Universal Music Grp U/Adr

Good evening and welcome to Universal Music Group's fourth quarter and fiscal year earnings call for the period ended December 31st, 2021. 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 Voidmere 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 1 on your telephone keypad. If you would like to withdraw your question, please press star, followed by 2. 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 prospective dated September 14th, 2021, which is available on its website at universalmusic.com. Management's commentary will also refer to non-IFRS measures on today's call. Reconciliations are available in the press release on the investor relations page of UMG's website. Thank you. Sir Lucian, you may begin your conference.

Thank you. Good evening, everyone, from where we are in Hilversum, and depending on where on the planet you happen to be right now, good afternoon or good morning. I'm excited to be able to report to you UMG's outstanding 2021, as well as our vision for what lies ahead. By the time we're done, I believe you'll understand why we're so proud of what we've accomplished this past year and so confident about what we'll be doing in the future. There are three main points that I'd like to convey. First, the creative and commercial success we helped our recording artists and songwriters to achieve last year. Second, that going forward, the music industry will continue to expand and that our unique understanding of the business and the creative process will further strengthen our position as the industry leader. Finally, just as our team's worldwide experience and global reach will continue to both break new artists and market our vast catalog, that same world-class talent will have to selectively acquire the most valuable and commercially successful music catalogs, whenever they may become available and wherever they may be. But more on that later. First, 2021. It's a cliche because it's true. Our artists and our songwriters remain at the heart of everything we do. And last year, our heart was in the right place. We helped so many of our artists, both new and established ones, achieve extraordinary success. With respect to our financial performance, for the fourth quarter, we achieved 16% growth in revenue, And for the full year, we grew revenue by 17% on a constant currency basis. We expanded our adjusted EBITDA margin and significantly improved free cash flow. While Boyd will go into further details on the financials later, let me highlight a few accomplishments from our artists, both new as well as from the established ones that contributed to this success. For example, the IFPI, the global trade body, recently released the top global artists of 2021. Once again, UMG artists had an outstanding showing, representing eight out of the top best-selling artists in the world. As you can imagine, we're pretty proud of that. This slide shows just a handful of highlights of our artists' global success. On every major streaming platform, UMG artists had an outstanding performance. Further, there are some highlights from the world's biggest music market. the United States, where again, UMG recording artists and songwriters were represented on the top of the album as well as singles charts. This remarkable success in the US is replicated in the major music markets around the world. With experts in territories covering 200 markets, our on-the-ground approach focuses on local artist signings, as well as development and expanding the reach of our global stars. On this slide, you can see a small sampling of our artists' extraordinary achievements in the UK, Germany, France, as well as Japan. Worldwide success like this just doesn't happen. UMG has built a portfolio of services and resources in artist merchandise, brand management, sponsorship, live, e-commerce, and film and television, to name just a few. An expansive portfolio which enables us to partner with artists at any stage and in all aspects of their careers. Our success in these areas is why so many artists lean into UMG beyond either recorded music or music publishing. Once they're in the family, see what we have to offer. Artists including Elton John, The Rolling Stones, Queen, ABBA, Taylor Swift, Drake, U2, Jose Balvin, Justin Bieber, Andrea Bocelli and Aerosmith, among many, many others, choose to expand and broaden their relationship with us. And through our partnership with HYBE in 2021, we expanded our relationship with BTS, the world's best-selling group, as well as partnered with them on initiatives including the fan-based platform Weverse and Venue Live, a premium live streaming platform. Let me move on to my second point and how we're going to build on our role as the industry leader in what we see as a growing market. I've seen many transformational shifts over the course of my long career in music. Changes in genres from rock to punk to hip hop. as well as changes in format, from vinyl to cassette to CD, and then, of course, downloading, streaming, and now the growth of social media from Web 1 to Web 2, and obviously the emerging Web 3, which I'll touch upon later. Change is a constant. Through all of them, UMG never resisted change. In fact, we embraced it. by adapting our business models, by promoting competition and by creating a healthier ecosystem for music and our artists. We always invest in the future, whatever form it takes, and we will always come out stronger. But the most critical investment we make is in our artists. Lately, There's been a lot of buzz about the big numbers being spent on catalogue deals. I'll have more to say about that in a minute or two, but it's important to remember that the future of music is, and always has been, dependent on the discovery and nurturing of new talent. We share a common interest with our artists, building and sustaining their long-term careers. We succeed only when they do. That's why our core business model is based on long-term artist development and investment. investment in artists takes many forms. Our worldwide resources, our capital, our marketing and promotional service, and the talent and expertise of thousands of our employees. Our labels are simply the best in the world at discovering and nurturing artistic talent. And UMG's investment in artists has never been higher. I'll give you three brief examples of what I mean when we talk about discovering, breaking, and nurturing artists. The Brits Rising star recently went to Holly Humberston. There were only two other nominees for this award in the UK, Brie Runway and Lola Young. All three of them are UMG artists. In 2021, the biggest artist breakthrough in the industry was Interscope's Olivia Rodrigo. She's the only debut artist to land a spot on the IFPI Global Top Ten Artist chart. Earlier this year, more than 10 years into their career, Glass Animals, who have been in the UMG family since their debut in 2014, became the first British band to top the Daily Global Spotify streaming chart. Their single heat waves also broke the record, taking 60 weeks to climb to number one on the Billboard global chart. This is what we mean when we talk about creating sustained interest and longevity, especially critical in today's streaming economy. So given the resources and commitment to succeed that UMG brings to the table, what does the music landscape look like for our artists? In a word, or two, in fact, it looks wide open and filled with possibility in so many ways. For starters, take ad-supported streaming and subscription. Since the pandemic begun, UMG saw a very significant influx of new subscribers to our platform partners. And now, according to our consumer research, nearly one in four consumers in over a dozen major markets are subscribed to at least one premium service. Why? because the value proposition of on-demand access to all their favorite music with excellent programming features means that once consumers migrate to a subscription service, they are highly likely to stay engaged and enjoy these services and the flexibility they afford to deliver the best listening services at home, in cars, smartphones, iPads, etc., etc., An increasing share of these new subscribers comes from older demographics. And as the population ages, we expect adoption rates to be sustained as consumers access their favorite music throughout their lives. Also, driving our support in streaming and subscriptions' continued growth are the diversification of and the competition amongst DSBs and improved product offerings. For example, with our involvement, platform partners are launching new features like high-def audio as well as richer integrations, further enhancing the value proposition for consumers. All these factors explain why we believe there is great potential for significant increase in streaming penetration and subscription growth. And even as ad-supported streaming and subscription continue to grow, there are a number of other digital advances that will create new revenue streams for UMG. For example, in January, building on our joint track record of success, we announced an expansion of our agreement with Amazon. The deal crosses an array of areas within the Amazon ecosystem, including their multi-tiered subscription service, higher quality and spatial audio, which we're very excited about, artist merchandise, and live streaming through a new agreement with Twitch. We will be creating innovative channels, experiences, and features with Twitch for our artists as well as our labels to engage and interact with existing fans as well as new audiences. The point being that even with a traditional partner such as Amazon, our relationships evolve as the platform evolves to encompass a full gamut of opportunities from physical product, artist merchandise, music subscription to live streaming. Another expanding area in which fans are connecting with artists and discovering songs in ways that were unimaginable just a few years ago is health and fitness. We now have 19 partnerships in the health and fitness space, including recent deals enabling innovative new services such as Strive, Murio, mentored by Sats, Steezy, and Climber. These add to what we believe is the widest portfolio of such partnerships in the music industry. We're also on the front line of developments in Web3 and the broader gaming and metaverse space. While still at an early stage of experimentation, we're testing and learning through active engagement with our artists in the development of new products as this whole world evolves. As opportunities arise for meaningful strategic moves that promise to deliver for our artists, we will be in a position to seize them. One of our key differentiators in advancing new Web3 opportunities is that we're implementing partnerships while engaging with operators so that we are ready to execute with our artists upon launch. This slide shows the range of our growing list of partners. And it will broaden and become sustainable. And the eagerness of our artists and partners have demonstrated to lean in with us into this space underscores the opportunities we collectively see. That the role of the music company will be indispensable to creative success and that this category will grow because of our unique ability to bring together a suite of rights that will create the most compelling and innovative products. as well as offer scalable solutions for artists that are seamlessly coordinated with their global marketing campaigns. Now, my third and final point, acquisitions. On our last call, Boyd explained why any number of players are waking up to a newfound enthusiasm for music copyright investment. In my remarks today, I hope I've made it clear that since UMG is the clear market leader in our industry and with a broad and global artist roster and deep relationships in the creative community, we're often the first stop for artists, states and others interested in selling music rights. We see almost everything. And when it comes to evaluating potential acquisitions, we can be and we are a very selective industry. We're quite bullish on the long-term prospects for music, and I believe no one can do more with music rights than our team. We therefore stand ready to take advantage of opportunities to acquire catalogues, but only the best catalogues at the right price, and only after we've thoughtfully assessed the value of the rights and have a clear view of how we will make returns well in excess of our cost of capital. So let me unpack what all that means. Our track record as a management team has demonstrated time and time again our ability to assess talent and understand the value of music rights. We have the ability to see and evaluate opportunities that others do not. Our unique understanding of opportunities has many sources. UMG's market-leading creative and industry expertise in every single major music market in the world, our own people on the ground. our own direct-to-consumer initiatives, our analysis of the many different drivers of music monetization, and the proprietary cross-platform data we receive from numerous services with whom we partner. Add to that our global resources, marketing expertise, and existing infrastructure, and you can see that the very knowledge and experience that has made UMG the industry leader gives us a distinct advantage in evaluating available catalogs. And our industry-leading capabilities allow us to maximize the value of the catalogs we do acquire. I believe, and I think we've demonstrated, that no one can do more with great catalogs than UMG. but it's important to understand that not all catalogs are created equal, whether with respect to their geographical appeal or their future growth potential, or, in fact, with respect to the very nature of what is being offered as a catalog. What is described as a potential acquisition can run the gamut from, one, a full suite of rights that gives control over the marketing and monetization of the catalogs, To two, a bundle of rights which is severely limited because approvals are required for their use. To three, acquiring only a portion of an artist's catalogue. And finally, to four, buying merely royalty streams that are nothing more than passive low return investments with limited upside and zero control. When we evaluate catalogues, we are looking for the truly special ones. Prized, valuable, special collections of great works of art. with which we would have the unrestricted ability to strategically make the most of the opportunities that they contain. Again, we are not in the business of buying individual royalty revenue streams or assets over which we will have no ability to make the most of those rights. We are more than happy to leave those deals to others. While more rights opportunities have been coming to market in the past few years, none of this is new to us. Believe me, we are an experienced acquirer, both highly selective and financially disciplined. We have been engaged in this activity for literally decades, whether or not it was the purchase of EMI Records, BMG Music Publishing, Sanctuary, or the Dick James Music Catalogue, which included, obviously, the great works of Elton John, or the catalogues of ABBA, Bob Dylan, Neil Diamond, to name just a few. This is what we do, and this is what we've done. And while the market around catalogue rights is active and competitive, UNG has long-standing relationships and powerful networks that enable us to spot opportunities before others do. As you know, our overall investment strategy is based on matching the risks we take with the opportunities for return. With new and proven talents. the higher risk profile is accomplished by a greater opportunity for significant upside. With an established music catalogue, where we have well-developed understanding of the artists and their fan base, a long history of how the rights have performed, and what has driven those returns, and an ability to make the most of those rights, with all our unique capabilities, the risk is considerably lower and the returns much more predictable. From a financial perspective, our investments are a thoughtful balance of high-risk, high-return new artists and low-risk, predictable and consistent return musical works. After all, this management team has decades upon decades of experience in successfully acquiring IP. This is how we built UMG into the leading company it is today. I can't give you a precise figure of what we expect to spend over the coming years on artists' rights. We're not a financial player. We're not a financial investor, nor are we a new-to-the-market fund on the hook to do deals at a set schedule. Further, unlike a fund, we will never sell or divest these rights. We are building our business and creating shareholder value for the long run, and we have the luxury, the wisdom, and the capacity to do deals that make sense when they become available. When a catalog opportunity arises that truly constitutes a prize, as I said, one that contains great assets that offer strategic and financial value at a reasonable cost when then we will acquire it, bring it into our family, make the most of those assets, and further accelerate our growth. If the opportunity does not meet our criteria, we will not acquire it. It really is as simple as that. because if we chose to, we could turn off catalogue acquisitions entirely and still continue to significantly grow our core business and our entire company. As for the funding of these acquisitions, that can be done in a myriad of ways which Boyd can address later in his remarks. Let me give you a perfect example of our acquisition strategy in action. Our recently announced 2021 acquisition of Sting's incomparable music publishing catalogue. Sting is a songwriting genius. His catalogue, one of the most commercially successful and critically acclaimed of the last half century, spanning his entire career with the police and as a solo artist, including hits like Roxanne, Every Breath You Take, Fields of Gold, and, of course, Message in a Bottle, among many, many other global hits. We couldn't be more excited by the myriad of opportunities now that Sting's publishing is united with his master recordings of The Police and his own solo recordings. Why do great artists such as Bob Dylan, Neil Diamond, and Sting choose UMG to be the home of their musical legacies? Well, Sting said it best. He said, and I quote, it's absolutely essential to me that my career's body of work have a home where it is valued and respected, not only to connect with longtime fans in new ways, but also to introduce my songs to new audiences, music, musicians and generations. And we have that ability and we have the flexibility. And that is what separates us. the opportunity for us. That validation speaks volumes about not only what we can provide artists in terms of global commercial success, but about the culture of UMG and why we believe we are best positioned to honor and expand the musical legacies of the world's greatest artists. As I said earlier, change in our business is a constant, and the changes at work in the industry today and in the months and years ahead will be opening up new and exciting opportunities. We will embrace them, as we always have, with skill and confidence. And with that, I'd like to turn it over to Boyd, who will, I hope, provide further details on our financial results. Mr. Boyd, thank you.

Thanks, Lucien. Okay, I'll start here by summarizing from a financial perspective what has been another remarkable year here at UMG. Looking at the full year, which is the best way to analyze our results, revenue grew 17% and EBITDA grew 20.9%. This drove our adjusted EBITDA margin to 21%, an expansion of nearly one percentage point for the year. Let me put the year into context for you. We've been able to consistently grow revenue, adjusted EBITDA and margins over the past few years. the business is benefiting from stronger, more predictable and more diversified revenue growth. And this revenue growth has driven significant EBITDA margin improvement as we benefit from continued operating leverage. As to the effect of COVID on financial reporting, It created an easier comparison for 2021 on the revenue side, but a more difficult comparison on the EBITDA margin side. In 2020, we saw cost savings around travel and entertainment and marketing as the world shut down. We also benefited from revenue mix away from lower margin merchandising and physical revenue. This drove very strong EBITDA margins for 2020 with a year-on-year gain of more than two percentage points. We therefore view it as a positive that despite this challenge in 2021, we were again able to expand our adjusted EBITDA margin by nearly a percentage point. In the fourth quarter, revenue grew by 16% and adjusted EBITDA grew by 6.8% in constant currency. While adjusted EBITDA continued to grow, adjusted EBITDA margin declined in the quarter for two reasons. Firstly, there was a 28 million Euro provision reversal in 2020 related to a label acquisition we did. This exceptional item wasn't disclosed by Vivendi as they don't report quarterly EBITDA. However, we felt it was important to bring this to your attention in the context of the quarterly comparison. Now, if this benefit were excluded from the prior year figures, fourth quarter adjusted EBITDA would have grown 14% in constant currency and the fourth quarter adjusted EBITDA margin would be close to flat year over year. And then secondly, we had a very, as you can see here in this slide, we had a very strong rebound in merchandising revenue and strong growth in vinyl sales, both of which have lower margins than our overall business. We also had a great quarter in music publishing where margins are slightly lower than they are in recorded music. So while there remains some variability quarter to quarter, as there always has been in this business, we encourage you to view the business over a longer time horizon and we continue to plan for margin expansion as we indicated in the mid-term guidance we provided at the time of the listing. Now, let me touch upon the results from each of our segments. Here is recorded music and you can see on this slide that recorded music revenue grew 12% for the quarter and 17% for the year. This revenue growth drove recorded music EBITDA up 20% and recorded music EBITDA margin to 23.7% for 2021, about one percentage point higher for the year. splitting out recorded music, giving you better insight into the revenue streams. If we look at subscription and streaming revenue, it continues to grow very well, up 16% for the quarter and 20%, almost 20% for the year in constant currency. It is worth pointing out the growth in physical. Physical revenue grew 11% in the fourth quarter, nearly 11%, and 21% for the year, with growth across the US, Europe, and Japan. The physical growth was largely driven by improved vinyl sales, as the quarter saw releases from ABBA, Taylor Swift, and The Beatles, which performed particularly well. We also had a particularly strong year in Japan, the world's second largest music market, where physical is still the dominant format. For the year, growth was well distributed globally, with all major regions seeing double digit growth. And at 21%, North America had the highest rate of growth. And as you can see on the right here, our major sellers included a well-balanced mix of both new and established artists. On this slide, you can see that both subscription and ad support to streaming revenue continue to grow at an impressive pace in 2021. As Lucien indicated, we see a long runway ahead for subscriber penetration and also for continued growth in advertising monetization. It is worth noting that from both a growth rate and a gross Euro perspective, 2021 streaming and subscription growth accelerated compared to the growth seen in 2020. As music content owners, the continued expansion and broadening of the streaming and subscription landscape is a positive story for UMG. It's driving further diversification of our revenue base. and we are seeing a growing number of meaningful distribution partners on a global basis. Now, to better help you understand our revenues, we will start breaking out subscription and add supported streaming revenue in our reporting beginning with the first quarter of 2022. In music publishing in Q4, revenue grew 28% and 15% for the full year. In the quarter, there were timing benefits and collections from certain partners and societies that drove the stronger growth. This is not uncommon. The 15% revenue growth rate for the year is more indicative of the underlying trends we're seeing in our business and reflects continued strong growth from subscription and streaming, as well as synchronization. Performance revenue was lower for both the quarter and the year, due to the COVID-related impact on live performances and bar, restaurant and nightclub closures, which led to temporarily lowering payments for the use of music in those venues. The publishing growth for the year was also helped by catalogue acquisitions made in prior years, such as Bob Dylan, and the publishing margins improved slightly for the year due to operating leverage. And as a reminder, again, in terms of improving our transparency, we plan to start breaking out publishing revenue by type in the first quarter of 2022. Turning to merchandising now. Merchandising revenue grew 42% in the quarter and 27% for the year, largely due to the partial recovery in touring revenue, particularly in the US, but also due to better retail income. However, touring, I'd like to point out, touring is a lower margin revenue source in what is already a low margin business compared to the rest of UMG. To give you a sense, at the gross margin line, touring is about an 8% to 10% margin business. Retail, about 15% to 18%. And direct-to-consumer, closer to 25%. In 2021, we also had higher... artist costs, which further negatively impacted margins. And therefore, our merchandising EBITDA and margin fell for the quarter and the year with a full year margin at just over 4%. Now, as we continue to focus on expanding our direct to consumer initiatives and growing our digital goods, we will look to improve the margin profile of our merch business. It remains strategically important for us to be in this business as it connects fans and their artists and artists and their fans. And it is in this connectivity that we are looking forward to increasing in the coming years. Now, let me turn to cash flow. As you can see here in the middle, Our net cash provided by operating activities for 2021 was 1.14 billion euros, which included net royalty advance payments, as you can see with the green on the left here, which included net royalty advance payments of 364 million euros. And again, in the green, you can see that we spent 388 million euros on catalogue acquisitions. down from €929 million in 2020, which follows our prior statements about catalogue spending in 2020 being elevated due to opportunistic investment. Now, this leaves us with a healthy free cash flow of €638 million for 2021. To remind you, Our dividend policy stipulates that we pay a dividend of 50% of net income. And as such, our dividend proposal for 2021 is €725 million, or €0.40 per share. And having already paid an interim dividend of €0.20, the final dividend to be proposed will be €0.20 per share. So this slide here sets out the collective content or investment that we've made in content. The blue are catalog investments like M&A and the green are our royalty advances net of recruitment clearly. Collectively, our net content investment for 2021 was about half of 2020, totalling 752 million euros compared to approximately 1.5 billion euros in the prior year. Within net advances, which were down 38% from 2020, they were still elevated compared to what we'd consider a more typical level. What you're seeing picked up in this number, in addition to the day-to-day advances in recruitment more typical of our core business, are some unique opportunities we've had with several superstar artists. In the last three years, Gross Advances have included several broad, multifaceted deals where our superstar artists have chosen to lock in very long-term deals with us. These have covered areas beyond recorded music and beyond music publishing and include branding, sponsorship, film and television, merchandise and other areas. For example, in 2020, we mentioned that this was the case with Drake and Taylor Swift and they continued in 2021. The same was true for several major artists, but due to artist confidentiality, We've not yet been able to disclose these. The fact that these artists want to double down with us at the height of their careers validates everything we do for them and will be long-term value driver for our business and for our shareholders. While our underlying operations fund this type of artist investment in both new and established artists alike, catalogue acquisitions are a bit more like M&A. Lucien talked in detail about our approach to catalogue investments. We've been doing them for many years, but we are highly selective strategic acquirers. There are a number of ways we can finance these. We can finance them from our operating cash flow to our balance sheet with our capacity to add leverage and also with special purpose vehicles. I can assure you we have received many, many offers from interested parties who just want to partner with us to access our insight and our ability to monetize. and we will consider all of these options. Another important point about the acquisitions we are making is that they are opportunistic and are not required to drive growth in our core business. They are also nearly impossible to identify and to provide guidance on in advance. So it's logical then that the revenue and EBITDA these investments may drive are not specifically included in the mid-term guidance we gave you in our prospectus, which to remind you was for high single-digit revenue CAGR against our 2020 results and mid-20s EBITDA margin. Though I would remind you that in any single year, the financial contributions of each of these catalogues is small compared to the scale of our business as a whole. And as a reminder, if we buy a publishing catalog that Universal Music is already administering, there will not be any incremental revenue impact. So to reiterate some of what Lucien said, we remain extremely disciplined in the investments we are making. We take a detailed and holistic view of the financial and strategic opportunities Each of these investments offers UMG. And then we decide the return profile, whether it fits into our portfolio. If not, then we don't acquire. We're only interested in those assets which we can control. We're not interested in passive income streams. And we're only interested in those assets where we can improve the monetization. And since I mentioned leverage a moment ago, I'd like to note here that we are going to be meeting with the rating agencies soon. And we are looking forward to getting our first rating for UMG. While we realize the business may currently be under levered, our intention is to be investment grade rated as we work toward a more optimal, longer term capital structure for the company in the coming months. So Lucien, Michael Nash and I will now take your questions. And operator, could you please open the line for Q&A?