Universal Music Grp U/Adr

Good evening and welcome to Universal Music Group's third quarter earnings call for the period ended September 30th, 2023. 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 one on your telephone keypad. If you would like to withdraw a question, please press star followed by two. Please let me remind you that management's commentary and responses to questions on today's call may include forward-looking statements, which by their nature are uncertain and outside of the company's control. Although these forward-looking statements are based on management's current expectations and beliefs, actual results may vary in a material way. For a discussion of some of the factors that could cause actual results to differ from expected results, please see the risk factors section of UMD's 2022 annual report, which is available on the investor relations page of UMD's 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, and thank you all for joining us today. I'm pleased and proud to report that Universal Music Group's third quarter was our ninth consecutive quarter of strong growth since becoming a standalone public company just over two years ago. Revenue was up. 10% in constant currency, and adjusted EBITDA increased by 11%. These results demonstrate that our plan to create and assemble a broad-based and strategically integrated portfolio of businesses is delivering both commercial and creative success. Expanding our revenue streams positions us to navigate the inevitable ebbs and flows in any particular business, as well as to seize opportunities in new and emerging categories Our approach produces consistent top and bottom line growth and has done so in light of the highly complex macroeconomic environment and the ever-changing shifts in both technology and media consumption. What today's results don't yet demonstrate, but future ones will, is how our leadership on issues such as AI and streaming economics will benefit not only UMG, and our artists, but the entire music ecosystem. So before Boyd presents a more detailed picture of the numbers, I'd like to talk about five key areas of our business strategy we're especially proud of. The artist-centric approach to streaming model innovation we are fostering with the DSPs. The positive steps we're taking, both in utilizing AI and its monetization, as well as in protecting against its dangers recent developments in our global diversification plans and the expansion of our best-in-class distribution partnerships and last but definitely not least of a continued remarkable success of our artists let me begin with streaming back in january i talked about how the streaming model needed updating to become more artist-centric i outlined some of the core principles that we would use to guide our work with platforms to strengthen the artist-fan relationship and better reward artists for the fan engagement they drive. And I stressed how important it is to address fraud and the oversupply of content that's drowning out the real music and real artists that fans actually want to hear. Last month, after months of collaboration, Deezer announced the launch of the first artist-centric model. This new model honors real artists by better rewarding them for music that attracts and engages fans, and by protecting against bad actors who deprive artists of their compensation. Based on its own in-depth data analysis, Deezer is integrating several major enhancements to its service that will, one, boost streams of music by what they define as professional artists, as well as the songs that fans actively engage with. Two, replace noise, such as non-artist content. And three, implement a much stricter fraud detection system. In the words of one prominent independent label executive, for labels who invest every year relentlessly in new talent, this has to be good news. But this important step forward is only the beginning of this critical evolution in streaming. We're determined to bring an artist-centric approach to every DSP. This initiative will achieve many goals. It will support all artists regardless of the scale at which they're operating and regardless of the stage of their careers. It will enhance artist discovery and it will also significantly benefit the DSPs themselves by returning them to their core mission of bringing great music to fans and in the process increasing subscriber acquisition and retention as well as of course reducing churn whilst reducing costs associated with valueless content volume we will have more announcements on this front in the near future as we work with other dsp partners next ai last quarter i said we'd soon have more to say about the commercial and creative opportunities that AI presents. I meant what I said. We subsequently announced that YouTube and UMG have agreed to partner in developing a commercially viable AI component within YouTube's music and video ecosystem. As a further expansion of our artist-centric strategy, This historic collaboration underscores our belief that the best way to ensure responsible AI development is through market-led solutions. Specifically, we agreed that YouTube will embrace a set of AI principles that empower human creativity and embrace artists' interests. And a new AI music incubator co-founded alongside UMG artists and songwriters that will play a key role in the development of AI-related musical tools and products. Let me mention just one important aspect of this historic initiative. Unlike past instances when new technologies were released into the world and the music community was left to figure out how to develop a business model that would protect artists' rights and compensation, here, thanks to our close relationship with YouTube, We're collaborating on opportunities and solutions and placing artists at the forefront. We will have more to say in the near future as our ongoing work with YouTube develops business models and products that further unlock the creative and commercial power of AI. Also, just last week, we announced an alliance with BandLab, the world's largest social music creation platform. The alliance will advance our shared commitment to the ethical use of AI and the protection of artists and songwriters. As our AI strategy progresses, you'll see more companies committed to responsible AI development working with us on solutions that unlock creativity, explore new commercial opportunities for us, and compensate artists appropriately. The third key area we're especially proud of is the accelerating expansion of our global presence. As I discussed last quarter, we're accomplishing this by signing and developing local artists outside of the established music market, providing local labels and entrepreneurs with global promotion, distribution, and a full suite of artist services. And, of course, M&A. that is acquiring local labels, catalogues and artist services businesses. Here's one example of a recent acquisition in the Middle East and North Africa, where the recorded music market grew 24% in 2022. To complement our current service offering and footprint in the MENA region, in August we announced the acquisition of Chewbacca Music, a UAE-based music company, Chewbacca has agreements with more than 150 independent artists and local labels and specializes in digital distribution, marketing, publishing, as well as artist servicing. They will become part of UMG's Virgin Music Group, working closely with the local Virgin and UMG teams in MENA and around the world. With Chewbacca's unparalleled regional expertise and Virgin Music Group's creative network and global footprints, The group will be uniquely positioned to reach and build the largest possible audiences for talent from the region. Along with our M&A strategy, we're strengthening our management teams in fast-growing markets. Last month, for example, we appointed Tim Hsu as Chairman and CEO of Universal Music Greater China, which includes our operations in mainland China, Hong Kong, as well as Taiwan. A highly respected industry executive, Tim has had three decades of success in breaking Chinese artists and talents across the region, most recently at Taihe Music Group, China's leading independent music company. And we've also accelerated our artist signings in China. Two prime examples, Republic Records China has signed Chinese pop icon Hannah Rebecca Jim, and Universal Music Publishing China has signed a global publishing deal with China Chinese singer-songwriter Tia Ray, the first and only Chinese singer so far to reach the IFPI's top 10 global singles chart. UNG has the world's leading capabilities in global distribution, best-in-class technology, and a flexible infrastructure to allow us to easily expand our distribution partnerships. And that's the fourth area I want to highlight today. Our global distribution business, in particular, our newly announced relationship with BMG. We're delighted that BMG will be moving the distribution physical formats to UMG, commencing in the second quarter of next year, 2024. This exciting development marks the start of potential future collaborations between the two companies. Fifth and finally, but always foremost, there are our artists, our brilliantly creative and enormously popular artists. I'd be remiss if I didn't talk just about a few of the incredible success stories so many UMG artists have all had around the world during the quarter. For example, Olivia Rodrigo's album Guts, which debuted at number one in the US, UK, Germany, Australia, Sweden, Norway, Spain, The list just goes on and on and on. In the US, she became the first female artist whose first and second albums debuted at the top of the album charts since Ariana Grande did nine years ago. In the UK, in its debut week, Guts outsold the rest of the top ten albums combined and is the country's most streamed album of the year so far. In September, Olivia's opening single Vampire returned to the number one spot in the US and became her third number one song in Europe. But Korean quintet New Jeans scored their first number one on the US Billboard album chart with their second EP, Get Up. Interestingly, roughly 80% of first week sales were actually physical CDs, a phenomenal attributable to superfan-focused collectible packaging with 14 different iterations individualized to members of the group. with branded merchandise including lyric books, photo books, and cards. And on Billboard's Hot Latin Songs chart, Karol G made history as the woman with the most interest since the chart debuted almost 40 years ago. Her fifth studio album landed nine debuts on the chart, giving her a total of 60 chart appearances. So far, to top it off, she won five awards at the 2023 Billboard Latin Music Awards, and brilliantly, that included Album of the Year. I'll mention just one more artist's success, someone who you may have heard of recently, Taylor Swift. Taylor's Speak Now, her version, launched with the year's biggest week in the US for any album. she became the first woman in history to have four albums in the top 10 at the same time. The album hit number one in the UK, where Taylor became the first artist in 59 years to achieve six studio albums in the top 10 simultaneously. In Australia, where the album also hit number one, she had all five of the top five albums in the country. Other number one countries were Belgium, Canada, Ireland, Netherlands, New Zealand, and Spain. On the US singles chart, Taylor became the first artist since the Beatles to have singles from three separate albums in the top 10 at any time. She is a phenomenon. This level of performance can only really be described as truly astonishing. Astonishing, I suppose, is an understatement when it comes to describing Taylor's breathtaking talent, popularity, and career. And of course, her version of 1989 comes out tomorrow. Continuous worldwide phenomenal artist successes like these are one reason Universal Music keeps attracting new talent to its roster. And new talent is indispensable for our future growth and success. Our relentless leadership in pursuing progress and evolution for the industry is yet another reason why we've become such a powerful magnet for label and artist partners alike. It's how we keep producing, and we will keep producing, remarkable results like those that we're reporting today. Now, before I hand it over to Boyd, I would be remiss if I didn't mention the historic event that occurred earlier this morning. And no, I'm not talking just about our earnings. I'm talking about the announcement of our forthcoming release of the last Beatles song ever recorded. The song, titled Now and Then, written and sung by John Lennon and worked on by Paul McCartney, George Harrison, and Ringo, will have its global premiere on November the 2nd. The fact that more than four decades after its original recording, we can use the latest technology to bring this recording to fans everywhere is truly remarkable and something that we're very proud of. And on that basis, Boyd, I'd like to hand over to you. Thank you.

Thank you, Lucien. I'm pleased to be reporting on another quarter of solid revenue and adjusted EBITDA growth at UMG. As usual, all of the growth figures I'll discuss today will be in constant currency. While I recognize one-time items complicate modeling, they are a reality of our business And there are a couple that I need to mention regarding this quarter and the prior year. As we previewed last quarter, the third quarter of 2023 includes an accrual for a catch-up payment from certain DSPs related to the Copyright Royalty Board's Phono Records III ruling in Music Publishing. The accrual is larger than we had estimated when we spoke last quarter and amounted to 53 million euros in revenue and 11 million in EBITDA. Note that the cash receipt for this accrual is not expected until the back end of 2024. As disclosed last year, the third quarter of 2022 included a recorded music settlement from a copyright infringement lawsuit with an internet service provider which was included in in other digital and amounted to 71 million euros in revenue and 52 million in ebitda i will present figures both including and adjusting for these items in my remarks and all the details are also laid out in today's press release UMG's revenue for the quarter of €2.75 billion grew 10% and adjusted EBITDA of €581 million grew 11%, leading to margin expansion of 0.3 percentage points. However, excluding the one-time items I just mentioned, revenue grew 11% and adjusted EBITDA grew 20%, driving margin expansion of 1.8 percentage points on an underlying basis. I'll come back to this in a moment. Our revenue growth continues to be broad-based with an expanding array of opportunities ahead of us. This drives our confidence in the outlook for the business as we play an increasingly important role to artists at each stage of their career. In the third quarter, recorded music revenue grew 5%, but underlying growth was actually 9%, excluding last year's legal settlement. Subscription revenue grew 13%, driven primarily by the continued solid growth in the number of subscribers. Subscription revenue benefited from the same price increases in the third quarter that benefited the second quarter, including those from Apple and Amazon. It's worth pointing out that our third quarter did not benefit from the recent Spotify price increase. We expect the fourth quarter to benefit from the Spotify and YouTube music price increases. As a reminder, each of these services raise prices in certain markets and on certain plans, not across all subscribers. In particular, with regard to YouTube, the price increases were announced for the US to start with, followed by several other markets a few weeks later. But YouTube has a particularly global subscriber base, so the benefit will initially be more limited. In the third quarter, ad-supported streaming had a similar growth rate to Q2, up 5% again. Right now, what we are seeing in our ad-funded streaming revenue is that the recovery is not uniform across all partners nor all markets. In addition, our ad-supported streaming revenue comes from a mix of both fixed and variable deal structures. So the results in any given quarter are not solely a reflection of trends in the advertising market. We remain cautious on the level of growth in ad-supported streaming in the upcoming quarters. We do, however, continue to see opportunities for improved deal terms and product innovation driving higher levels of growth in this business over the medium term. Physical revenue grew 20%, driven by strong vinyl sales in both the US and in Europe. Physical revenues in Japan also grew across all formats, including CDs, DVDs, and vinyl. Physical sales came from artists, including Taylor Swift, Seventeen, New Jeans, and Olivia Rodrigo, to name a few. License and other revenue declined 7% as it faced a difficult comparison against a prior year quarter that grew 30% due to live touring and stage productions, activities where we participate in certain markets. Licensing revenue in itself continued to grow in the quarter. Download and other revenue declined 53%. primarily due to the legal settlement included in last year's figure, as well as the continued format shift away from downloads. Moving on to music publishing. Revenue grew 25% in the quarter and 11% when excluding the Phono Records 3 catch-up accrual. Within music publishing, digital revenue grew 34% and grew 10% excluding the accrual, driven primarily by the growth of streaming and subscription. Performance revenue grew 22%, reflecting the continued COVID recovery, particularly in Europe and in Asia, and synchronization revenue grew 4%. In merchandising and other, Revenue increased 28%, driven primarily by the growth in direct-to-consumer sales. Touring revenue also increased thanks to higher activity in the US and the UK, while retail revenues declined. As I mentioned at the start of my remarks, third quarter adjusted EBITDA grew 11%. but grew 20%, excluding the one-time items in both years. Also excluding these items, adjusted EBITDA margin improved 1.8 percentage points to 21.1%, compared to 19.3% in the third quarter of 2022. Part of this year-over-year margin improvement is related to an easier comparison. As we discussed on last year's third quarter call, ANR expenses were elevated in the third quarter of 2022 due to timing. While the incremental ANR expense last year was 40 million euros, it would be inaccurate to consider this as a one time, as the amount for the nine months and for the year were not unusual. In addition to the easier comparison on ANR expense, margin expansion was driven by the revenue growth and operating leverage, as well as by cash compensation savings of €21 million related to our equity plan implementation. This was partially offset by revenue mix, as revenues in the third quarter of 2023 were more heavily weighted towards merchandising and physical, which carry a lower EBITDA margin than digital sales. We saw strong growth in line with our expectations across all of our segments and especially strong growth that exceeded our expectations on our lower margin physical and merchandising businesses. That drove strong EBITDA growth, but limited the amount of margin expansion across the entire business. Even with the mixed impact from higher physical and merchandise revenue growth, we expect to meet our guidance for more than one point of adjusted EBITDA margin expansion in 2023. Moving on to share-based compensation expense. The total impact was 103 million euros in the quarter, compared to 14 million euros during the third quarter of 2022. We now expect our share-based compensation for 2023 to be just over 550 million euros. Below the 630 million euros we anticipated when we announced the details of our equity plan earlier this year. About half of these savings are permanent, while the other half are timing related with the cost likely coming in 2024. Lastly, we are currently conducting a careful review of our cost base, which we will complete over the coming months, and we will update you when appropriate about an anticipated cost savings program to commence in 2024. We remain focused and optimistic as we continue to execute on the growth prospects that lie ahead for UMG. We see enormous opportunity for value creation, both for our artists and for the company, as we advance our artist-centric initiatives and work to further capture the value of the engagement being driven by our unparalleled roster of artists and songwriters. Thank you. Lucy and Michael and I will now take your questions. Operator, please open the line for Q&A.