Universal Music Group

Good evening and welcome to Universal Music Group's second quarter and first half earnings call for the period ended June 30th, 2022. My name is Nadia and I'll be your conference operator today. Your speakers for today's call will be Sir Lucian Grange, Chairman and CEO of Universal Music Group and Boyd Muir, Executive Vice President, CFO and President of Operations. They will be joined during Q&A by Michael Nash, UMG's Executive Vice President, Digital Strategy. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, please press star followed by two. Please let me remind you that management's commentary and responses to questions on today's call may include forward-looking statements which by their nature are uncertain and outside of the company's control. Although these forward-looking statements are based on management's current expectations and beliefs, Actual results may vary in a material way. For a discussion of some of the factors that could cause actual results to differ from expected results, please see the risk factors section of UMD's 2021 annual report, which is available on its website at universalmusic.com. Management's commentary will also refer to non-IFRS measures on today's call. Pre-consolidations are available in the Interim Financial Review and Unaudited Condensed Consolidated Interim Financial Statements for the six-month period ended June 30th, 2022 on the Investor Relations page of UMD's website. Thank you, Sir Lucian. You may begin your conference.

Hello and thank you for joining us as we report the results for the first half, including another successful quarter as well for Universal Music Group. As we stated in today's press release, our strategy is progressing as planned. UNG reported 25% revenue growth and achieved 17% constant currency revenue growth in the quarter ending June 30th. That significant growth is attributable to strong performance from our increasingly well-diversified set of revenue streams. Ending June 30, our constant currency revenue growth also stood at 17%. In addition, we grew adjusted EBITDA for the half year by 11%, with growth in both revenue and EBITDA coming from all segments of our business. UMG's overall performance is fueled by the successful partnerships we've formed with our artists, both new and established, in markets and regions around the world. I could spend the next hour or two telling you about all the remarkable and deeply satisfying recent successes by our artists, but instead I'll describe just a handful of them, ones that are emblematic of our ability to deliver global success and underscore the fact that our artist partnerships take many different forms. We've continued to build profitable services and resources so that we can partner with artists at any stage of their careers and provide them with whatever services they may need. Beyond that, we've built a global infrastructure that includes teams in film and TV, brand partnerships, merchandise, D2C, e-commerce and estate management to further extend an artist's brand so that their music lives on for decades, continually attracting new audiences and new generations of fans. When we think about artist investment, we don't simply think about it in terms of cash to sign the artist or the expense related to promoting an album. It's about building an organization with best-in-class resources to manage the entire artist brand for the long term. That's meaningful investment and commitment. And that's UMG. Let me provide four examples from the quarter that exemplify our ability to garner global success that leverages our entire organization for artists at every stage of their careers. Last month in the US, Drake's Honestly Nevermind became his 11th number one album and the track Jimmy Cooks became his 11th number one single. Drake is now the only fifth artist in history to have had more than 10 number one albums and the only artist ever to have simultaneously had top Billboard album singles and artist charts for 16 weeks. This album propelled Drake past 160 billion global career streams, solidifying his stature as the most streamed artist in the world. The next example is about what the Korean band BTS achieved through our multifaceted partnership with HYBE. On June 10, HYBE, in partnership with Ingrooves Geffen, released the band's new compilation album, Proof, which debuted at number one in a dozen countries, including Japan and the US, where it became BTS's sixth number one album. The third example is that of the three-time Grammy-winning Olivia Rodrigo. Her debut album, Sour, is the 21st century's longest-running debut album in the top 10 on Billboard's Top 200 chart. My last example is Frank Zappa, a widely prolific artist who was well ahead of his time. As we announced in the quarter in 2021, UMG acquired a broad array of his intellectual property rights, including the vast archive of his released as well as unreleased recordings, his publishing catalog of iconic songs, countless films and videos in his vault, as well as rights to his name and likeness. Starting even before the acquisition, we've revitalized the Frank Zappa catalog through a broad approach of vinyl reissues, archival releases, and streaming initiatives. In fact, every year has seen a double-digit growth in streams of his music. We recently made a large portion of his legacy available in high-res audio for download and streaming, and also provided the soundtrack to Alex Winter's acclaimed 2020 documentary Zapper. Accelerated by the acquisition, our plans will see that this work remains alive and available for many decades to come through new archival projects, feature films, interactive experiences, merchandise, NFTs, and other next-generation Web3 projects. In addition, a number of our other recent catalog acquisitions include existing film and TV projects. Our Neil Diamond deal, for example, includes five existing long-form films. These films, along with our ability to execute new audiovisual projects, are critical components of value creation. They fit perfectly within our strategy to help fans engage and spend more time with our artists. It's important to remember that nearly 50% of time spent consuming media in the US is on long-form audiovisual content. Not long ago, our participation in this space was limited to granting synchronization licenses of our music for use by third parties. Now we have the in-house expertise and global resources to generate substantial value from these acquisitions beyond recorded music and publishing. We have greatly expanded our reach, fashioning stories ourselves. We create the intellectual property that celebrates our artists and their music, the very music that makes those stories come alive. We'll announce specific projects related to some of our acquisitions at a later date. But when you look at a small sampling of our recent completed film projects, you can get a sense of some of the opportunities that we feel lie ahead. Take the Rolling Stones, for example, celebrating the legendary band's 60th anniversary UNG's Mercury Studios produced a four-part series of films entitled My Life as a Rolling Stone, with each part focusing on a different member of the band. The series aired on the BBC earlier this month and will premiere in the US on Epyx in August. This week, Netflix premiered Not Just a Girl, a career-spanning documentary about Shania Twain, with whom we've had a nearly 30-year relationship. which was also produced by Mercury Studios. In addition to the documentary, UMG released a compilation album, also entitled Not Just a Girl, which includes a new bonus title track alongside some of Shania's biggest global hits. Incidentally, we also look forward to more new music from Shania very soon. We'll take the Bee Gees. The Emmy award-winning documentary from UMG's Polygram Entertainment entitled The Bee Gees, How Can You Mend a Broken Heart? That's available on HBO Max. And complete access to decades of the band's archive. All of the recorded music in the documentary is with UMG's Capitol Records. And all of the publishing rights sits within our publishing division, UMPG. And there are many more examples of recent successful documentaries, from the Beastie Boys to the Go-Go's to Velvet Underground, just to name a few. Let me leave you with this statistic, however. On average, a newly released music-based film produces, cumulatively, over the three years following the film's release, a 94% catalogue streaming uplift. Not bad for an ancillary benefit. So when you look at all these artist examples, there's more going on here than the phenomenal first week sales and record chart statistics. Each of these success stories reflects UMG's ability to help an artist generate and sustain fan engagement. Not only over the initial run of an individual song or an album, we help sustain that fan engagement over the course of an artist's career and beyond. Because building artists' careers and keeping them relevant and thriving over the years is what we do at UMG. As streaming has developed, it's become clearer than ever that driving truly meaningful fan engagement is not based on simply employing complex algorithms or flooding services with overwhelming quantities of low-quality content. No. What brings fans to platforms all around the world is great music created by great artists. It's that simple as well as that hard. Identifying, developing and supporting the artists who can bring fans to platforms can drive deep engagement and can move culture globally is at the heart of what we do. The unprecedented worldwide success of our artists is proof of that. All this applies not only to the major DSPs. It's also critical when it comes to social media. As you know, there's never been a place in our strategy for being passive, just sitting back and reaping the benefits of trends in the digital and social space. Rather, we pride ourselves on being catalysts, intelligently driving innovation and adoption of new business models. And that's certainly been true in the ad-supported space. a material and growing segment of our business. Our efforts there provide another revenue by which our artists grow their careers creatively and commercially. And in the process, we help grow the entire commercial ecosystem for music to the benefit of majors, indies, and everyone else who seeks to make a career in music. Advertisers place a premium on reaching audiences with authentic, high-quality and culturally relevant content. That is exactly why we continue to see robust and substantial growth in our ad-supported revenue. And that growth is particularly apparent in social media and online video, where advertising is key to the business model of large global platforms. High-quality content and our high-quality content is the globe. To enhance and optimize our opportunities in the advertising market, we've designed our ad-supported and social media relationships in two ways. On the one hand, by working closely with those platforms to drive audience engagement, and on the other, by building in-house capabilities to create unique offerings that drive revenue for ourselves, our artists, and our brand partners alike. Let me take you through two of these approaches. A good example of working with a platform is our relationship with Meta. More than four years ago, by forming our industry-first partnership with them, we opened the social media space to music. Before we took that giant step, the industry had generated almost no revenue from social media whatsoever. Because of our groundbreaking partnership, Meta now plays a crucial role in connecting our artists with their fans around the world and has become one of our top 10 revenue generating digital platform partners. Given our history together, it gives me great pleasure today to announce that in the second quarter, we completed a new agreement with Meta that expands revenue sharing and enhances Meta community's engagement with our catalogue. From the forging of our pioneering deal, we've been proud to partner with Meta and help propel their journey to advance the interests of the creative community. As for the second approach, our UMG for Brands business has been the industry leader in forming direct relationships with brand partners. Some of UMGB's clients include Coca-Cola, Samsung, Intel, Pokemon, Lenovo, and Hertz, amongst many others. To further expand our brand partnership strategy, we recently launched the YouMusic Media Network, a comprehensive media and data service designed to connect brands and partners with exclusive media from UNG and our artists. The YouMusic Media Network allows brand partners exclusive access to proprietary data and insights, as well as premium UMG content, such as official music videos, songs, and lyric videos, original behind the scenes and lifestyle content, and artist blogs from such UMG-owned businesses as Rebel Labs, Mercury Studios, and of course, Polygram Entertainment. Perhaps you're not surprised to hear that Comscore places UMG as number one in music. What may surprise you is that UMG ranks as number two in entertainment overall in US digital reach. So our vast catalog of tens of thousands of hours of video content, which has generated more than four trillion minutes of cumulative watch time on YouTube alone, provides a powerful offering that enables brand partners not only to select the content they seek in ways they could never have imagined before but also to know that they are choosing from the most reliable source when it comes to reaching an audience i hope i've given you a clear snapshot of why we are justifiably content about the path ahead as we think and plan for the long term we continue to build artists careers expand opportunities and forms of content for fans to enjoy what our artists create, drive culture globally, and generate the best commercial and creative results for our artists, all while building the greatest long-term value for our artists, our partners, of course, shareholders. Everything we do, it's in our blood, is for the long term, as we have demonstrated over time. Thank you. And I'd like to now hand over to Boyd to talk us through the financial results in more detail. So thank you, Boyd, over to you.

Thank you, Lucien. In the second quarter, we've continued with what has been a very solid start to the year for UMG. All of the, just to point out here, all of the growth figures I'll discuss today will be in constant currency. So you can see here, UMG's revenue for the quarter of 2.5 billion euros grew 17% and adjusted EBITDA of 507 million euros grew just over 8%. Similar to Q1, This revenue growth came from all areas of the business as we continue to effectively monetize a growing number of differing revenue opportunities. It is this broad based growth profile is what actually supports our confidence in the sustainability of our momentum. While adjusted EBITDA margin of 20% was lower when compared to 21.3% in the prior year quarter, there were a couple of items impacting that comparison. First, as had been previously disclosed by Vivendi when they reported the second quarter of 2021, this quarter, Q2, benefited from a one-time, excuse me, not this quarter, Q2 2021 benefited from a one-time catch-up payment from a digital partner amounting to €41 million in subscription revenue and €26 million in EBITDA. And second, as we discussed last quarter, we had a change in our revenue recognition accounting policy from a cash receipt or notification basis to an accrual basis, which mostly impacts music publishing. Due to the mix of publishing revenues, the accrual is at a lower margin than our blended music publishing margin. This accrual amounts to 98 million euros in revenue and 17 million euros in EBITDA in Q2. Excluding both of these items, UMG's adjusted EBITDA margin only declined 0.2 percentage points year over year. The remainder of the lower adjusted EBITDA margin was driven by revenue mix, as revenues were more heavily weighted towards merchandising, which has a significantly lower margin than the rest of our business. For the first half of the year, revenue also grew 17%, and adjusted EBITDA grew 11%. Adjusted EBITDA margin contracted 1.2 percentage points year over year to 20.3%. However, in addition to the digital partner catch-up and the accounting policy change I just mentioned, you'll recall that on our last results call, we disclosed that in the prior year, Q1 2021, benefited from the exceptional recovery of an advanced provision and release of historical royalties, which had a positive €20 million EBITDA impact. Excluding these items, adjusted EBITDA margin in the first half of 2022 was down 0.4 percentage points, also driven by the mixed shift towards merchandising. Now, let me touch on the results from each of our business segments. Recorded music. Recorded music revenue grew 9% for the quarter and 10% for the first half. This revenue growth drove recorded music EBITDA up 7% in the first half and recorded music EBITDA margin to 23.1%. Again, excluding the digital partner catch-up and the exceptional recovery of advanced provisions and royalty release in the prior year, EBITDA margin grew 0.4 percentage points in the first half. Looking further at recorded music revenue for the quarter, the sources of growth are well diversified. Excluding the digital partner catch-up payment in 2021, subscription revenue grew 12.1% in Q2. Ads supported. Streaming revenue grew 16% in the second quarter. And as Lucien talked about earlier, we continue to be encouraged by the trajectory of that business, with technology developments enabling us to monetize in ways previously not possible. The social and video segments of the ad market have continued to perform well. We are monitoring this performance closely, but have not yet seen a negative change in trends related to the softness in the economy or the overall advertising market. Physical revenue also showed another quarter of strong growth, increasing by 17% in the second quarter, mainly driven by strong sales from King & Prince in Japan and from BTS globally. License and other revenue also grew, up 6% in the quarter, driven by improvements in synchronization revenue. As you can see on this slide, for the half year, recorded music growth was well distributed globally, with all major reasons seeing growth. And with 27%, Latin America had the highest rate of growth. as you can see major sellers this half year were also well diversified geographically with bts and king and prince and olivia rodrigo being among the best sellers this quarter and year to date german band rammstein and japanese band ini also made their top seller list for the quarter now turning to music publishing in music publishing Revenue grew 51% in the second quarter and 42% in the first half of 2022. As I mentioned earlier, part of the growth was due to a change in our revenue recognition accounting policy from cash receipts and notification basis to an accrual basis. This has changed the timing of revenue recognition across the quarters. When we spoke last quarter, we expected the accounting change to be largely neutral for the year, and therefore we did not provide the precise breakout of the impact. Now, although we expected to be some reversal in the second half of the year, we believe that there is likely to be a positive impact for the full year, which is why we are now giving you more precise figures so that you can have better visibility to the underlying trends. Excluding the 98 million euro accrual in Q2, music publishing revenue still grew by almost 20%. Very strong indeed. For the first half of the year, the revenue benefit from the accrual was 144 million euros and the EBITDA benefit was 34 million euros. Excluding this accrual, music publishing revenue grew 18% in the first half year and EBITDA grew 16.1% and the margin was 23.5%. We continue to see a mid-teens growth rate as more indicative of the underlying trends that we are seeing in our music publishing business. Turning now to merchandising. Merchandising revenue grew 66% in the quarter and 68% in the first half of 2022, largely due to the recovery in touring revenue. Merchandising EBITDA for the quarter grew to 14 million euros, up from zero in the first half of 2021 when we had higher timing-related artist costs and there was no touring revenue. However, as we've discussed in the past, Turing is a 8% to 10% gross margin business. Retail, about 15% to 18%. And direct-to-consumer is closer to 25%. Therefore, the growth in merchandising revenue fueled by Turing, although profitable, is not accretive to the overall margin profile of UMG. As we continue to focus on expanding our direct to consumer initiatives and growing our digital goods business, we will improve the margin profile in our merch business. It remains strategically important for us to be in this business as it connects artists with their fans. And it is this connectivity that we're looking forward to increasing in the coming years. Now, let me take you through the rest of the income statement. Net profit for the first half of 2022 amounted to €241 million compared to €452 million in 2021, resulting in earnings per share of €0.13 compared to €0.25 in half one of 2021. The decline in net profit was due to the variance in the revaluation of our investments in listed companies. That was a net expense in 2022 of €565 million, compared to a net expense in 2021 of €170 million. Adjusted net profit, which adjusts for the revaluation of these investments, amongst some other items, amounted to €763 million in 2022 compared to €578 million in 2021, resulting in adjusted earnings per share of €0.42 compared to €0.32 last year. The increase in adjusted net profit was driven by the growth in EBITDA, as well as a decline in income tax expense and a small decline in interest expense. which were both driven by a 100 million euro settlement of two tax litigations finalised in the first half of 2022. As a result of the increase in adjusted net profit, we will pay an interim dividend of 435 million euros, or 24 euro cents per share, an increase of 20% over the 20 euro cents declared in 2021. I'd like to now turn to cash flow. Our net cash from operating activities for the first half of 2022 was 474 million euros, compared to 352 million last year. This included net royalty advance payments of 223 million euros, up 93 million from the first half last year, due to an extension of a superstar artist's recorded music merchandise and film and TV rights. Additionally, as you can see here, we spent €264 million on catalogue acquisitions, the most significant of which by far was our previously announced acquisition of the songwriting of Sting. This leaves us with free cash flow of €104 million in the first half, down from 280 million in 2021. You'll note that our interest expense was zero and a half. This was, as I mentioned before, part of the tax litigation I mentioned. We received 11 million of interest income on that settlement. Now turning to the balance sheet. It's been a busy quarter for us. We recently concluded our process with the rating agencies, receiving a BBB rating from S&P and a BW1 rating from Moody's. We then issued our first bonds as a standalone public company with a strongly oversubscribed offering of €500 million of five-year notes at 3% and €500 million of 10-year notes at 3.75%. On July 1, We use the net proceeds of these offerings to repay our existing 1 billion euro floating rate term loan. The new debt structure will extend our maturity profile and lock us into fixed interest rates for the future. While we realize the company could handle more leverage, we like the flexibility that we currently have within this investment grade rating recently secured. So thank you very much. Lucy and Michael Nash and I will now take your questions. So operator, perhaps you could open the line for Q&A.