statements in accordance with IFRSs as adopted by the EU and applicable law and have elected to prepare the parent company financial statements in accordance with UK Accounting Standards and applicable law (UK Generally Accepted Accounting Practice).

 

Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and parent company and of their profit or loss for that period. In preparing each of the Group and parent company financial statements, the Directors are required to:

 

·      select suitable accounting policies and then apply them consistently;

·      make judgements and estimates that are reasonable and prudent;

·      for the Group financial statements, state whether they have been prepared in accordance with IFRSs as adopted by the EU;

·      for the parent company financial statements, state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the parent company financial statements; and

·      prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and the parent company will continue in business.

 

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the parent company's transactions and disclose with reasonable accuracy at any time the financial position of the parent company and enable them to ensure that its financial statements comply with the Companies Act 2006. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities.

 

Under applicable law and regulations, the Directors are also responsible for preparing a Directors' Report, Remuneration Report and Corporate Governance Statement that comply with that law and those regulations.

 

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

 

Each of the Directors, the names of whom are set out in the Board of Directors section, confirms that to the best of his or her knowledge:

 

·      the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets and liabilities, financial position and the profit or loss of the Company and the undertakings included in the consolidation taken as a whole; and

·      the Directors' Report includes a review of the development and performance of the business and the position of the issue and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.

 

By order of the Board

 

Andrew Garard 

Company Secretary

29 February 2012

 

 

Financial Statements

 

Independent Auditor's Report to the Members of ITV plc

 

We have audited the Consolidated and Company financial statements of ITV plc for the year ended 31 December 2011 set out in the Financial Statements section.

 

The financial reporting framework that has been applied in the preparation of the Group financial statements is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the EU. The financial reporting framework that has been applied in the preparation of the Parent Company financial statements is applicable law and UK Accounting Standards (UK Generally Accepted Accounting Practice).

 

This report is made solely to the Company's members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company's members those matters we are required to state to them in an auditor's 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 and the Company's members, as a body, for our audit work, for this report, or for the opinions we have formed.

 

Respective responsibilities of directors and auditor

As explained more fully in the Statement of Directors' Responsibilities, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit, and express an opinion on, the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board's (APB's) Ethical Standards for Auditors.

 

Scope of the audit of the financial statements

A description of the scope of an audit of financial statements is provided on the APB's website at www.frc.org.uk/apb/scope/private.cfm

 

Opinion on financial statements

 

In our opinion:

 

·      the financial statements give a true and fair view of the state of the Group's and of the Parent Company's affairs as at 31 December 2011 and of the Group's profit for the year then ended;

·      the Group financial statements have been properly prepared in accordance with IFRSs as adopted by the EU;

·      the Parent Company financial statements have been properly prepared in accordance with UK Generally Accepted Accounting Practice;

·      the financial statements have been prepared in accordance with the requirements of the Companies Act 2006; and, as regards the Group financial statements, Article 4 of the IAS Regulation.

 

Opinion on other matters prescribed by the Companies Act 2006

 

In our opinion:

 

·      the part of the Directors' Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006; and

·      the information given in the Directors' Report for the financial year for which the financial statements are prepared is consistent with the financial statements.

 

Matters on which we are required to report by exception

We have nothing to report in respect of the following:

 

Under the Companies Act 2006 we are required to report to you if, in our opinion:

 

·      adequate accounting records have not been kept by the Parent Company, or returns adequate for our audit have not been received from branches not visited by us; or

·      the Parent Company financial statements and the part of the Directors' Remuneration Report to be audited are not in agreement with the accounting records and returns; or

·      certain disclosures of directors' remuneration specified by law are not made; or

·      we have not received all the information and explanations we require for our audit.

 

Under the Listing Rules we are required to review:

 

·      the directors' statement, in relation to going concern;

·      the part of the Corporate Governance Statement relating to the Company's compliance with the nine provisions of the UK Corporate Governance Code specified for our review; and

·      certain elements of the report to shareholders by the Board on directors' remuneration.

 

Mark Summerfield (Senior Statutory Auditor) 

for and on behalf of KPMG Audit Plc, Statutory Auditor

Chartered Accountant

15 Canada Square

London, E14 5GL

 

29 February 2012

 

Introduction and Table of Contents

 

In preparing these financial statements we continue to apply the principles outlined in the Financial Reporting Council's publication 'Louder than words' to make ITV's financial statements less complex and more relevant to shareholders. We have grouped notes in sections under three key headings: 'Results for the year', 'Operating Assets and Liabilities' and 'Capital Structure and Financing Costs'. Each section sets out the accounting policies applied in producing these notes together with any key judgements and estimates used. The purpose of this format is to provide readers with a clearer understanding of what drives financial performance of the Group.

Notes to the financial statements provide additional information required by statute, accounting standards or Listing Rules to explain a particular feature of the financial statements. The notes which follow will also provide explanations and additional disclosure to assist readers' understanding and interpretation of the annual report and the financial statements.

 

Contents


Primary statements


Consolidated Income Statement


Consolidated Statement of Comprehensive Income


Consolidated Statement of Financial Position


Consolidated Statement of Changes in Equity


Consolidated Statement of Cash Flows


Section 1 - Basis of Preparation


Section 2 - Results for the Year


2.1 Profit before tax


2.2  Exceptional items


2.3  Taxation


2.4  Earnings per share


Section 3 - Operating Assets and Liabilities


3.1  Working capital


3.2  Property, plant and equipment


3.3  Intangible assets


3.4  Acquisitions, assets held for sale and disposals


3.5  Provisions


3.6  Pensions


Section 4 - Capital Structure and Financing Costs


4.1  Net cash/(debt)


4.2  Borrowings and held to maturity investments


4.3  Derivative financial instruments


4.4  Net financing costs


4.5  Financial risk factors


4.6  Fair value hierarchy


4.7  Equity


Section 5 - Other Notes


5.1  Related party transactions


5.2  Contingent liabilities


5.3  Subsequent events


ITV plc Company Financial Statements


Financial Record

 

Consolidated Income Statement

 

For the year ended 31 December:

Note

 
2011
£m


2010
£m

Revenue

2.1

2,140

2,064

Operating costs


(1,736)

(1,700)

Operating profit


404

364





 Presented as:




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

2.1

462

408

 Operating exceptional items

2.2

1

19

 Amortisation of intangible assets

3.3

(59)

(63)

Operating profit


404

364





 Financing income

4.4

196

185

 Financing costs

4.4

(271)

(260)

Net financing costs

4.4

(75)

(75)

Share of profits or (losses) of joint ventures and associated undertakings

2.1

(2)

(3)

Loss on sale and impairment of non-current assets (exceptional items)

2.2

(3)

(4)

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

2.2

3

4

Profit before tax


327

286

Taxation

2.3

(79)

(16)

Profit for the year


248

270





Profit attributable to:




Owners of the Company


247

269

Non-controlling interests


1

1

Profit for the year


248

270





Earnings per share




Basic earnings per share

2.4

6.4p

6.9p

Diluted earnings per share

2.4

6.2p

6.6p

 

 

Consolidated Statement of Comprehensive Income

 

 

For the year ended 31 December:

2011

£m

2010

£m

Profit for the year

248

270




Other comprehensive income:



Foreign currency translation differences

-

3

Revaluation of available for sale financial assets

3

(3)

Actuarial (losses)/gains on defined benefit pension schemes

(124)

67

Income tax credit/(charge) on other comprehensive income

30

(22)

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

(91)

45

Total comprehensive income for the year

157

315




Total comprehensive income attributable to:



Owners of the Company

156

314

Non-controlling interests

1

1

Total comprehensive income for the year

157

315

 

Consolidated Statement of Financial Position

 

 

As at 31 December

Note

2011

£m

2010

£m

Non-current assets




Property, plant and equipment

3.2

167

151

Intangible assets

3.3

934

969

Investments in joint ventures and associated undertakings


3

2

Available for sale financial assets


2

3

Held to maturity investments

4.1

147

148

Derivative financial instruments

4.3

110

89

Distribution rights

3.1.1

11

12

Net deferred tax asset

2.3

65

73



1,439

1,447

Current assets




Programme rights and other inventory

3.1.2

285

284

 Trade and other receivables due within one year

3.1.4

370

442

 Trade receivables due after more than one year

3.1.4

26

6

Trade and other receivables


396

448

Derivative financial instruments

4.3

-

69

Cash and cash equivalents

4.1

801

860

Assets held for sale

3.4

-

3



1,482

1,664

Current liabilities




Borrowings

4.2

(9)

(55)

Derivative financial instruments

4.3

(1)

(3)

 Trade and other payables due within one year

3.1.5

(639)

(672)

 Trade payables due after more than one year

3.1.6

(45)

(26)

Trade and other payables


(684)

(698)

Current tax liabilities


(36)

(65)

Provisions

3.5

(24)

(34)



(754)

(855)





Net current assets


728

809





Non-current liabilities




Borrowings

4.2

(912)

(1,223)

Derivative financial instruments

4.3

(44)

(39)

Defined benefit pension deficit

3.6

(390)

(313)

Other payables


(3)

(3)

Provisions

3.5

(9)

(15)



(1,358)

(1,593)

Net assets


809

663





Attributable to equity shareholders of the parent company




Share capital

4.7.1

389

389

Share premium

4.7.1

120

120

Merger and other reserves

4.7.2

300

304

Translation reserve


14

14

Available for sale reserve


8

5

Retained losses


(25)

(171)

Total equity attributable to equity shareholders of the parent company


806

661

Non-controlling interests


3

2

Total equity


809

663

 

Ian Griffiths 

Group Finance Director

 

Consolidated Statement of Changes in Equity

 


Attributable to equity shareholders of the parent company



Note

Share

capital

£m

Share

premium

£m

Merger

and other

reserves

£m

Translation

reserve

£m

Available

for sale

 reserve

£m

Retained

losses

£m

 

 

Total

£m

Non-

controlling

interests

£m

 

Total

equity

£m

Balance at 1 January 2011


389

120

304

14

5

(171)

661

2

663

Total comprehensive income for the year











Profit


-

-

-

-

-

247

247

1

248

Other comprehensive income/(cost)











Revaluation of available for sale financial assets

-

-

-

-

3

-

3

-

3

Actuarial losses on defined benefit
pension schemes

3.6

-

-

-

-

-

(124)

(124)

-

 

(124)

Income tax on other comprehensive income

2.3

-

-

-

-

-

30

30

-

30

Total other comprehensive income/(cost)


-

-

-

-

3

(94)

(91)

-

(91)

Total comprehensive income for the year


-

-

-

-

3

153

156

1

157

Transactions with owners, recorded directly in equity











Contributions by and distributions to owners










Equity dividends


-

-

-

-

-

(16)

(16)

-

(16)

Equity portion of the convertible bond

4.1

-

-

(4)

-

-

4

-

-

-

Movements due to share-based compensation

4.7.7

-

-

-

-

-

11

11

-

 

11

Purchase of own shares via employees' benefit trust

4.7.7

-

-

-

-

-

(6)

(6)

-

 

(6)

Total contributions by and distributions to owners

-

-

(4)

-

-

(7)

(11)

-

(11)

Change in ownership interest in subsidiaries
that do not result in a loss of control










Total changes in ownership interests in subsidiaries

-

-

-

-

-

-

-

-

-

Total transactions with owners


-

-

(4)

-

-

(7)

(11)

-

(11)

Balance at 31 December 2011

4.7

389

120

300

14

8

(25)

806

3

809

 

Consolidated Statement of Changes in Equity

 


Attributable to equity shareholders of the parent company



Note

Share

capital

£m

Share

premium

£m

Merger

and other

reserves

£m

Translation

reserve

£m

Available

for sale

 reserve

£m

Retained

losses

£m

 

 

Total

£m

Non-

controlling

interests

£m

 

Total

equity

£m

Balance at 1 January 2010


389

120

308

11

8

(491)

345

1

346

Total comprehensive income for the year











Profit


-

-

-


-

269

269

1

270

Other comprehensive income/(cost)











Revaluation of available for sale financial assets

-

-

-

-

(3)

-

(3)

-

(3)

Foreign currency translation differences


-

-

-

3

-

-

3

-

3

Actuarial gains on defined benefit
pension schemes

3.6

-

-

-

-

-

67

67

-

 

67

Income tax on other comprehensive income

2.3

-

-

-

-

-

(22)

(22)

-

(22)

Total other comprehensive income/(cost)


-

-

-

3

(3)

45

45

-

45

Total comprehensive income/(cost)
for the year


-

-

-

3

(3)

314

314

1

 

315

Transactions with owners, recorded directly in equity











Contributions by and distributions to owners










Equity portion of the convertible bond

4.1

-

-

(4)

-

-

4

-

-

-

Movements due to share-based compensation

4.7.7

-

-

-

-

-

8

8

-

8

Purchase of own shares via employees' benefit trust

4.7.7

-

-

-

-

-

(6)

(6)

-

(6)

Total contributions by and distributions to owners

-

-

(4)

-

-

6

2

-

2

Change in ownership interest in subsidiaries
that do not result in a loss of control










Total changes in ownership interests in subsidiaries

-

-

-

-

-

-

-

-

-

Total transactions with owners


-

-

(4)

-

-

6

2

-

2

Balance at 31 December 2010

4.7

389

120

304

14

5

(171)

661

2

663

 

Consolidated Statement of Cash Flows

 

 

For the year ended 31 December:

Note

 

£m

2011

£m

 

£m

2010

£m

Cash flows from operating activities






Profit before tax


327


286


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

2.2

(3)


(4)


Loss on sale and impairment of non-current assets (exceptional items)

2.2

3


4


Share of (profits) or losses of joint ventures and associated undertakings


2


3


Net financing costs

4.4

75


75


Operating exceptional items

2.2

(1)


(19)


Depreciation of property, plant and equipment

3.2

26


30


Amortisation and impairment of intangible assets

3.3

59


63


Share-based compensation

4.7

11


8


 Decrease in programme rights and other inventory,

 and distribution rights


-


108


    Decrease/(increase) in receivables


52


(8)


 Decrease in payables


(34)


(1)


Movement in working capital

3.1

18


99


Cash generated from operations before exceptional items



517


545

Cash flow relating to operating exceptional items:






Net operating income

2.2

1


19


Decrease in payables and provisions and the impact of the

exceptional pension gain


(5)


(45)


Cash outflow from exceptional items



(4)


(26)

Cash generated from operations



513


519

Defined benefit pension deficit funding


(48)


(30)


Interest received


48


40


Interest paid on bank and other loans


(85)


(100)


Interest paid on finance leases


(3)


(4)


Net taxation paid


(68)


(23)





(156)


(117)

Net cash inflow from operating activities



357


402

Cash flows from investing activities






Acquisition of subsidiary undertakings, net of cash and cash equivalents acquired and debt repaid on acquisition

3.4

 

(14)


 

-


Proceeds from sale of property, plant and equipment


2


7


Acquisition of property, plant and equipment


(35)


(26)


Acquisition of intangible assets


(8)


(2)


Loans granted to associates and joint ventures


(6)


(6)


Loans repaid by associates and joint ventures


2


9


Proceeds from sale of subsidiaries, joint ventures and available for sale investments


2


69


Net cash (outflow)/inflow from investing activities



(57)


51

Cash flows from financing activities






Bank and other loans - amounts repaid


(331)


(155)


Capital element of finance lease payments


(5)


(7)


Purchase of own shares via employees' benefit trust


(6)


(6)


Equity dividends paid


(16)


-


Net cash outflow from financing activities



(358)


(168)

Net (decrease)/increase in cash and cash equivalents



(58)


285

Cash and cash equivalents at 1 January

4.1


860


582

Effects of exchange rate changes and fair value movements



(1)


(7)

Cash and cash equivalents at 31 December

4.1


801


860

 

Section 1 Basis of Preparation

 

This section sets out the Group's accounting policies that relate to the financial statements as a whole. Where an accounting policy is specific to one note, the policy is described in the note to which it relates. This section also shows new EU endorsed accounting standards, amendments and interpretations, whether these are effective in 2011 or later years. We explain how these changes are expected to impact the performance of the Group.

 

The financial statements consolidate those of ITV plc ('the Company') and its subsidiaries (together referred to as 'the Group') and include the Group's interests in associates and jointly controlled entities. The Company is domiciled in the United Kingdom.

 

As required by EU law (IAS Regulation EC 1606/2002) the Group's accounts have been prepared in accordance with International Financial Reporting Standards as adopted by the EU ('IFRS'), and approved by the Directors.

 

The financial statements are principally prepared on the basis of historical cost. Where other bases are applied these are identified in the relevant accounting policy.

 

The Company has elected to prepare its parent company financial statements in accordance with UK GAAP.

 

Going concern

As a result of the Group's continued generation of significant free cash flows for the year the Group reduced its current level of net indebtedness to a positive net cash position, and has also improved both its short-term and medium-term liquidity position.

 

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 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 consolidated financial statements.

 

Subsidiaries, joint ventures, associates and special purpose entities

Subsidiaries are entities that are directly or indirectly controlled by the Group. Control exists where the Group has the power to govern the financial and operating policies of the entity in order to obtain benefits from its activities. In assessing control, potential voting rights that are currently exercisable or convertible are taken into account.

 

A joint venture is an entity in which the Group holds an interest under a contractual arrangement where the Group and one or more other parties undertake an economic activity that is subject to joint control. The Group accounts for its interests in joint ventures using the equity method. Under the equity method the investment in the entity is stated as one line item at cost plus the investor's share of retained post-acquisition profits and other changes in net assets.

 

An associate is an entity, other than a subsidiary or joint venture, over which the Group has significant influence. Significant influence is the power to participate in, but not control or jointly control, the financial and operating decisions of an entity. These investments are also accounted for using the equity method.

 

The Group establishes special purpose entities (SPEs) for trading and investment purposes. An SPE is consolidated if, based on an evaluation of the substance of its relationships with the Group and the SPE's risks and rewards, it is concluded that the Group controls the SPE. Those SPEs controlled by the Group are established under terms that impose strict limitations on the decision-making powers of their management and that result in the Group receiving the majority of the benefits related to their operations and net assets, being exposed to the majority of risks incidental to their activities and receiving the majority of the residual or ownership risks related to the SPEs or their assets.

 

Current/non-current distinction

Current assets include assets held primarily for trading purposes, cash and cash equivalents, and assets expected to be realised in, or intended for sale or use in, the course of the Group's operating cycle. All other assets are classified as non-current assets.

 

Current liabilities include liabilities held primarily for trading purposes, liabilities expected to be settled in the course of the Group's operating cycle and those liabilities due within one year from the reporting date. All other liabilities are classified as non-current liabilities.

 

Classification of financial instruments

The financial assets and liabilities of the Group are classified into the following financial statement captions in the statement of financial position in accordance with IAS 39: financial instruments:

 

·     'Loans and receivables' - separately disclosed as cash and cash equivalents (excluding gilts over which unfunded pension commitments have a charge) and trade and other receivables;

·     'Available for sale financial assets' - measured at fair value through other comprehensive income. Includes gilts over which unfunded pension commitments have a charge and equity securities that do not meet the definition of subsidiaries, joint ventures or associates;

·     'Held to maturity investments';

·     'Financial assets/liabilities at fair value through profit or loss' - separately disclosed as derivative financial instruments,  assets/liabilities; and

·     'Financial liabilities measured at amortised cost' - separately disclosed as borrowings and trade and other payables.

 

Details on the accounting policies for measurement of the above instruments are set out in the relevant note.

 

Recognition and derecognition of financial assets and liabilities

The Group recognises a financial asset or liability when it becomes a party to the contract. Financial instruments are no longer recognised in the statement of financial position when the contractual cash flows expire or when the Group no longer retains control of substantially all the risks and rewards under the instrument.

 

Cash and cash equivalents

Cash and cash equivalents comprise cash balances, call deposits with maturity of less than or equal to three months from the date of acquisition, cash held to meet certain finance lease commitments and gilts over which unfunded pension commitments have a charge. The carrying value of cash and cash equivalents is considered to approximate fair value.

 

Foreign currencies

The primary economic environment in which the Group operates is the UK. The consolidated financial statements are therefore presented in pounds sterling ('£').

 

Where Group companies based in the UK transact in foreign currencies, these transactions are translated into pounds sterling at the exchange rate on that day. Foreign currency monetary assets and liabilities are translated into pounds sterling at the year-end exchange rate. Where there is a movement in the exchange rate between the date of the transaction and the year-end, a foreign exchange gain or loss may arise. Any such differences are recognised in the income statement. Non-monetary assets and liabilities measured at historical cost are translated into pounds sterling at the exchange rate on the date of the transaction.

 

The assets and liabilities of Group companies outside of the UK are translated into pounds sterling at the year-end exchange rate. The revenues and expenses of these companies are translated into pounds sterling at the average monthly exchange rate during the year. Where differences arise between these rates, they are recognised in the translation reserve within equity and other comprehensive income.

 

Exchange differences arising on the translation of the Group's interests in joint ventures and associates are recognised in the translation reserve within equity and other comprehensive income.

 

In respect of all Group companies outside of the UK only those translation differences arising since 1 January 2004, the date of transition to IFRS, are presented as a separate component of equity. On disposal of an interest in a joint venture or an associate, the related translation reserve is released to the income statement as part of the gain or loss on disposal.

 

Accounting judgements and estimates

The preparation of financial statements requires management to exercise judgement in applying the Group's accounting policies. It also requires the use of estimates and assumptions that affect the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.

 

Estimates and underlying assumptions are reviewed on an ongoing basis, with revisions recognised in the period in which the estimates are revised and in any future periods affected.

 

The areas involving a higher degree of judgement or complexity are set out below and in more detail in the related notes:

 

·     Revenue recognition (note 2.1)

·     Classification of financial instruments (included in this note)

·     Consolidation of SPEs (included in this note)

 

The areas involving the most sensitive estimates and assumptions that are significant to the financial statements are set out below and in more detail in the related notes:

 

·     Defined benefit pension schemes (note 3.6)

·     Taxation (note 2.3)

·     Provisions (note 3.5)

·     Employee benefits (note 4.7)

·     Intangible assets (note 3.3)

·     Impairment of assets (note 3.2 and note 3.3)

·     Programme rights and other inventory (note 3.1)

·     Trade receivables (note 3.1)

 

New or amended EU endorsed accounting standards

The table below represents new or amended EU endorsed accounting standards relevant to the Group's results that are effective in 2011:

 

Accounting Standard

Requirement

Impact on financial statements

IFRS 7 Financial Instruments: Disclosures

IFRS 7 is amended to add an explicit statement that the interaction between qualitative and quantitative disclosures better enables users to evaluate an entity's exposure to risks arising from financial instruments.

The Group has reviewed their disclosure of financial instruments to ensure they are in compliance with the amendment to IFRS 7.

IAS 1 Presentation of Financial Statements

IAS 1 is amended to clarify that a reconciliation from opening to closing balances is required to be presented in the statement of changes in equity for each component of equity. IAS 1 is also amended to allow the analysis of the individual OCI line items by component of equity to be presented in the notes. Previously, such analysis could only be presented in the SOCIE.

The Group has reviewed their Statement of changes in equity to ensure they are in compliance with the amendment to IAS 1.

 

The Directors also considered the impact of other new and revised accounting standards, interpretations or amendments on the Group that are currently endorsed but not yet effective. It was concluded that none were relevant to the Group's results.

 

Section 2 Results for the Year

 

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 year, segmental information, exceptional items, taxation and earnings per share.

 

2.1 Profit before tax

 

This section analyses the Group's profit before tax by reference to the activities performed by the Group and an analysis of key operating costs.

 

Earnings before interest, tax, amortisation (EBITA) and before 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.

 

Accounting policies

Revenue recognition

Revenue is stated exclusive of VAT and comprises the sale of products and services to third parties. Selecting the appropriate timing and amount of revenue recognised requires judgement. The key area of judgement in respect of recognising revenue is the timing of recognition. Revenue from the sale of products is recognised when the Group has transferred both the significant risks and rewards of ownership and control of the products sold and the amount of revenue can be measured reliably. Revenue recognition criteria for the Group's key classes of revenue are recognised on the following bases:

 

Class of revenue

Recognition criteria

Advertising

on transmission or display

Sponsorship

 

on transmission of the sponsored programme or series

Programme production

on delivery and acceptance by the customer

Programme rights

when contracted and available for exploitation

Participation revenues (interactive & 'red button' services)

as the service is provided

 

 

Segmental information

Operating segments, which have not been aggregated, 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 years ended 31 December 2011 and 31 December 2010 are therefore 'Broadcasting & Online' and 'ITV Studios', the results of which are outlined in the following table:

 


Broadcasting

& Online

2011

£m

 

ITV Studios

2011

£m

 

Consolidated

2011

£m

Total segment revenue

1,820

612

2,432

Intersegment revenue

-

(292)

 (292)

Revenue from external customers

1,820

320

2,140

EBITA before exceptional items

379

83

462

Share of profits or (losses) of joint ventures and associated undertakings

(2)

-

(2)

 


Broadcasting

& Online

2010

£m

 

ITV Studios

2010

£m

 

Consolidated

2010

£m

Total segment revenue

1,771

554

2,325

Intersegment revenue

-

(261)

(261)

Revenue from external customers

1,771

293

2,064

EBITA before exceptional items

327

81

408

Share of profits or (losses) of joint ventures and associated undertakings

(3)

-

(3)

 

Sales between segments are carried out on arm's length terms.

 

In preparing the segment information, costs have been allocated between reportable segments consistently on the basis of a relevant allocation methodology. For example, rent is allocated on the basis of square feet occupied. This reflects the basis of reporting to the Board of Directors.

 

Broadcasting & Online

This segment is responsible for commissioning and scheduling programmes on the ITV channels, marketing and programme publicity and online rights exploitation. Broadcasting & Online derives its revenue primarily from the sale of advertising airtime and sponsorship. Other sources of revenue are from participation revenue, online advertising and the digital terrestrial multiplex, SDN.

 

ITV Studios 

This segment generates revenue primarily from ITV Studios UK (a commercial programme production business), international production centres in the USA, Germany, Sweden, Australia and France and the distribution and exploitation businesses in ITV Studios Global Entertainment.

 

A significant portion of ITV Studios' revenue is generated when it creates ideas that are then produced and sold as programming to the 'Broadcasting & Online' segment, primarily for ITV1.

 

ITV Studios Global Entertainment sells programming, exploits merchandising and licensing worldwide, and is a distributor of DVD entertainment primarily in the United Kingdom.

 

EBITA before exceptional items

The Directors assess the performance of the reportable segments based on a measure of EBITA before exceptional items. The Directors use this measurement basis as it excludes the effect of non-recurring income and expenditure. Amortisation, investment income and share of profit/(losses) of joint ventures and associates are also excluded to reflect more accurately how the business is managed and measured on a day-to-day basis. Net financing costs are not allocated to segments as this type of activity is driven by the central treasury function, which manages the cash position of the Group.

 

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

 


2011

£m

2010

£m

EBITA before exceptional items

462

408

Operating income - exceptional items

1

19

Amortisation and impairment of intangible assets

(59)

(63)

Net financing costs

(75)

(75)

Share of profits or (losses) of joint ventures and associated undertakings

(2)

(3)

Loss on sale and impairment of non-current assets (exceptional items)

(3)

(4)

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

3

4

Profit before tax

327

286

 

The Group's principal operations are in the United Kingdom. Its revenue from external customers in the United Kingdom is £1,900 million (2010: £1,865 million), and the total revenue from external customers in other countries is £240 million (2010: £199 million).

 

There are three media buying agencies acting on behalf of a number of customers that represent the Group's major customers. These agencies are the only customers which individually represent over 10% of the Group's revenues. Revenues of approximately £480 million (2010: £400 million), £239 million (2010: £270 million) and £221 million (2010: £196 million) were derived from these customers. These revenues are attributable to the 'Broadcasting & Online' segment.

 

Operating costs

Staff costs

Staff costs before exceptional items can be analysed as follows:

 


2011

£m

2010

£m

Wages and salaries

220

212

Social security and other costs

36

32

Share-based compensation

(see note 4.7)

11

8

Pension costs

20

17


287

269

 

There are no Staff costs within exceptional items in 2011 (2010: £11 million).

 

The number of full-time equivalent employees (excluding short-term contractors and freelancers), calculated on a weighted average basis, during the year was:

 


2011

2010

Broadcasting & Online

2,271

2,312

ITV Studios

1,687

1,635


3,958

3,947

 

Details of the Directors' emoluments, share options, pension entitlements and long-term incentive scheme interests are set out in the Remuneration Report.

 

Depreciation

Depreciation in the year was £26 million (2010: £30 million), of which £15 million (2010: £19 million) relates to 'Broadcasting & Online' and £11 million (2010: £11 million) to 'ITV Studios'.

 

Operating leases

The total future minimum lease payments under non-cancellable operating leases fall due for payment as follows:

 

2011

Transponders

Property

Total

Within 1 year

12

10

22

Later than 1 year and not later than 5 years

120

31

151

Later than 5 years

159

88

247


291

129

420

 

 

2010 (restated)



Total

(Property)

Within 1 year



14

Later than 1 year and not later than 5 years



32

Later than 5 years



87




133

 

The Group's operating leases relate to transponder assets and office and studio properties. During the year, the Group entered new transmission supply agreements that require the use of specific transponder assets for a period of up to 12 years with payments increasing over time, limited by specific RPI caps. These supply agreements are classified as operating leases, in accordance with the Group's policy on leases detailed in Section 3.2.

 

Property leases typically run for a period of between 3 and 15 years and may have an option to renew after that date. Lease payments are generally subject to market review every 5 years to reflect market rentals, but because of the uncertainty over the amount of any future changes, such changes have not been reflected in the table above. None of the leases include contingent rentals. The property operating lease disclosures in 2010 have been restated principally because of revised estimations of break clauses in the lease contracts.

 

The total future minimum sublease payments expected to be received under non-cancellable subleases at the year end is £4 million (2010 restated: £6 million).

 

The total operating lease expenditure recognised during the year was £42 million (2010 restated: £12 million) and total sublease payments received was £4 million (2010 restated: £5 million).

 

Audit fees

The Group engages KPMG Audit Plc ('KPMG') on assignments additional to their statutory audit duties where their expertise and experience with the Group are important. The Group's policy on such assignments is set out in the Audit Committee Report.

 

Fees paid to KPMG and its associates during the year are set out below:

 

 

 


2011

£m

2010

£m

 For the audit of the Group's annual accounts 

0.7

0.7

 For the audit of subsidiaries of the Group  

0.1

0.2

 Audit-related assurance services

0.1

0.2

Total Audit and Audit-Related assurance services

0.9

1.1

    Taxation compliance services

0.1

0.1

 Taxation advisory services

0.7

0.7

Non-Audit Services

0.8

0.8


1.7

1.9

 

Fees payable to KPMG and associates for the auditing of accounts of any associate of the Group, internal audit services, services relating to corporate finance transactions entered into or proposed to be entered into, by or on behalf of the Group or any of its associates, and any other assurance services were £nil during 2011 and 2010.

 

Fees paid to KPMG for audit and other services to the Company are not disclosed in its individual accounts as the Group accounts are required to disclose such fees on a consolidated basis.

 

2.2 Exceptional Items

 

Accounting policies

Exceptional items as described above are disclosed on the face of the income statement.

 

Subsequent revisions of estimates for items initially recognised as exceptional provisions are recorded as exceptional items in the year that the revision is made. Gains or losses on disposal of non- core assets are also considered exceptional due to their nature and impact on the Group's underlying quality of earnings.

 

Exceptional items

Operating and non-operating exceptional items are analysed as follows:

 

 

(Charge)/credit

Ref

2011

£m

2010

£m

Operating exceptional items:




 Reorganisation and restructuring costs

A

-

(17)

 Onerous contract provisions


-

1

 Onerous property provision

B

1

7

 Pension scheme changes

C

-

28

Total net operating exceptional items


1

19

Non-operating exceptional items:




 Loss on sale and impairment of non-current assets

D

 (3)

(4)

 Gain on sale and impairment of subsidiaries and investments

E

3

4

Total non-operating exceptional items


-

-

Total exceptional items before tax


1

19

 

A - Reorganisation and restructuring costs

There were no exceptional reorganisation or restructuring costs in 2011 (2010: £17 million in relation to cost saving restructuring initiatives).

 

B - Onerous property provision

A £1 million credit (2010: £7 million credit) due to revised estimates for property provisions raised as exceptional items due to the large headcount reduction in 2009.

 

C - Pension scheme changes (see note 3.6)

In 2010 operating exceptional gains of £28 million were recognised for service credits relating to introduction of a member option to change pension payments at retirement and one-off change to pension payments, and settlement gain in relation to the enhanced transfer value exercise.

 

D - Loss on sale and impairment of non-current assets

In 2011 a £3 million (2010: £4 million) loss on sale and impairment of non-current assets was incurred primarily as a result of a detailed fixed asset review undertaken in preparation for moving premises in Manchester.

 

E - Gain on sale, net of impairment, of subsidiaries, joint ventures and associates

The £3 million gain principally relates to the sale of Screenvision Holdings (Europe) Limited. In 2010 the £4 million gain principally related to the sale of Screenvision US (Technicolor Cinema Advertising LLC).

 

2.3 Taxation

 

Accounting policies

The tax charge for the period is recognised in the income statement and the statement of comprehensive income, according to the accounting treatment of the related transaction. The tax charge comprises both current and deferred tax. The calculation of the Group's total tax charge involves a degree of estimation and judgement in respect of certain items whose tax treatment cannot be finally determined until a resolution has been reached by the relevant tax authority.

 

Current tax is the expected tax payable or receivable on the taxable income or loss for the year and any adjustment in respect of previous years. The current tax charge is based on tax rates that are enacted or substantively enacted at the year-end.

 

The Group recognises liabilities for anticipated tax issues based on estimates of the additional taxes that are likely to become due, which require judgement. Amounts are accrued based on management's interpretation of specific tax law and the likelihood of settlement. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made.

 

Deferred tax arises due to certain temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and those for taxation purposes. The following temporary differences are not provided for:

 

·     the initial recognition of goodwill;

·     the initial recognition of assets or liabilities that affect neither accounting nor taxable profit other than in a business combination; and

·     differences relating to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future.

 

The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities. A deferred tax asset is recognised only to the extent that it is probable that sufficient taxable profit will be available to utilise the temporary difference.

 

Recognition of deferred tax assets, therefore, involves judgement regarding the timing and level of future taxable income. Deferred tax assets and liabilities are disclosed net to the extent that they relate to taxes levied by the same authority and the Group has the right of set-off.

 

 

Taxation - Income statement

The total taxation charge in the income statement is analysed as follows:

 


2011

£m

2010

£m

Current tax:



 Current tax charge before exceptional items

(60)

(64)

 Current tax credit on exceptional items

-

3


(60)

(61)

 Adjustment for prior periods

19

-


(41)

(61)

Deferred tax:



 Origination and reversal of temporary differences

(38)

53

 Deferred tax on exceptional items

-

(8)

 Adjustment for prior periods

-

-


(38)

45

Total taxation charge in the income statement

(79)

(16)

 

In order to understand how, in the income statement, a tax charge of £79 million (2010: £16 million) arises on a profit before tax of £327 million (2010: £286 million), the taxation charge that would arise at the standard rate of UK corporation tax is reconciled to the actual tax charge as follows:

 


2011

£m

2010

£m

Profit before tax

327

286

Taxation charge at UK corporation tax rate of 26.5% (2010: 28%)

(87)

(80)

Non-taxable income/non-deductible expenses

(7)

(1)

Recognition of tax losses brought forward

11

68

Over provision in prior periods

8

-

Impact of changes in tax rate

(3)

-

Other

(1)

(3)

Total taxation charge in the income statement

(79)

(16)

 

Non-deductible expenses are expenses that are not expected to be allowable for tax purposes. Similarly non-taxable income is income that will not be taxed.

 

Tax losses brought forward may be utilised against current year profits if the brought forward losses and the current year profits are of the same type. Use of tax losses in this way leads to a reduction of the tax charge. Tax losses of £11 million (2010: £68 million) principally include the recognition of a deferred tax asset of £11 million (2010: £45 million) on the remaining financing losses linked to previous investments ('loan relationship deficits') following the successful conclusion of an enquiry with the tax authorities. In 2010 this also included a credit for utilisation of £16 million of previously deferred loan relationship deficits and a credit of £5 million on the recognition of a deferred tax asset on other losses.

 

Over provision in prior periods may arise where a more favourable outcome is obtained for tax purposes than was expected when the provision was made. Upon confirmation that the more favourable tax treatment will apply, the over provision is released to lower the current year tax charge. The opposite is true of under provisions.

 

The effective tax rate is the tax charge on the face of the income statement expressed as a percentage of the profit before tax. In the year ended 31 December 2011, the effective tax rate is lower than the standard rate of UK corporation tax primarily because of the release of an overseas prior year over provision. In the year ended 31 December 2010, the effective tax rate was lower than the standard rate of UK corporation tax primarily due to the recognition of deferred tax assets on brought forward tax losses. As explained in the Financial and Performance Review, the Group uses an adjusted tax rate to show the cash tax impact on its adjusted earnings.

 

Taxation - Other comprehensive income

Within other comprehensive income a tax credit totalling £30 million (2010: charge of £22 million) has been recognised representing deferred tax. An analysis of this is included below in the deferred tax movement table.

 

Taxation - Statement of financial position

The table below outlines the deferred tax assets/(liabilities) that are recognised in the statement of financial position, together with their movements in the year:

 


At

1 January

2011

£m

Recognised in

the income

statement

£m

Recognised

in equity

£m

At

31 December

2011

£m

Property, plant and equipment

2

(1)

-

1

Intangible assets

(65)

16

-

(49)

Programme rights

2

(1)

-

1

Pension scheme deficits

76

(35)

30

71

Tax losses

50

(18)

-

32

Interest-bearing loans and borrowings, and derivatives

(1)

-

-

(1)

Share-based compensation

7

1

-

8

Other

2

-

-

2


73

(38)

30

65

 

 


At

1 January

2010

£m

Recognised in

the income

statement

£m

Recognised

in equity

£m

At

31 December

2010

£m

Property, plant and equipment

1

1

-

2

Intangible assets

(82)

17

-

(65)

Programme rights

2

-

-

2

Pension scheme deficits

122

(24)

(22)

76

Tax losses

-

50

-

50

Interest-bearing loans and borrowings, and derivatives

(1)

-

-

(1)

Share-based compensation

7

-

-

7

Unremitted earnings of subsidiaries, associates and joint ventures

(3)

3

-

-

Other

4

(2)

-

2


50

45

(22)

73

 

At 31 December 2011, total deferred tax assets are £115 million (2010: £139 million) and total deferred tax liabilities are £50 million (2010: £66 million).

 

The deferred tax balance relates to:

 

·     property, plant and equipment principally relates to timing differences arising on assets qualifying for capital allowances;

·     intangible assets mainly relates to timing differences on intangible assets arising on business combinations;

·     programme rights relates to timing differences on intercompany profits on stock;

·     pension scheme deficits relate to timing differences on the IAS 19 pension deficit, additional contributions resulting from funding through the SDN pension partnership (not recognised as contributions under IAS 19) and the spreading of tax relief on one-off large pension funding payments;

·     tax losses relates to timing differences in receiving the benefit of the Group's tax losses;

·     interest-bearing loans and borrowings and derivatives relates to timing differences on hedging instruments;

·     share-based compensation relates to timing differences on share schemes;

·     unremitted earnings of subsidiaries, associates and joint ventures relates to tax losses of associated companies; and

·     other relates to timing differences on miscellaneous items including sale and leaseback arrangements and various provisions.

 

Due to the change in the statutory tax rate, deferred tax is provided at 25% (2010: 27%), which is the rate that has been substantively enacted to apply from 1 April 2012. The impact of the change in the tax rate is £6 million (2010: nil), of which £3 million was recognised in the deferred tax charge and the remainder recognised in equity.

 

The deferred tax balance associated with the pension deficit has been adjusted to reflect the current tax benefit obtained in the current year following the contribution of £101 million to the Group's defined benefit pension scheme. This comprises £59 million of employer contributions and £42 million, being the discounted value of the SDN pension partnership extension as described in the Financial and Performance Review.

 

A deferred tax asset of £558 million (2010: £602 million) in respect of capital losses of £2,230 million (2010: £2,230 million) has not been recognised due to uncertainties as to the amount and whether a capital gain will arise in the appropriate form and relevant territory against which such losses could be utilised. For the same reasons, deferred tax assets in respect of overseas losses of £9 million (2010: £9 million) that time expire between 2017 and 2026 have not been recognised.

 

2.4 Earnings per share

 

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

 

Earnings per share 2011


Ref.

Basic

£m

Diluted

£m

Profit for the year attributable to equity shareholders of ITV plc


247

Weighted average number of ordinary shares in issue - million


3,883

3,883

Dilution due to share options


-

36

Dilution due to convertible bond

A

-

192

Total weighted average number of ordinary shares in issue - million


3,883

4,111

Earnings per ordinary share


6.4p

6.2p

 

Adjusted earnings per share 2011


Ref.

Adjusted

£m

Diluted

£m

Profit for the year attributable to equity shareholders of ITV plc


247

255

Exceptional items

B

(1)

(1)

Profit for the year before exceptional items


246

254

Amortisation and impairment of acquired intangible assets

C

35

35

Adjustments to net financing costs

D

18

18

Other tax adjustments

E

7

7

Adjusted profit

F

306

314

Total weighted average number of ordinary shares in issue - million


3,883

4,111

Adjusted earnings per ordinary share


7.9p

7.6p

 

Earnings per share 2010


Ref.

Basic

£m

Diluted

£m

Profit for the year attributable to equity shareholders of ITV plc


269

270

Weighted average number of ordinary shares in issue - million


3,884

3,884

Dilution due to share options


-

27

Dilution due to convertible bond

A

-

192

Total weighted average number of ordinary shares in issue - million


3,884

4,103

Earnings per ordinary share


6.9p

6.6p

 

Adjusted earnings per share 2010


Ref.

Adjusted

£m

Diluted

£m

Profit for the year attributable to equity shareholders of ITV plc


269

270

Exceptional items

B

(14)

(14)

Profit for the year before exceptional items


255

256

Amortisation and impairment of acquired intangible assets

C

35

35

Adjustments to net financing costs

D

4

4

Other tax adjustments

E

(47)

(47)

Adjusted profit

F

247

248

Total weighted average number of ordinary shares in issue - million


3,884

4,103

Adjusted earnings per ordinary share


6.4p

6.0p

 

A.   Diluted earnings per share are impacted by the £135 million 2016 Convertible Eurobond issued in November 2009.

B.   The exceptional items detailed in Section 2.2 are adjusted to reflect profit for the year before exceptional items. The exceptional items are not materially impacted by tax effects (2010: charge of £5 million).

C.  Amortisation and impairment of acquired intangible assets of £47 million (2010: £48 million) is adjusted, including a related tax credit of £12 million (2010: £13 million). The rationale for adjustments to amortisation of intangibles is provided in the Financial and Performance Review.

D.  Adjustments to net financing costs of £25 million (2010: £6 million) includes a related tax effect of a credit of £7 million (2010: credit of £2 million). The rationale for adjustments made to financing costs is provided in the Financial and Performance Review.

E.   Other tax adjustments reflect the reversal of the credit arising from the recognition of the deferred tax asset generated on certain losses partially offset by those losses utilised in the current year. This credit is the main reason why on a statutory basis the EPS for 2010 is higher than 2011.

F.   Adjusted profit is defined as profit for the year before exceptional items, amortisation and impairment of acquired intangible assets, net financing cost adjustments and other tax adjustments.

 

Section 3 Operating Assets and Liabilities

 

3.1 Working capital

 

Accounting policies

Distribution rights

'Distribution rights' are programme rights the Group buys from producers to derive future revenues principally through licensing to broadcasters. These are classified as non-current assets as these rights are used to derive long-term economic benefit for the Group.

 

Distribution rights are recognised initially at cost and charged through operating costs in the income statement over a maximum five-year period that is dependent on either cumulative sales and programme genre, or based on forecast future sales. Certain film rights are expensed over a period of up to ten years reflecting the estimated longer period over which these types of rights can be exploited. These estimates are based on historical experience with similar rights as well as anticipation of future events. Advances paid for the acquisition of distribution rights are disclosed as distribution rights as soon as they are contracted. These advances are not expensed until the programme is available for distribution. Up to that point they are assessed annually for impairment through the reassessment of the future sales expected to be earned from that title.

 

Programme rights and other inventory

Where programming, sports rights and film rights are acquired for the primary purpose of broadcasting, these are recognised within current assets.

 

Assets are recognised when the Group controls the respective assets and the risks and rewards associated with them.

 

For acquired programme rights, assets are recognised as payments are made and are recognised in full when the programme is available for transmission. Programmes produced internally, either for the purpose of broadcasting or to be sold in the normal course of the Group's operating cycle, are recognised within current assets at production cost.

 

Programme costs and rights, including those acquired under sale and leaseback arrangements, are generally expensed to operating costs in full on first transmission. Film rights, sports rights and certain acquired programmes are expensed over a number of transmissions reflecting the pattern in which the right is consumed.

 

Programme costs and rights not yet written off are included in the statement of financial position at the lower of cost and net realisable value. In assessing net realisable value for programmes in production, consideration is given to the contracted sales price and estimated costs to complete. For programme stock, sports rights and film rights, the net realisable value assessment is based on estimated airtime value, with consideration given to whether the number of transmissions purchased can be efficiently played out over the licence period. Any reversals of write-downs for programme costs and rights are recognised as a reduction in operating costs.

 

Historically, ITV has entered into sale and leaseback agreements in relation to certain programme titles. Related outstanding sale and leaseback obligations, which comprise the principal and accrued interest, are included within borrowings. The finance related element of the agreement is charged to the income statement over the term of the lease on an effective interest basis. Sale and leaseback obligations are secured against an equivalent cash balance held within cash and cash equivalents.

 

Trade receivables

Trade receivables are recognised initially at the value of the invoice sent to the customer and subsequently at the amounts considered recoverable (amortised cost). Where payments are not due for more than one year, they are shown in the financial statements at their net present value to reflect the economic cost of delayed payment. The Group provides goods and services to substantially all its customers on credit terms.

 

Estimates are used in determining the level of receivables that will not, in the opinion of the Directors, be collected. These estimates include such factors as historical experience, the current state of the UK and overseas economies and industry specific factors. A provision for impairment of trade receivables is established when there is sufficient evidence that the Group will not be able to collect all amounts due.

 

The carrying value of trade receivables is considered to approximate fair value.

 

Trade payables

Trade payables are recognised at the value of the invoice received from a supplier.

 

The carrying value of trade payables is considered to approximate to fair value.

 

Working capital management

Cash and working capital management continues to be a key focus. During the year the cash inflow from working capital was £18 million (2010: £99 million) derived as follows:

 


2011

£m

2010

£m

Decrease in programme rights and other inventory and distribution rights

-

108

Decrease/(increase) in receivables

52

(8)

Decrease in payables

(34)

(1)

Working capital inflow

18

99

 

3.1.1 Distribution rights

Movements in distribution rights during the year are shown in the table below:

 


2011

£m

2010

£m

Cost:



At 1 January

111

99

Additions

14

12

At 31 December

125

111




Charged to income statement:



At 1 January

99

83

Expense for the year

15

16

At 31 December

114

99




Net book value

11

12

 

3.1.2 Programme rights and other inventory

The programme rights and other inventory at the year-end are shown in the table below:

 


2011

£m

2010

£m

Acquired programming

122

170

Production

87

52

Commissions

36

36

Sports rights

36

21

Prepayments

2

4

Other

2

1


285

284

 

Programme rights and other inventory written down in the year were £5 million (2010: £3 million). There have been no reversals relating to inventory previously written down to net realisable value (2010: £nil).

 

3.1.3 Programme commitments

There are operating commitments in respect of programming entered into in the ordinary course of business with programme suppliers, sports organisations and film distributors in respect of rights to broadcast on the ITV network. Commitments in respect of these purchases, which are not reflected in the statement of financial position, are due for payment as follows:

 


2011

£m

2010

£m

Within one year

396

396

Later than one year and not more than five years

599

315

More than five years

85

-


1,080

711

 

Programme commitments increased in the year principally because of the signing of a new Champions League contract and the extension of the ITN news contract.

 

3.1.4 Trade and other receivables

Trade and other receivables can be analysed as follows:

 


2011

£m

2010

£m

Due within one year:



 Trade receivables

271

354

 Other receivables

22

14

 Prepayments and accrued income

77

74


370

442

Due after more than one year:



 Trade receivables

26

6




Total trade and other receivables

396

448

 

£297 million (2010: £360 million) of total trade receivables that are not impaired are aged as follows:

 


2011

£m

2010

£m

Current

277

301

Up to 30 days overdue

4

7

Between 30 and 90 days overdue

5

1

Over 90 days overdue

11

51


297

360

 

The table below shows the Group's net receivables relating to non-consolidated licensees in the 'Broadcasting & Online' segment, where the Group has both supplier and customer relationships.

 


2011

£m

2010

£m

Trade receivables - current

9

12

Trade receivables - past due but not impaired

12

55

Other receivables

5

5

Trade and other payables

(4)

(49)


22

23

 

As at 31 December 2011, trade receivables of £11 million (2010: £8 million) were provided against. Movements in the Group's provision for impairment of trade receivables can be shown as follows:

 


2011

£m

2010

£m

At 1 January

8

8

Charged during the year

8

5

Receivables written off during the year as uncollectable (utilisation of provision)

(1)

(1)

Unused amounts reversed

(4)

(4)

At 31 December

11

8

 

The £11 million provision for doubtful debts is aged as £4 million due in more than 90 days, £2 million due between 31 and 90 days and £5 million due in up to 30 days from the reporting date.

 

3.1.5 Trade and other payables due within one year

Trade and other payables due within one year can be analysed as follows:

 


2011

£m

2010

£m

Trade payables

69

56

Social security

16

16

Other payables

183

183

Accruals and deferred income

371

417


639

672

 

3.1.6 Trade payables due after more than one year

Trade payables due after more than one year can be analysed as follows:

 


2011

£m

2010

£m

Trade payables

45

26

 

This primarily relates to film creditors for which payment is due after more than one year.

 

3.2 Property, plant and equipment

 

Accounting policies

Property, plant and equipment

Property, plant and equipment are stated at cost less accumulated depreciation and impairment losses. Certain items of property, plant and equipment that were revalued to fair value prior to 1 January 2004, the date of transition to IFRS, are measured on the basis of deemed cost, being the revalued amount less depreciation up to the date of transition.

 

Leases

Finance leases are those which transfer substantially all the risks and rewards of ownership to the lessee. Certain service contracts involve the use of specific assets (e.g. transmission or studio equipment) and therefore contain an embedded lease.

 

Determining whether a lease is a finance lease requires judgement as to whether substantially all of the risks and benefits of ownership have been transferred to the Group. Estimates used by management in making this assessment include the useful economic life of assets, the fair value of the asset and the discount rate applied to the total payments required under the lease. Assets held under such leases are included within property, plant and equipment and depreciated on a straight-line basis over their estimated useful lives.

 

Outstanding finance lease obligations, which comprise the principal plus accrued interest, are included within borrowings. The finance element of the agreements is charged to the income statement over the term of the lease on an effective interest basis.

 

All other leases are operating leases, the rentals on which are charged to the income statement on a straight-line basis over the lease term.

 

Depreciation

Depreciation is provided to write off the cost of property, plant and equipment, less estimated residual value, on a straight-line basis over their estimated useful lives. The annual depreciation charge is sensitive to the estimated useful life of each asset and the expected residual value at the end of its life. The major categories of property, plant and equipment are depreciated as below.

 

Asset class

Depreciation policy

Freehold land

not depreciated

Freehold buildings

up to 60 years

Leasehold properties

shorter of residual lease term or 60 years

Leasehold improvements

shorter of residual lease term or estimated useful life

Vehicles, equipment and fittings(1)

3 to 20 years

 

(1) Equipment includes studio production and technology assets.

 

Impairment of assets

Property, plant and equipment that is subject to depreciation is reviewed annually for impairment or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Indicators of impairment may include changes in technology and business performance.

 

Property, plant and equipment

Property, plant and equipment can be analysed as follows:

 


Freehold land

and buildings

Improvements to leasehold

land and buildings

Vehicles, equipment

and fittings

Total


 

£m

Long

£m

Short

£m

Owned

£m

Finance leases

£m

 

£m

Cost







At 1 January 2010

54

50

20

211

15

350

Additions

-

5

-

22

-

27

Reclassification

3

-

-

(3)

-

-

Reclassification to assets held for sale

-

(3)

-

(2)

-

(5)

Disposals and retirements

(5)

-

-

(3)

-

(8)

At 31 December 2010

52

52

20

225

15

364

Additions

-

5

-

39

-

44

Additions from acquisition

-

-

-

5

-

5

Reclassification

(1)

1

-

-

-

-

Reclassification from assets held for sale

-

1

-

-

-

1

Disposals and retirements

-

-

(2)

(64)

(1)

(67)

At 31 December 2011

51

59

18

205

14

347

Depreciation







At 1 January 2010

12

12

14

144

7

189

Charge for the year

1

1

1

25

2

30

Impairment charge for the year (see note 2.2)

-

-

1

2

-

3

Reclassification to assets held for sale

-

(1)

-

-

-

(1)

Disposals and retirements

(5)

-

-

(3)

-

(8)

At 31 December 2010

8

12

16

168

9

213

Charge for the year

2

2

1

18

3

26

Accumulated depreciation from acquisition

-

-

-

5

-

5

Reclassification

(1)

1

-

-

-

-

Disposals and retirements

-

-

(2)

(61)

(1)

(64)

At 31 December 2011

9

15

15

130

11

180

Net book value







At 31 December 2011

42

44

3

75

3

167

At 31 December 2010

44

40

4

57

6

151

 

Included within the book values above is expenditure of £27 million (2010: £9 million) on property, plant and equipment that are in the course of construction.

 

A review of tangible assets for obsolescence was undertaken in the period resulting in net impairments of £3 million to net book value, £67 million of cost and £64 million of accumulated depreciation.

 

Capital commitments

There are £10 million of capital commitments at 31 December 2011 (2010: £2 million).

 

3.3 Intangible assets

 

Accounting policies

Goodwill

Goodwill represents the future economic benefits that arise from assets that are not capable of being individually identified and separately recognised. The goodwill recognised by the Group has all arisen as a result of business combinations.

 

Due to changes in accounting standards goodwill has been calculated using three different methods depending on the date the relevant business was purchased:

 

Method 1: All business combinations that have occurred since 1 January 2009 were accounted for using the acquisition method. Under this method, goodwill is measured as the fair value of the consideration paid (including the recognition of any non-controlling interests of the business being bought), less the fair value of the identifiable assets acquired and liabilities assumed, all measured at the acquisition date. Subsequent adjustments to the fair value of net assets acquired can only be made within 12 months of the acquisition date, and only if fair values were determined provisionally at an earlier reporting date. These adjustments are accounted for from the date of acquisition. Acquisitions of non-controlling interests are accounted for as transactions with owners and therefore no goodwill is recognised as a result of such transactions. Transaction costs incurred in connection with those business combinations, such as legal fees, due diligence fees and other professional fees were expensed as incurred.

 

Method 2: All business combinations that occurred between 1 January 2004 and 31 December 2008 were accounted for using the purchase method in accordance with IFRS 3 'Business Combinations (2004)'. Goodwill on those combinations represents the difference between the cost of the acquisition and the fair value of the identifiable net assets acquired and did not include the value of the non-controlling interest. Transaction costs incurred in connection with those business combinations, such as legal fees, due diligence fees and other professional fees were included in the cost of acquisition.

 

Method 3: For business combinations prior to 1 January 2004, goodwill is included at its deemed cost, which represents the amount recorded under UK GAAP at that time less amortisation up to 31 December 2003. The classification and accounting treatment of business combinations occurring prior to 1 January 2004, the date of transition to IFRS, has not been reconsidered as permitted under IFRS 1. Goodwill is stated at its recoverable amount being cost less any accumulated impairment losses and is allocated to cash-generating units.

 

Other intangible assets

Other intangible assets are those which are identifiable and can be sold separately or which arise from legal rights.

 

Within ITV there are two types of intangible assets: those acquired and those that have been internally generated (such as software licences and development).

 

Other intangible assets acquired directly by the Group are stated at cost less accumulated amortisation. Those separately identified intangible assets acquired as part of a business combination are shown at fair value at the date of acquisition less accumulated amortisation.

 

The main intangible assets the Group has been required to value are brands, licences, customer relationships and contracts.

 

Each class of intangible asset's valuation method on initial recognition, amortisation method and estimated useful life is set out in the table below:

 

Class of intangible asset

Valuation method

Amortisation method

Estimated useful life

Brands

 

Applying a royalty rate to the expected future revenues over the life of the brand.

Straight-line

 

up to 11 years

 

Customer contracts and relationships

 

 

 

 

Expected future cash flows from those contracts and relationships existing at the date of acquisition are
estimated. If applicable, a contributory charge is deducted
for the use of other assets needed to exploit the cash flow.

The net cash flow is then discounted back to present

value.

Straight-line

 

 

 

 

 

up to 6 years for customer contracts

 

5 to 10 years for customer relationships

Licences

 

 

 

 

Start-up basis of expected future cash flows existing at
the date of acquisition. If applicable, a contributory charge is deducted for the use of other assets needed to exploit the cash flow. The net cash flow is then discounted back to present
value.

Straight-line

11 to 17 years depending on term of licence

 

 

Software licences and development*

Initially at cost and subsequently at cost less accumulated amortisation.

Straight-line

 

1 to 5 years

 

Film libraries

 

Initially at cost and subsequently at cost less accumulated amortisation.

Sum of digits

 

20 years

 

 

* Internally generated software development costs in relation to itv.com are expensed as incurred.

 

Determining the fair value of intangible assets arising on acquisition requires judgement. The Directors make estimates regarding the timing and amount of future cash flows derived from exploiting the assets being acquired. The Directors then estimate an appropriate discount rate to apply to the forecast cash flows. Such estimates are based on current budgets and forecasts, extrapolated for an appropriate period taking into account growth rates, expected changes to selling prices, operating costs and the expected useful lives of assets. Judgements are also made regarding whether and for how long licences will be renewed; this drives our amortisation policy for those assets. The Directors estimate the appropriate discount rate using pre-tax rates that reflect current market assessments of the time value of money and the risks specific to the businesses being acquired.

 

Amortisation

Amortisation is charged to the income statement over the estimated useful lives of intangible assets unless such lives are judged to be indefinite. Indefinite life assets, such as goodwill, are not amortised but are tested for impairment at each year-end.

 

Impairment

Goodwill is not subject to amortisation and is tested annually for impairment and when circumstances indicate that the carrying value may be impaired.

 

Other intangible assets are subject to amortisation and are reviewed for impairment whenever events or changes in circumstances indicate that the amount carried in the statement of financial position is less than its recoverable amount.

 

Determining whether the carrying amount of intangible assets has any indication of impairment requires judgement. Any impairment is recognised in the income statement.

An impairment test is performed by assessing the recoverable amount of each asset, or for goodwill, the cash-generating unit (or group of cash-generating units) related to the goodwill. Assets are grouped at the lowest levels for which there are separately identifiable cash flows ('cash-generating unit' or 'CGU').

 

The recoverable amount is the higher of an asset's fair value less costs to sell and 'value in use'. The value in use is based on the present value of the future cash flows expected to arise from the asset. Growth assumptions derived from the Transformation Plan are not included in the estimated future cash flows used as the Group applies cautious assumptions for impairment testing.

 

Estimates are used in deriving these cash flows and the discount rate. Such estimates reflect current market assessments of the risks specific to the asset and the time value of money. The estimation process is complex due to the inherent risks and uncertainties. If different estimates of the projected future cash flows or a different selection of an appropriate discount rate or long-term growth rate were made, these changes could materially alter the projected value of the cash flows of the asset, and as a consequence materially different amounts would be reported in the financial statements.

 

Impairment losses in respect of goodwill are not reversed. In respect of assets other than goodwill, an impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset's carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised.

 

Intangible assets

Intangible assets can be analysed as follows:

 


 

 

Goodwill

£m

 

 

Brands

£m

Customer

contracts

and relationships

£m

 

 

Licences

£m

Software

licences and

development

£m

Film libraries

and other

£m

 

 

Total

£m

Cost








At 1 January 2010

3,365

173

328

121

52

79

4,118

Additions

-

-

-

-

2

-

2

At 31 December 2010

3,365

173

328

121

54

79

4,120

Additions

14

-

-

-

10

-

24

Disposals

-

-

-

-

(2)

-

(2)

At 31 December 2011

3,379

173

328

121

62

79

4,142

Amortisation and impairment








At 1 January 2010

2,654

94

249

47

12

32

3,088

Charge for the year

-

16

20

9

15

3

63

At 31 December 2010

2,654

110

269

56

27

35

3,151

Charge for the year

-

17

18

9

12

3

59

Disposals

-

-

-

-

(2)

-

(2)

At 31 December 2011

2,654

127

287

65

37

38

3,208

Net book value








At 31 December 2011

725

46

41

56

25

41

934

At 31 December 2010

711

63

59

65

27

44

969

 

Goodwill has increased £14 million in 2011 following the acquisition of Channel Television Holdings Limited (see note 3.4).

 

Also included within the book values above is expenditure of £10 million (2010: £1 million) on software that is in the course of development.

 

Goodwill impairment tests

The following CGUs represent the carrying amounts of goodwill.

 


2011

£m

2010

£m

Broadcasting & Online

342

328

SDN

76

76

ITV Studios

307

307


725

711

 

There has been no impairment charge for the year (2010: nil).

 

When assessing impairment, the recoverable amount of each CGU is based on value in use calculations. These calculations require the use of estimates, specifically: pre-tax cash flow projections; long-term growth rates; and a pre-tax market discount rate.

 

Cash flow projections are based on the Group's current five-year plan. Beyond the five-year plan these projections are extrapolated using an estimated long-term growth rate of 1%-2.5% (2010: 1%-2.5%) depending on the CGU. The growth rates used are consistent with the long-term average growth rates for the industry and are appropriate because these are long-term businesses.

 

The discount rate has been revised for each CGU to reflect the latest market assumptions for the Risk-Free rate, the Equity Risk Premium and the net cost of debt. There is currently no reasonably possible change in discount rate that would reduce the headroom in any CGU to zero.

 

Broadcasting & Online

The goodwill in this CGU arose as a result of the acquisition of broadcasting businesses since 1999, the largest of which were the acquisition by Granada of United News and Media's broadcast businesses in 2000 and the merger of Carlton and Granada in 2004 to form ITV plc.

 

No impairment charge arose in the Broadcasting & Online CGU during the course of 2011 (2010: nil). Management believes that currently no reasonably possible change in the advertising market would reduce the headroom in this CGU to zero.

 

The main assumptions on which the forecast cash flow projections for this CGU are based include: the share of the television advertising market; share of commercial impacts; programme and other costs; and the pre-tax market discount rate.

 

The key assumption in assessing the recoverable amount of Broadcasting & Online goodwill is the size of the television advertising market. In forming its assumptions about the television advertising market, the Group has used a combination of long-term trends, industry forecasts and in-house estimates, which place greater emphasis on recent experience. Industry consensus is 0.1% for 2012 and 1.1% for 2013. Cautious assumptions of -5% were applied for both years to the industry consensus for the purposes of the impairment test, with no impairment identified. The impairment test also assumed that ITV renews its broadcasting licences in 2014.

 

A pre-tax market discount rate of 11.6% (2010: 11.8%) has been used in discounting the projected cash flows.

 

The Directors believe that currently no reasonably possible change in these assumptions would reduce the headroom in this CGU to zero.

 

SDN

Goodwill was recognised when the Group acquired SDN (the licence operator for DTT Multiplex A) in 2005. It represented the wider strategic benefits of the acquisition specific to the Group, principally the enhanced ability to promote Freeview as a platform, business relationships with the channels which are on Multiplex A and additional capacity available from 2010.

 

No impairment charge arose on the SDN goodwill during the course of 2011 (2010: nil).

 

The main assumptions on which the forecast cash flows are based are income to be earned from medium-term contracts, the market price of available multiplex video streams in the period up to and beyond digital switchover and the pre-tax market discount rate. These assumptions have been determined by using a combination of current contract terms, recent market transactions and in-house estimates of video stream availability and pricing.

 

A pre-tax market discount rate of 12.7% (2010: 11.8%) has been used in discounting the projected cash flows.

 

The Directors believe that currently no reasonably possible change in the income and availability assumptions would reduce the headroom in this CGU to zero.

 

ITV Studios

The goodwill for ITV Studios arose as a result of the acquisition of production businesses since 1999, the largest of which were the acquisition by Granada of United News and Media's production businesses in 2000 and the merger of Carlton and Granada in 2004 to form ITV plc.

 

No impairment charge arose in the ITV Studios CGU during the course of 2011 (2010: nil).

 

The key assumption