Universal Music Grp U/Adr

Good evening and welcome to Universal Music Group's first quarter earnings call for the period ended March 31st, 2022. My name is Katie 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 Maher, 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 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 factor section of UMG'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. Reconciliations are available in the press release on the investor relations page of UMG's website. A supplemental historical revenue fact sheet is also available on the investor relations page of UMG's website. Thank you. Solution, you may begin your conference.

Thank you and apologies to everyone for a few minutes delay and some technical issues. Thank you all for joining us this morning, this evening. I'm happy to be with you to report on the start of yet another stellar year for Universal Music Group. I want to start off by cutting straight to the chase and then to walk you through how we built UMG to bring us to such an exciting moment in our history. Simply put, our revenue growth and trajectory remains robust. Revenue growth of 17% is coming from a broad array of sources. In recorded music, it's coming from subscription, ad-supported streaming, physical product, and licensing. At Music Publishing, it's coming from digital revenue, performance income, synchronization from film and television, and mechanical income, which comes from physical products. And when it comes to music merchandising, we're experiencing both a return to a very strong touring growth, as well as continuing growth driving our retail and direct-to-consumer merchandising operations. Our touring merchandise is coming from the likes of Billie Eilish, Imagine Dragons, Justin Bieber, and Elton John. And on our direct-to-consumer and on our own retail platforms, it's coming from the likes of Taylor Swift and Rolling Stones, just to give a couple of examples. These many varied revenue streams each with their own unique characteristics in terms of size, margin, predictability, longevity, and so on, are all critical to our success. For many years, we've been designing UMG and our strategic roadmap to generate revenue, recurring and stable revenue, from a healthy mix of sources and through a variety of commercial and creative means. It's a term you will all know, you will all No wealth. It's what we call our portfolio approach. I've witnessed firsthand what can happen when an industry puts nearly all its eggs in one basket. If the vast majority of your revenue and profit comes from one source, as was the case with the CD back in the late 90s, when online piracy reared its ugly head. or when the vast majority of downloads were sold in one online store, your entire business can be vulnerable. Our diversity of revenue sources makes UMG a healthier and stronger company. But just as importantly, it also serves as a magnet for artists. Our track record proves to artists that we are home That is, a home that helps you reach as many fans as possible in many different ways, and a home that also delivers to you the greatest commercial return. So when I describe UMG as a portfolio company, I use that term in four fundamental ways. First, as an artist portfolio, we invest in artists at every stage of their career. from brand new to mid-career or to when they've eventually become established superstars. Second, as a creative portfolio, our recording artists and songwriters produce music in almost every conceivable genre. At the Grammys last month, for example, UMG artists won 26 awards across a wide range of genres, including pop, Latin, country, gospel, jazz, hip-hop, and to top it all off, album of the year went to Jean Baptiste, a jazz artist on our Verve label. Third, as a geographic portfolio, with operations in more than 60 countries, fueling creative ecosystems in local languages, local culture, we help shape that culture, not only regionally, but globally as well. I'll be saying a lot more about our geographic portfolio in a few moments. And finally, as a revenue portfolio, as I've said, producing income streams across a range of existing products, experiences, and media, while also serving as a catalyst for new opportunities for growth, such as Web3 and the broader gaming and metaverse space. It's what makes UMG the industry leader that it is. I'd like to focus your attention for a few minutes now on the importance of our geographic portfolio, which is vast. As I've said, we have company operations in 60 countries covering 200 markets, and we're growing. We are a truly global company, constantly making moves to expand our reach. Take China, for example, the fastest growing of the world's top 10 music markets. Last year, we became the first major music company to establish multiple frontline labels across China. With these small creative units in place, we're continuing a strategy that has proven effective in other markets that have transitioned from ones where the commercial opportunity was from importing international music to markets that are also exporting their own local talent. With an A&R presence on the ground, We develop local artists in a variety of genres with the goal of achieving success domestically across the wider region and beyond. And our efforts are really bearing fruit. Yishun Chan, UMG star from Hong Kong, has led the Mando pop market all year with his latest single. And that is also the theme song to global hit gaming franchise, Arcane, League of Legends. Smashing charts on all major streaming platforms in China since its release. And we're thrilled to say it's now the biggest digital song in UMG China's history. We're taking a similar approach in India. After our recent Def Jam launches in the UK, Europe and Africa, and across Asia, this quarter, UMG launched Def Jam India. UMG has long been committed to supporting investing in the next wave of talent from the region. Having spearheaded the transition over the last five years towards original artist music and non-film music, we are proud to be leading the charge of the sound we call Desi Pop. The best example is Badshaw, an incredible 2021 signing for us. Badshaw is his generation's most successful musical artist. more than 15 billion streams worldwide and the only indian artist ever to have achieved 15 different songs with more than 200 million video views each on youtube the next phase of his musical journey will bring uh indian music culture to new audiences worldwide through collaborations with some of the most influential and popular artists around the world Late last month, with the weight of our global company behind him, Badshul released his first international track, a collaboration with UMG's massive Latin artist, Jose Balvin. The track had the biggest international audio streaming debut ever for an Indian artist last week. The video has also already been watched more than 25 million times on YouTube. Beyond these new frontline labor launches, we're expanding our global presence across key territories in a myriad of other ways. Korea is a good example. Since 2020, when Republic Records partnered with JYP Entertainment, one of the world's biggest K-pop labels, the presence of the girl group TWICE has blossomed in the U.S. The partnership has now been expanded to include JYP's boy band Stray Kids, who recently debuted at number one on the Billboard album chart here in the U.S., as well as the girl group ITZY. also has been the US home for TXT, one of Korea's most popular boy bands since 2019, thanks to a partnership with HYBE. TXT will be releasing new music later this month. And speaking of HYBE, it has become a terrific partner to us. This quarter also saw... the further expansion of their relationship with Geffen Records. HYBE's BTS was named by IFPI as the top selling global act for the second consecutive year in 2021. BTS and Label Mate 17 both hit the top 10 best sellers list in 2021. All through this year, the HYBE-Geffen alliance will be releasing new music from BTS, 17 and others. And it's also currently conducting open auditions in the U.S. with Interscope Geffen for its first ever global K-pop girl group, part of the first of its kind joint venture between us both. In Japan, the world's second largest market, we've had both an incredible 2021 and an equally great first quarter of 22, with We believe UMG, now the number one company in terms of market share. Three of our biggest sellers this quarter were from Japanese artists. King & Prince, Fujikaze, and Ado. One of the most successful new Japanese artists to debut in recent years, Ado released a new album earlier this year, which spent two weeks at number one on the Billboard chart in Japan. And Fujikaze's second album... also hit number one on the Billboard chart in Japan in March. Overall, we've seen substantial growth in our Japanese business and are confident that we have the right strategy in place for this continued success. Another point of access and expansion for UMG into high-growth international markets is our Virgin Music label, an artist services business. Juan Gabriel, one of the most recognized and acclaimed Mexican singer-songwriters in the history of Spanish language music, He sold more than 150 million albums and composed more than 1,800 songs. Virgin Music has entered into an exclusive worldwide agreement with Gabriel's estate for his post-2008 catalogue and future posthumous releases. Further, through an extended exclusive global music publishing agreement, Universal Music Publishing will represent Gabriel's entire iconic catalogue, uniting his musical legacy... under the Universal Music roof. And Virgin Music has also announced a multi-layered global partnership with Mushroom, Australia's largest independent label group, to support and distribute Mushroom artists, releases worldwide, outside of Australia and New Zealand. The vision and execution that allows us to amplify the careers of the most iconic artists in the world is not only true for catalogue artists of the past like Juan Gabriel. The biggest artists of today are also leaning in and expanding their relationship with UMG in every region and for this we're particularly proud. Drake is a prime example. At our capital markets day last year, we shared with you our new long-term worldwide partnership with Drake, which expanded from recorded music to music publishing, film, television, and brands. And we couldn't be more excited about what lies ahead for our relationship. The same holds true for other artists who may have begun their relationship with us through a traditional label, publishing deal, or even an artist distribution deal. Over time, as they see the results of what our global teams can deliver and the care with which we treat their art and the artist-first culture that is the driving force behind our joint success, they want to form deeper, broader, and longer-lasting relationships covering other aspects of their careers. They also see the quality of our roster, which includes the most critically acclaimed and commercially successful artists in the world. It's quality that is simply unmatched, It's no wonder that artists including Taylor Swift, U2, The Rolling Stones, ABBA, Neil Diamond, Elton John, Aerosmith, Dre Ibicelli and J Balvin are just a handful of the global stars that have all over time extended and broadened their relationship with us. And here's some exciting news about another one. of these global stars. Just last week we announced the expanded partnership we've entered into with The Weeknd, one of the most commercially successful and critically acclaimed recording artists and songwriters of the last decade. The Weeknd had both 2020 and 2021's biggest selling global singles, the first artist in IFPI history to ever achieve that. Building on the relationship he's had with Republic Records since 2012, the new expanded relationship formed in 2021. Of course, it encompasses future albums and singles, but it also makes our music publishing division the home to his songwriting catalogue and all his future works. In addition, Bravado, our leading brand management and merchandise company, will continue to work closely with The Weeknd to expand and develop global merchandising, branding, e-commerce, and retail licensing opportunities around his future projects and releases. As you can see, all of the portfolios I outlined here are interlinked. This is just a small sample of how we are expanding these portfolios to grow our revenue and bottom line from as many different sources as we're able. Finally, none of this activity would be possible without the thing we believe we do better than anyone else. long-term artist development, and music promotion. I could not close a presentation like this, therefore, without talking about some of this quarter's successes, about which we're obviously very proud. A song called Heatwaves by Glass Animals was the number one song on Spotify's weekly global chart for 10 of the 13 weeks of the first quarter. heat waves also reached number one on the U.S. Billboard charts. That's always a pretty special feat in itself. But what's really special about this achievement is that it hit number one after the longest accident in the history of that chart. That is 59 weeks on the chart before it finally reached the number one slot. That's the UMG difference. Artist development. Glass Animals' global breakthrough did not come overnight. But after almost a decade of UMG's working closely with the band, because we believed in them, from distribution, via label services to a record deal directly with Polydor in the UK and sister company in the US Republic Records to being nominated at this year's Grammys. UMG's relationship with the band has continued to evolve and expand. We recently announced the group had signed a music publishing deal with UMPG as well, bringing their recording and publishing together for the very first time. A great opportunity for developing expansive projects and opportunities moving forward. And here's just a little more of the big things we're proud of. In the US, UMG had the number one album for 11 of the 13 weeks in the first quarter. The Encanto soundtrack for nine weeks, Machine Gun Kelly, and Stray Kids had one week each. And also, the number one single for 10 of those 13 weeks. Five weeks... each for We Don't Talk About Bruno from Encanto and Heatwaves by Glass Animals. In the UK, Dave Singles' Starlight hit number one, where it stayed atop the official singles chart for four straight weeks, a record for a UK rap song. I could go on, but instead of reciting all of the artist success metrics from this quarter, let me conclude by saying that we remain incredibly optimistic about our continued growth. Clearly, there's much enthusiasm about the music industry revenues returning to the peak level of the late 90s. I believe the strength, stability, Predictive and recurring nature and growth prospects of UMG today dwarfs those of previous heights. Fans are not only enjoying more music than ever before, they're also connecting with artists in ways that were completely unimaginable just a few years ago. This translates into expanded music monetization opportunities for UMG and for our artists. As we continue, we work hand in hand with our artists across multiple facets of their careers. We are building creative businesses with them for the long term. Within each of these businesses are multiple revenue streams with different margin profiles and also the potential for further collaboration in new areas. I hope what I've talked about today gives you a sense of the breadth as well as the reasons for the future commercial growth opportunities that lie ahead for UMG, geographic diversity, increased monetization of existing rights, and expanded deepening relationships with the world's most iconic artists of the past and the present, a part of what makes us so optimistic that the future for UMG is incredibly bright. Thank you. I'll now turn it over to Boyd, who can walk you through the results of Q1. Thank you, Boyd.

Thanks, Lucien. And as you said, we are indeed off to a strong start in 2022. The figures are laid out in the press release we just issued, but let me provide some additional color. I'd remind you that any growth rates we discussed today are in constant currency. Total revenue in the quarter grew 16.5% year over year to 2.2 billion euros. With all three of our business segments, recorded music, music publishing and merchandising contributing. Not only did all three segments contribute strong growth, but with the exception of downloads, every major revenue stream throughout our business is growing within those segments. This broad-based growth profile further supports our confidence about the sustainability of the positive direction of our business. To break it out, Recorded music grew 11% with ad supported streaming, subscription, physical and licensing and other revenue all growing well. Subscription and streaming together grew 15%. And as promised, we've broken each We've broken out subscription and streaming separately. And not only that, you can find two years of quarterly historical figures for these categories on our investor relations website. Subscription revenue grew just over 13% and continues to be driven by strong subscriber growth in both developed and developing music markets across a broad array of platform partners. Ad-supported streaming grew 18% compared to the prior year quarter and now accounts for just over a quarter of total streaming and subscription and streaming revenue combined. Ad-supported streaming growth was driven by the continued strength of ad-based monetization, but also by new and enhanced deals in social media, including our new deal with Twitch. Physical revenue continued to grow, up 9% over the prior year quarter. This was driven largely by a strong quarter in Japan, with releases, as Lucien mentioned, from King & Prince, Fujii Kazi, and ADO. But also, we still see continued strong sales of vinyl, with Taylor Swift being a significant contributor. Another area of growth within recorded music was in our license and other revenues, which were up 10%. It was due to growth in synchronization revenues. Turning now to music publishing. Revenue grew 33% over the prior year quarter, as all publishing revenue streams grew. However, let me highlight that part of this growth was due to a change in our revenue recognition accounting policy, from a cash to an accruals basis. Before this change in accounting policy, revenues collected through societies were recognised when the collection society notified UMG of the usage by its end consumer. Now revenue is being recognised based on an estimate of when the usage occurs and the amount of consideration which is probable to be collected. This has changed the timing of revenue recognition across quarters, with benefit in music publishing for the first quarter of 2022 compared to the prior year. While this change elevated our growth rate this quarter, we expect the impact for the full year to be minimal, with the benefit in the first half likely to be offset in the second half of the year. This quarter, we're breaking out our key publishing revenue streams. And again, these historicals are available on our investor relations website. Digital revenue, which is the largest revenue source, grew 45%, thanks to both the continued strength in streaming and subscription growth, as well, as I pointed out, to the accounting policy I just mentioned. Performance revenue grew 17%, largely due to the accounting change, and synchronization revenue grew 29%, as advertising and film and TV revenue both improved. While our catalogue acquisitions, such as Bob Dylan and Sting, among others, are starting to contribute to our music publishing growth, the vast majority of the growth we are seeing is organic. Moving on to merchandising. We saw a strong rebound as concerts have resumed following the COVID stoppage, and thus concert merchandise revenues increased significantly. Our total merchandise business grew 70%, with strength not just in tour-related sales, but also indeed to see a continued focus area for us, but also in retail. As I said last quarter, tour merchandise sales are a 7% to 10% gross margin business for us, below the gross margin of our other businesses. Hence, increased merchandise revenues create a meaningful margin percentage impact. Now turning to EBITDA. Our adjusted EBITDA for the quarter was €455 million, up 14% in constant currency. As our initial listing costs are now behind us and our equity plan, which is up for a shareholder voter at our AGM next week, it is yet to be implemented. Therefore, there is minimal difference between EBITDA and adjusted EBITDA this quarter. In fact, only 1 million euros. Adjusted EBITDA margin was 20.7% compared with 21.9% in the prior quarter. It's worth noting that there was a 20 million euro benefit in the prior year quarter related to the release of historic royalty provisions and an exceptional recovery of artist-related provisions. This was the primary driver of the year-over-year decline in margin. 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. If this benefit were excluded from the prior year figures, adjusted EBITDA would have grown 20% in constant currency and adjusted EBITDA margin would be steady year over year. In addition, the current year margin, as I mentioned before, was impacted by revenue mix, with merchandising revenues growing faster than recorded music and music publishing. Merchandise thus represents a larger share of our total revenue. We continue to encourage you not to look at one quarter in isolation. We continue to expect adjusted EBITDA margin expansion for the year as operating leverage shows up in our results as the year goes on and the revenues build. We remain encouraged by the growth trajectory of the business and excited by the opportunities that lie ahead, not only through positive industry trends, but also by our artist and business development initiatives. Lucy and Michael and I would be happy to take your questions. So operator, perhaps you could open the line for Q&A.