Warner Music Group Corp.

Welcome to Warner Music Group's second quarter earnings call for the period ended March 31st, 2023. At the request of Warner Music Group, today's call is being recorded for replay purposes. And if you object, you may disconnect at any time. Now I would like to turn today's call over to your host, Mr. Kareem Chin, head of investor relations. You may begin.

Good morning, everyone, and welcome to Warner Music Group's fiscal second quarter earnings conference call. Please note that our earnings press release, earnings snapshot, and the Form 10-Q we filed this morning will be available on our website. On today's call, we have our CEO, Robert Kinsel, and our CFO, Eric Levin, who will take you through our results and then will answer your questions. Before our prepared remarks, I'd like to refer you to the second slide of the earnings snapshot to remind you that this communication includes forward-looking statements that reflect the current views of Warner Music Group about future events and financial performance. We plan to present certain non-GAAP results during this conference call and in our earnings snapshot slides and have provided schedules reconciling these results to our GAAP results in our earnings press release. All of these materials are posted on our website. Also, please note that all revenue figures and comparisons discussed today will be presented in constant currency unless otherwise noted. All forward-looking statements are made as of today, and we disclaim any duty to update such statements. Our expectations, beliefs, and projections are expressed in good faith and we believe there is reasonable basis for them. However, there can be no assurance that management's expectations, beliefs, and projections will result or be achieved. Investors should not rely on forward-looking statements because they are subject to a variety of risks, uncertainties, and other factors that can cause actual results that differ materially from our expectations. Information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in our filings with the SEC. And with that, I'll turn it over to Robert.

Thanks, Karim, and good morning, everyone. It's been four months since I joined Warner Music Group from Google, and I'd like to talk today about some changes we've made so far and shed some light on what's to come. But first, let me give you a summary of our Q2 results. As expected on our last earnings call, some of the macroeconomic, currency, and release slate headwinds from Q1 carried over into Q2. As a result, total revenue grew 5% and adjusted OIDA increased 8%. Recorded music revenue increased 3%, and streaming grew 2%, reflecting ongoing weakness in the ad market and modest growth in the United States. Music publishing had another impressive quarter, with revenue growth of 15%. Our strategy at Warner Chappell continues to deliver long-lasting relationships with a wide array of global and local talent, while expanding our services to songwriters and creating new opportunities for catalogs. This quarter, highlights included our creative partnership with Belgian superstar Stromae, Mac's contributions as a co-producer of Bad Bunny's latest album, and 21 Savage's collaboration with Drake on the number one album, Her Loss. I promised I would be direct with you, so I'll simply say that while our results in music publishing were best in class, we underperformed in recorded music. There's plenty of room for improvement, and we're addressing both company-specific and industry-wide issues. As we signaled, we have had two consecutive quarters where our release schedule was less robust than normal. That is now changing with the slate we have planned for the remainder of 2023. The early results are promising, with new releases from the likes of Ed Sheeran, Jack Harlow, and Tiesto. I'll give some more details later on. While we're optimistic that our second half release late will drive better results in the second half, this recovery may be gradual during the balance of the year. Overall, we're confident in our ability to return to a better cadence of releases, which should lead to more consistent results. At the same time, the music industry continues to morph, creating some risks and even more opportunities. This includes questions around the future of the streaming model and the rise of AI. It only increases our conviction in a tech-enabled strategy that will differentiate Warner Music Group. On our last earnings call, I said that we would be reallocating resources to accelerate our use of technology to empower artists and songwriters, as well as drive greater impact and efficiency in our business. In March, we made some tough but necessary decisions. We announced an approximately 4% reduction in our workforce, that will yield annual savings of $49 million. We'll see approximately $20 million of savings in the remainder of this fiscal year. I want to be clear that this was not straightforward cost cutting. We'll be reinvesting a significant portion of these savings into new expertise and tech initiatives that will drive company-wide benefits in the coming years. I want to frame for you how we're going to position Warner Music Group for long-term success in a highly proactive, fiscally responsible way. The demand for music is ubiquitous, and as the use cases multiply, the opportunities on the horizon are bigger and more wide-ranging than ever. Many of the key ingredients for our long-term success are already in place. We have incredible artists and songwriters and one-of-a-kind catalog of iconic music. We have the expertise, resources, and reach to build artists' careers and brands. But having said that, I don't underestimate our challenges either. The pace of change is faster, the competition for talent is fiercer, the world is growing noisier, and attention spans are getting shorter. If we are to maximize our opportunities and solve our challenges, we need to add great technology into our mix. And it can't be tools we borrow from someone else. It's got to be proprietary, central part of our value proposition. Technology can be our force multiplier. A force multiplier for the skills and capabilities of our team, in service of our artists, songwriters, and our catalog. It's not going to happen overnight. But long-term, we're looking at music and technology as the twin engines of our success. I'd like to tell you a bit more about our plan, starting, as always, with the music. Today, the majority of the music industry's revenues come from a relatively small fraction of the world's population. That makes growth potential in emerging markets enormous. This March, IFBI released a list of fastest-growing recorded music markets. I was pleased to note that we've been expanding our presence in these regions for years by appointing new leadership, opening additional offices, and partnering with influential local players. The recorded music industry's fastest-growing region in 2022 was Sub-Saharan Africa, jumping 35%. It's an area that's full of incredibly diverse, dynamic music cultures, and we've been steadily ramping up our A&R activities there for the past five years. Key moves have included acquiring Africa's leading independent distributor, Africory, at the start of last year. We now contend for market leadership, driven by the success of artists like CK, Burnaboy, Master KG, and Inkabi Zazwe. The next three fastest-growing regions for the recorded music industry in 2022 were China, up 28%, MENA, up 24%, and Latin America, up 26%. In both China and MENA, our revenue growth outperformed the market. In Q2 and in Latin America, we're taking the necessary steps to catch up and gain share. We have a great story to tell about how we're enhancing our profile in each of these key regions. In China, Warner Music Group has led the way as far back as 2014 by acquiring the Gold Typhoon catalog and by being the first major music company to partner with Tencent. In MENA, We established our regional office over five years ago, and we've since leapfrogged our competitors through deals with Rotana and Canoa. In Latin America, we've rejuvenated our A&R strategy. Our breakout artists include Mexico's Young Lucas, who is currently number three on global Spotify charts. We're also looking to expand our presence in fast-growing genres. This April, the annual report for the International Music Summit revealed that the dance music industry generated revenue of $11.3 billion in 2022, an increase of 34% from 2021. We're fully primed to capitalize on this trend. Since 2017, we've acquired spinning records, launched new labels including major recordings in the U.S. and wet records in Asia, and partnered with dance music legend Patrick Moxie. In 2021, we acquired the catalog of French superstar DJ-producer David Guetta and signed a new deal with him for future recordings. Amazingly, David, who released his first album in 2002, was the most-streamed dance artist in 2021, 2022, and so far in 2023. On technology, we're still evolving our plan, but let me share a glimpse into my vision. As the music industry transitioned from physical to digital, it continued to focus on high-touch areas it's always been good at and underinvested in its tech capabilities. These are the capabilities we're forging here under the guidance of Ariel Bardin, our new president of technology. We're building the leadership, the team, and the culture that will bring an unprecedented level of tech expertise to the music business. As we look ahead, here's what you should expect us to do. Number one, create efficiency by enhancing our systems and decision-making so we free up resources for higher ROI opportunities. Number two, increase our effectiveness as brand managers for our artists and songwriters. Number three, grow scale through services for greater range and number of artists and songwriters, all on one tech stack. And number four, evolving our products to better monetize the artist and songwriter superfan relationship. Switching to monetization. As I've said before, music is undervalued. This is something we intend to change in order to create a healthier ecosystem for artists, songwriters, the streaming services, and us. Recent price increases have been successful and are a move in the right direction, but this should be just the first step. Those subscription services which have raised prices have done the fiscally prudent thing for themselves, their shareholders, and the creative community. There is no sign that they are seeing elevated trends. At the same time, WMG has started to experiment with different streaming models. I cannot name all these services as the deal terms are confidential. But this is just the beginning, and we will continue to collaborate with our partners on new paradigms. When it comes to generative AI, it needs to be put into proper context. Framing it only as a threat is inaccurate. Our first priority is to vigorously enforce our copyrights and our right to name, image, likeness, and voice to defend the originality of our artists and songwriters. It is crucial that any AI generative platform discloses what their AI is trained on, and this must happen all around the world. Europe is leading by example with the EU Artificial Intelligence Act. The European Parliament is considering amendments which would codify the position that copyrighted content may not be used to train AI without prior authorization from rights holders and would require AI developers to disclose a summary of the materials they use to train AI. As in Europe, all around the world, lawmakers are debating AI, but the primary focus has been issues such as transparency, safety, algorithmic bias, privacy protection, notice to consumers, and an ability to opt out. Last month, Senator Chuck Schumer announced his intention to draft a U.S. AI bill coming later this year. I can promise you that whenever and wherever there is a legislative initiative on AI, we will be there in force to ensure the protection of intellectual properties high on the agenda. However, we must also see and seize the massive opportunity that generative AI will also be. Consider this. User-generated content containing copyrighted material was originally viewed as a big threat by media companies. From my personal experience at YouTube, when I arrived in 2010, we were fighting many lawsuits around the world and were generating low tens of millions of dollars from UGC. We turned that liability into a billion-dollar opportunity in just a handful of years and a multi-billion-dollar revenue stream over time. In 2022, YouTube announced that it paid out over $2 billion from UGC to music rights holders alone, and far more across all other content industries. AI is just like any emerging technology. There will be challenges and opportunities. And with the proper expertise, it will be a powerful tool for the music industry, and we intend to be there at the forefront on how to best deploy it. Before I hand it over to Eric, I wanted to say that our strong second half slate has begun to take shape. On Friday, immediately following a victorious outcome in the faceless copyright infringement case lodged against him, Ed Sheeran dropped his acclaimed new album, Subtract. The first single, Eyes Closed, which you may have heard on our prequel Hold Music, became Ed's 14th number one single in the UK. The album has already hit number one in 41 countries on iTunes, while physical pre-orders have outstripped the numbers for Ed's last album in multiple territories. We're seeing encouraging signs from other recent releases. Rap superstar Jack Harlow's surprise dropped a new album on April 28th, and it's already racked up over 70 million streams, while Tiesto released its new album on April 21st and quickly went double platinum in Brazil and Norway. 5050's Cupid and Young Lucas' La Bebe remix have been two of the hottest streaming singles. Our releases from across the globe occupy four of the top ten spots on the Spotify Top 50 USA chart, with all four coming from outside the US, highlighting how we're bringing local artists to global stage. Additionally, We have new music from Dua Lipa, David Guetta, Lil Uzi Vert, Burna Boy, Kelly Clarkson, Thiago PZK, and Bailey Zimmerman, and many more in the months to come. I'm very confident in the path forward as we combine creative and marketing excellence with tech innovation to propel our growth. Finally, in March, Eric announced that he will retire by the end of the calendar year. We started the process of searching for his successor, but we're fortunate that he'll be with us for a while longer. I'll give you an update on the surge in the coming months. For now, I'll turn it over to Eric to take you through our results, and then we'll answer your questions.