Universal Music Group

Good evening and welcome to Universal Music Group's first quarter earnings call for the period ended March 31st, 2024. My name is Nadia and I'll be your conference operator today. Your speakers for today's call will be Solution 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, Executive Vice President and Chief Digital Officer. 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 1 on your telephone keypad. If you would like to withdraw a question, please press star followed by 2. As a reminder, this call is being recorded. Please also 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 UMG's 2023 Annual Report, which is available on the Investor Relations page of UMG's website at universalmusic.com. Management's commentary will also refer to non-IFRS measures on today's call. Reconsolidations are available in the press release on the Investor Relations page of UMG's website. Thank you. Solution, you may begin your conference.

Hello, everyone, and thank you for joining us. Today, I'm pleased to report that Universal Music Group has had a strong start to 2024. The three months have brought us yet another quarter of solid growth. Revenue was up 8% in constant currency, and adjusted EBITDA increased by 16%, driving healthy margin expansion. And these are the results before we begin seeing the benefits that will flow from our recently announced strategic organizational redesign. In a few minutes, Boyd will walk you through the numbers in detail. But for now, I want to make clear that UMG's continued success is in large measure attributable to the broad-based and strategically integrated portfolio of businesses that we've created and assembled. By diversifying our revenue streams in this way, we're better positioned to navigate the inevitable ups and downs in the revenue of any one particular business. Today, though, I want to focus my remarks on three areas of which we are especially proud and from which we expect even more impressive results going forward. They are, first, the continued extraordinary success of our artists. Second, how we further develop, extend, and broaden mutually beneficial partnership relationships. And third, the resolution of our dispute with TikTok, its significance with respect to artificial intelligence, and the global progress we've been making around the world around our entire responsible use of AI and its related public policy. First, let me relay to you just a handful of first-quarter achievements by our incredible artists. I'll start with Ariana. In the US, her new album, Eternal Sunshine, became her fourth consecutive album to hit number one on the Billboard 200 chart. All 12 songs landed on the Hot 100, with the first two singles each becoming number one. The album reached more than a billion streams on Spotify in 20 days and was released in 12 physical configurations, six vinyl and six CD, with four vinyl configurations sold exclusively through Ariana's official web store, which we operate, and one exclusively through Target. In the US, the K-pop group TWICE saw its debut album reach number one on the Billboard 200. This marked the third number one album in three years by an all-female group released by UMG, the predecessors being New Jeans and Blackpink. In the UK this past quarter, a wide spectrum of UMG artists, including The Weeknd, Taylor Swift, Olivia Rodrigo, Eminem, Elton John, ABBA, and Ariana Grande again, held nine of the top ten album spots, with Noah Khan, who has already seen enormous success in the US, having both the best-selling album and the best-selling single. At Japan's 38th annual Gold Disc Awards in March, a diverse array of UMD artists led the way in many categories. King and Prince won both single and album of the year, Best Asian Artist went to 17, and Travis Japan was New Artist of the Year. The International Album of the Year was the Rolling Stones' Hackney Diamonds and the Beatles. Yes, the Beatles. won International Artist of the Year for the ninth consecutive year. Unbelievable. In music publishing, Universal Music Publishing Group songwriters had seven of the eight different songs that hit number one in the quarter on the Billboard Global 200. In addition, UMPG won Latin Publisher of the Year at the ASCAP Awards, with Fade winning Artist Songwriter of the Year. Then, of course, there's Taylor. Her newest album, The Tortured Poets Department, has shattered records around the world as the biggest album of the decade and the biggest debut of her career. In the US, the album debuted with the second largest sales week in the modern era since Luminate began tracking sales in 1991. In its first six days of release, it broke the single week streaming record in the US. Further, Taylor became the only artist to ever hold the entire top 14 on the Billboard Hot 100, with all 31 songs from the album debuting in the top 55. In the UK, the album debuted at number one, outselling the rest of the top 10 combined, with the biggest opening week for an album in the UK in seven years. The debut helped Taylor overtake the Beatles for the record of the fastest artist to achieve 12 UK number one albums. And in Australia, Taylor became... the first artist to hold the entire top 10 on the singles chart and established a new mark for the most singles in the top 50 with 29. And these are just highlights from a few countries. The album also debuted at number one in at least a dozen more countries around the world. We're of course thrilled with the success of all of these artists. And what drives us at UNG is not only working on behalf of the world's biggest artists, but also breaking the next generation I'm particularly excited about what we're seeing around the world from our developing talent, including Sabrina Carpenter, who's just had the top global song on Spotify, Chapel Rowan, David, iSpice, Noah Khan, and Gracie Abrams, and then really just a few. These artists, all from different labels, different parts of the world, from different genres, underscores the importance of our multi-label structure our creative executive talent, and our consistency in breaking the industry's best new artists year after year. I'd like to talk a bit now about the strategic and financial importance of our relationships with emerging and established music companies and entrepreneurs. These relationships are available to us because we've designed and built UMG so that we're able to leverage our scale and global infrastructure to provide third parties with a wide range of distribution, marketing, promotion, and other services. While these relationships may begin as lower margin deals, we view them as having great potential. The connections we make with some of the most exciting entrepreneurs and artists often, over time, expand into broader suites of services as well as grow into opportunities for multifaceted partnerships, which in return, they result in greater strategic benefits and higher margins. I'll give you a few examples from the quarter. In 2017, UMG teamed up with HYBE in South Korea by way of a label services agreement for BTS, the superstar boy band. Four successful years later in 2021, the company has expanded the relationship with a global strategic agreement providing for collaborations across a number of artists and projects. Then last year, Geffen Records and Hive announced a new joint venture to launch the debut Dream Academy, aimed at implementing Hive's K-pop methodology to launch a new group in the U.S. The group will debut through a Netflix series later this year. We're thrilled that in Q1, we entered a new partnership with Hybe. As part of our new partnership, UMG will also work closely with Hybe to help enhance the growth of the superfan platform Weverse in North America. Then there's China. Last month, Universal Music Greater China announced a new global digital label services deal with TF Entertainment's roster of talent. Since its inception in 2009, TF Entertainment has been a pioneer in China's pop culture landscape, introducing the trainee system to cultivate idol groups. Their unique approach led to the establishment of the TF family, under which various groups have flourished, with TF Boys and Teens in Time in particular seeing massive success in China. Now targeting markets outside of mainland China, TF Entertainment will leverage UMG's global capabilities and marketing network, Our alliance underscores our dedication to elevating Chinese pop music to global acclaim, both culturally and commercially, and also advances our superfan strategy, offering fans around the world access to distinctive cultural experiences. The final part of the deal I mentioned is Virgin Music's agreement with 3AM Entertainment, a new label founded by Jay Sean, who has nearly 10 million monthly listeners on Spotify and 1.5 million subscribers on his YouTube channel. Our new partnership will focus on supporting artists from the South Asian diaspora and breaking them as global stars. The third area I'll discuss concerns TikTok and the many issues surrounding AI and its impact on music. As you're likely aware, we've just announced that we've reached a new agreement with TikTok and agreed to key changes in several critical areas. It's been very important to us. including addressing our concerns about generative AI on their platform, as well as better aligning with the value of other comparable partnerships. As a result, we have resumed licensing our music to them. We are an organization committed to breaking new ground and driving the industry forward, but we're also fundamentally rooted in protecting artists and songwriters from the negative effects of disruptive technology. So we expect and even embrace the inevitable conflicts that will result from fulfilling our commitments. But ultimately, the point of engaging in such conflicts is to find a higher common ground from which new and greater progress can be made. I'm enormously proud of what our teams and our artists have been able to achieve with TikTok in finding common ground on which we will build a foundation for a brighter future. It's important to note that this new agreement has ramifications beyond this single platform. It's another significant step we've taken to guide the industry's evolution to a future where human artistry must be respected. Artists and songwriters must be treated fairly, and fans are provided with platforms that better prioritize safety as well as integrity. Further, during the last few months, we've worked to accelerate engagement with music on Snapchat, Instagram, and YouTube Shorts. And in a recent agreement with Spotify, which makes available a range of new features that were previously found only on social media platforms, we've even broadened the very definition of the social music category. In short, the income from social media is increasingly important income to artists, songwriters, labels, and publishers, which is why we've pushed so hard, and we will continue to push hard to protect and to develop it. As our partnerships in the tech space expand and evolve, it remains paramount that we continue to focus our attention with partners and in public policy on an artist-centric and even more productive approach to AI. To that end, we're encouraged that the European Parliament resoundingly pass the EU's Artificial Intelligence Act. The first of its kind legislation establishes obligations for AI systems based on the potential risks and level of impact. It's a strong first step that includes important provisions such as transparency with respect to the materials used to train AI platforms. In the U.S., even as support continues to build for a federal right of publicity, several states are taking action. The state of Tennessee recently enacted the Ensuring Lightness Voice and Image Security Act, known as the Elvis Act. It provides strong protections against generative AI voice cloning. We expect further action on these issues as there are ongoing legislative debates in jurisdictions around the world. But we are not waiting for these processes to complete. While public policy guardrails, like the legislation I mentioned, are crucial, we believe that this rapid technological transformation is best addressed by the private sector. So we are working now to shape a healthy, responsible, and ethical AI with an ever-growing roster of partners. For example, we recently partnered with Roland Corporation, the maker of electronic musical instruments, to establish a set of principles that two companies will advocate for adoption across the music industry and the creative community relating to the responsible use of AI. These principles highlight the opportunities for AI innovation in music production, composition and songwriting, whilst also emphasizing the need for transparency, equity as well as community involvement. As you can see, we remain at the forefront of industry innovation. We continue to broaden our relationships with artists, entrepreneurs, and technology partners alike. We remain laser-focused on driving positive AI developments, putting the appropriate protections in place to secure a productive future for human artistry. All of the actions I've spoken about today align with the artist-centric initiatives that we've been speaking about for some time now. putting artists at the center of every conversation. Our focus on the future has always served us well, and we will continue to do just that, operating to drive long-term health and success for our company, our artists, and the broader industry. So thank you. With that, let me turn it over to Boyd for a closer look at our financial results. Thanks, Lucien.

As Lucien indicated, 2024 is off to a healthy start. The figures laid out in the press release, they are laid out in the press release, but let me give some additional color. I'd remind you that any growth rates we discussed today will be in cost of currency. Total revenue in the quarter grew 8% year over year to 2.59 billion euros, with growth across all three business segments. This broad-based growth continues to underpin our confidence about the longer-term health of our business. In looking at the segments, recorded music revenue grew 6%, with subscription and ad-supported streaming revenue both exhibiting strong growth. Subscription revenue grew just under 13% to €1.1 billion, driven primarily by growth in subscribers, but also helped by price increases. While we saw the full benefit of the Spotify price increases in the quarter compared to last year, we began to anniversary the positive 2023 impact on price increases at Apple and Amazon. While our growth from Spotify very closely aligns with their performance in the quarter, several other platforms did not grow as quickly. Subscriber growth is the biggest driver of the year-over-year growth rates we see at UMG. Our market share is stable and healthy, and we remain encouraged by the total subscriber growth throughout the market. Ad support to streaming growth accelerated to 10% in Q1, with some of our largest partners seeing strong growth. We are encouraged that our growth this quarter was more broad-based across many partners and geographies. That being said, this is still only one quarter, so we will continue to monitor our advertising revenues very closely. As anticipated, physical revenue faced a particularly difficult comparison this quarter, declining 14%. If you recall, our physical revenue grew 33% in the first quarter of 2023, driven by an unusually strong performance in Japan. And it was this which was the primary reason for this quarter's decline. As we've said, physical results are more release schedule driven than streaming and subscription, and skew towards certain genres, artists, and geographies. While our 2024 release slate is strong, we continue to expect a difficult 2023 comp to impact physical sales performance throughout the year. License and other revenues declined slightly in the quarter due largely to the timing of synchronization deals and other revenue. But our positive view on the overall trend for licensing has not changed. Turning to music publishing. Revenue grew 18% over the prior year quarter. This strength was driven by 25% growth in digital revenue, thanks to continued growth in streaming and subscription activity, as well as 28% growth in performance revenue due in part to higher society payments in the U.S., as well as greater than anticipated live activity in Europe. Moving on to merchandising. Merchandising revenue grew 8%, fueled by growth in touring revenue, particularly in the U.S. Now turning to adjusted EBITDA. Adjusted EBITDA grew 16% in the quarter to 591 million euros, driven primarily by revenue growth. Adjusted EBITDA margin expanded 1.5 percentage points to 22.8% compared with 21.3% in the prior year quarter. The margin expansion came from a combination of operating leverage as well as strong growth in higher margin subscription and streaming revenue relative to the declines in lower margin physical revenue. In addition, we had an incremental 12 million euros of cash compensation savings from last year's implementation of our equity plan. As in the first quarter of 2023, we were not yet at run rate. We don't expect the cash compensation savings for the remainder of 2024 to have any further incremental benefit over 2023. Every quarter has a slightly different margin profile, depending on revenue mix, segment mix, repertoire mix, and many other factors. It's hence why we encourage you to look at our business over the course of at least a year rather than any individual quarter. Adjusted EBITDA and margin did not materially benefit from the cost savings initiatives we discussed on our last call, as those savings began to roll out in April. As anticipated, we expect to begin to see the positive impact of the cost savings in the second quarter and we remain on track for the 75 million euros in cost savings we previously guided to for 2024. Restructuring charges of 92 million euros in the first quarter were in line with our guidance and are excluded from both EBITDA and adjusted EBITDA. Adjusted EBITDA also excludes non-cash share-based compensation expenses of 101 million euros during the first quarter of 2024 compared to the 261 million euros in the first quarter of 2023. We remain on track for our previously disclosed estimate of about 260 million euros of non-cash share-based compensation expense this year. Overall, 2024 is off to a healthy start. We remain encouraged by the growth trajectory of the business and excited by all of the opportunities that lie ahead of us. Lucy and Michael and I would now be happy to take your questions. So operator, please open the line for Q&A.