Universal Music Grp U/Adr

Good evening and welcome to Universal Music Group's third quarter earnings call for the period ended September 30th, 2021. My name is Maxine 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, press star followed by the number 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 UMG's perspective dated September 14th, 2021, which is available on its website at universalmusic.com. Thank you. Sir Lucian, you may begin your conference.

Thank you. Good evening, everyone. I'm delighted to be here with you for this, our very first earnings call for Universal Music Group as a public company. Let me begin by setting the context with a fundamental fact. Music is on a stunningly powerful trajectory. For example, just last week, the IFPI, the Global Trade Association, issued a report underscoring what we see every day in the marketplace. about music's increasing influence. After surveying more than 40,000 music fans in more than 20 countries, the report found that the average listening grew to more than 18.5 hours per week, the equivalent of 368 songs per consumer. And over the past two years, the amount of time fans spent on subscription audio streaming rose by 51%. When you combine this increased time spent listening with further penetration of streaming monetization in both the developed and high-growth music markets, it's easy to understand our optimism about the industry growth. People are not only enjoying more music than ever before, but they are also connecting with artists in ways that were unimaginable just a few years ago. A diverse mix of musical genres are delighting fans across an expanding landscape, that includes short-form video, social networks, fitness apps, gaming, live streams, digital goods, and much more. And even as all that is taking place, the demand for physical products continues to grow. This expanding music consumption landscape means expanding music monetization. In a few minutes, Boyd will be addressing our financial results in more detail. But for now, here are two highlights for the quarter just ended. All segments contributed to a 17% revenue growth compared to the prior year quarter and to an increased 21% of adjusted EBITDA. We feel that these numbers speak for themselves. Looking ahead, we believe there is unprecedented opportunity for further growth. Given that fans now have access to essentially all of the world's music in the palm of their hands, and that consumer demand for music across cultures, eras, languages, and genres is at historic highs, I remain unwavering in my confidence that the path we're on will lead us on to greater heights. As someone who's been in the business for an entire career, I can tell you that growth like this just doesn't happen. It begins, as of course it must, with great music from gifted artists and songwriters. But from there it takes hard work by inspired professionals and investment by companies like ours to grow and broaden the entire music system. But make no mistake, there really are no other companies like ours. UMG is the driving force of progress and innovation in the industry. At a time when the music market seemingly has no barriers to entry, when anyone, anywhere can record and distribute audio content, and when every single day, approximately 60,000 tracks are uploaded to Spotify alone, the reality is it's harder than ever for artists to cut through all of the noise to find and expand their audience That is exactly why we place the utmost priority on maximizing opportunities for artists to bring their music to the world and to connect with fans in increasingly rich ways. When we help artists break through to commercial success, we're also empowering them to reach new levels of artistic creativity and to go on to hopefully develop really sustainable careers. By prioritizing our focus on artist development, and consistently delivering greater opportunities for artists' success. We remain the destination of choice for those artists seeking a partner that both shares a long-term, career-oriented vision and has an unmatched track record to prove it. As I said, we are uniquely positioned to drive the greatest value based on our global resources and marketing experience that simply is why the world's greatest artists at every stage in their career continue to sign, renew and expand their partnerships with UMG. Let me highlight some developments this quarter with a few of our artist partnerships. Last month, Germany's most successful music artist, Elaine Fischer, extended her partnership with Universal Music Germany. Fischer has topped Germany's annual sales charts for five of the last eight years, more than any other artist in German chart history. Her new studio album, Rauch, debuted on October the 15th and is already this year's fastest-selling album. In August, we entered into an expansive worldwide alliance with Aerosmith, the best-selling American hard rock band of all time, that includes their entire discography, merchandise, and audiovisual projects. We couldn't be more excited to unite the work of this iconic group at UMG ahead of their upcoming 50th anniversary. For the first time, All of Aerosmith's incredible recordings will be marketed and distributed exclusively by one company, us. As a sign of the truly global nature of UMG's business today, in July we were thrilled to sign an exclusive global agreement with Indian music superstar and entrepreneur Badshaw. With more than 15 billion streams worldwide, He's a dynamic, Delhi-born rapper, singer and music producer, and is one of the world's most popular musical artists. Our multi-year agreement embraces all elements of his career, including future recordings, music publishing rights for non-film compositions, brand licensing and partnership. He's a most welcome addition to our family. We also announced the new agreement with one of the world's most acclaimed artists, multiple Grammy winner Andrea Bocelli. And just last week, BTS, the world's number one best-selling group, according to the IFPI, announced that they will be expanding their relationship with UMG, partnering with us globally, including in the U.S. Earlier, I mentioned our long-term career-oriented approach to artist partnerships, an approach that also includes finding innovative ways to introduce legendary artists' music to new generations. This quarter, I can cite no better example than ABBA, one of the most successful pop groups of all time. ABBA recently announced the upcoming UMG release of their first studio album in 40 years, and we're also partnering with the band on a revolutionary type of concert. Next year, the group will perform as avatars in an immersive digital concert experience with a live 10-piece band in an arena in London. The news of that upcoming concert took ABBA's back catalogue to the top of the streaming charts and gained them in just one week over a million followers on TikTok alone. There's yet another way in which we are the industry's driving force. Because UMG has today's most popular artists and hits, as well as the world's deepest and widest catalog, we are in a unique position to deliver the essential content and platform engagement new digital businesses seek in order to accelerate their business models. Our position inevitably leads us to focus relentlessly on the future, and we do. I've described music as becoming an indispensable ingredient in a wide range of media. Short form video on social networks, fit tech, gaming, etc. Music is everywhere today and it will be everywhere in the future as innovation drives market transformation and the landscape keeps expanding. Looking at health, for example, where we have promoted exciting new applications in music licensing within fitness services. We've now established a partnership that harnesses music as a key component of the medical therapy, something which I'm particularly excited about. We recently partnered with a digital therapeutics company, Medrhythms, our first deal in the medical area and the first deal of its kind in the industry, for the use of our catalog as prescription music to stimulate part of a patient's brain. This is just one example that points to the ever-expanding scope of the music business landscape. We are also fostering innovative new partnerships in social media, building on the solid foundation of our industry-leading strategic relationships with YouTube, Facebook, Instagram, TikTok. Over the last four months, we have completed new deals with Snap, Lermative, and Kwai Sho, We're expanding our social media partnership portfolio with innovative services that further extend engagement and monetization opportunities for our artists with fan bases around the world. Another area where we are intensely focused and have bolstered our efforts is the production of original film and TV content. This is a key facet of our ability to promote our IP outside of the traditional realms of music. Our success in this arena was already evident at the recent 2021 US Emmy Awards. UMG's Polygrand Entertainment garnered 11 nominations. With the Bee Gees, how can you mend a broken heart receiving six nominations and winning one Emmy? Polygram Entertainment's Zoe's Extraordinary Playlist received five nominations, and Interscope's film Billie Eilish, The World's a Little Blurry, received four. And in July, the Velvet Underground documentary premiered at the Cannes Film Festival to rave reviews before opening last week, both theatrically and on Apple+. And while we're talking about awards, I'd be remiss not to mention a few remarkable chart statistics as well. Through the third quarter of 2021, according to MRC data in the US, UMG has all of the top four albums from Morgan Wallum, Olivia Rodrigo, Pop Smoke, and Justin Bieber, as well as the number one album for 33 of the 39 first weeks of the year, as well as all of the year's top seven album debut weeks. from Drake, Kanye West, Olivia Rodrigo, Taylor Swift, J. Cole, Morgan Wallen, and Billie Eilish. In the UK, according to the official charts company, so far this year, we have eight of the top ten artists. The top album with Olivia Rodrigo's Sour and three of the top four singles. On Spotify's global chart, Olivia was the number one song through the third quarter of 2021, remaining at that spot for 45 consecutive days. This is just a small sample of what is happening around the world at Universal Music Group. I'm proud of all that we've done to bring us to this point, and in particular, what we've accomplished this quarter. But let me assure you, our vision remains far-reaching, and our strategy is, and always will be, long-term. I firmly believe the music industry is only at the beginning of a new wave of growth and evolution. We're positioning UMG to lead this evolution for the benefit of our artists, fans, and obviously shareholders. Thank you. I'll now turn it over to Boyd, who's going to walk you through our financial results, and then we'll come back with you after for your questions.

Boyd. Thank you, Lucien. I'm pleased to be with you to report that our first quarter as a public company has been a strong one. The results are laid out in the press release issued a short time ago, but I'm now going to review some of the key metrics and provide a bit more color. Please note that any revenue growth I am discussing is in constant currency. Total revenue grew 17% this quarter compared to the prior year, with all three of our businesses contributing. Recorded music revenue grew 17%, but it's the diversity of that revenue growth what makes it particularly exciting. Subscription and streaming grew 15%. Within that, ad-supported streaming was particularly strong. thanks to ongoing improvement in ad-based monetization and new and enhanced deals in social media. For example, this year, we reached a new deal with TikTok, we added a partnership agreement with Snap, we saw the launch of Shorts, the new product on YouTube, and we've seen strong growth from YouTube overall as we focused on better monetizing our content on that platform. In fiscal 2022, we plan to break out our streaming revenue between subscription and ad-supported. Both continue to show meaningful growth, and these revenues are each becoming sizable enough for us to discuss their trends separately starting next year. Now let me turn to other growth drivers within recorded music. Physical revenue grew 12% over the prior year quarter. This was driven largely by strong vinyl sales in the US. Incredibly, Taylor Swift, Olivia Rodrigo and Billie Eilish now hold the top three positions of the last 30 years for single week vinyl sales. For Olivia and Billie, those weeks fell into this third quarter of 2021. We also had physical sales strength in Japan as a result of a new release by King & Prince and continued sales from BTS. While we don't expect physical album sales to remain a growth business every quarter, it does speak to the enormous demand for products that cater to superfans, an area which we are focused on further developing. Another noteworthy area of growth within recorded music was in our license and other revenues, which were up 49%. Neighboring rights, synchronization, live and branding deals rebounded from their pandemic impact. And we also saw growth this quarter, as Lucien mentioned, from our audiovisual production business. This is the area of our company which creates original music-based film and TV content. As this is a newer business for us, driven by a smaller number of titles, revenue will vary quarter to quarter based on the timing of deals to sell this content to distributors and to platforms. Of note this quarter was Billie Eilish's concert film, Happier Than Ever, a love letter to Los Angeles, which premiered on Disney+. We are passionate about this business and we see it as an important part of our strategy for growth, but don't yet expect it to drive this level of growth consistently. Turning now to music publishing. Revenue grew 21% over the prior year quarter, despite there still being continued COVID impact on performance revenue. Subscription and streaming revenue continue to show strong growth, and synchronization is growing well, as this business has now rebounded following the impact of COVID. Also, certain publishing revenues, including those reported from collection societies, are booked when reported by those societies. We saw a bit of a timing benefit this quarter. Our merchandising business grew 14%. as it is also beginning to rebound from last year's COVID impact. The negative COVID impact was primarily to touring and, to a certain extent, to retail. However, large-scale tours are still limited for now, so we believe it will take more time for this business to fully return. Now turning to EBITDA. While we will provide EBITDA for the first and third quarters, We will only break out EBITDA by segment as a half and for the full year. Our total EBITDA for this quarter was €426 million, up 12% on a reported basis. However, please note, this included €35 million of non-recurring expenses in Q3, expenses which were related to our listing. This consisted of 15 million euros of professional and listing fees, as well as 20 million euros of share-based compensation expense. Adjusting for these costs, EBITDA grew 21% to 461 million euros, and our margin expanded to 21.4%. The adjusted EBITDA growth and margin expansion are primarily a result of the revenue growth and operating leverage. Before we turn to Q&A, I want to speak briefly about our content spend and investment plans, which I know are important areas to discuss with the investment community. There's a great deal of newfound enthusiasm in music copyright investment, and we certainly appreciate why music's growing value is attracting interest. But our team's knowledge and experience give us a sharper and clearer perspective on the music industry's prospects and a distinct advantage in evaluating investment opportunities. The knowledge and experience we have has many different sources. Firstly, there is UMG's creative and industry expertise in every major music market in the world. Added to this, are our own direct-to-consumer initiatives. Then there's our analysis of the many different drivers of music monetization. And finally, the proprietary cross-platform data we receive from numerous services with whom we partner. Why is all of that important? Well, these combined strengths and insights enable us to both identify and acquire music assets and to develop and keep reinvigorating our already extraordinary portfolio of new and established recording artists and songwriters from all around the world. Our global resources and marketing expertise make us uniquely positioned to create the greatest value from these assets for both our artists and our shareholders. I plan to give further color on our content investment when we report our full-year results so that I can do so in the context of updated figures. For now, I want to say, however, we remain highly disciplined in the investments we are choosing to make. And secondly, we believe continuing to invest in the business, both organically and opportunistically, is a strong driver of value creation and in the best interest of our company and our long-term shareholders. I look forward to discussing this in more detail during our full-year results call. Now, Lucy and Michael Nash and I would be happy to take your questions. And so if the operator could please open the line for Q&A.