Universal Music Grp U/Adr

Good evening and welcome to Universal Music Group's second quarter and first half earnings call for the period ended June 30, 2026. My name is Gavin and I'll be your conference operator today. Your speakers for today's call will be Lucian Grainge, Chairman and CEO of Universal Music Group and Matt Ellis, Chief Financial Officer. They will be joined during Q&A by Michael Nash, Chief Digital Officer and Boyd Muir, Chief Operating 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 your question, please press star one again. As a reminder, this call is being recorded. Please also let me remind you that management's commentary and responses to questions on today's call may include forward-looking statements, which by their nature are uncertain and outside of the company's control. Although these forward-looking statements are based on management's current expectations and beliefs, actual results may vary in a material way. For a discussion of some of the factors that could cause actual results to differ from expected results, please see the Risk Factors section of UMG's 2025 Annual Report, which is available on the Investor Relations page of UMG's website at universalmusic.com. Management's commentary will also refer to non-IFRS measures on today's call. Reconciliations are available in the Interim Financial Review and Unaudited Condensed Consolidated Interim Financial Statements for the six-month period ended June 30, 2026 on the Investor Relations page of UMG's website. Thank you, Lucian. You may begin your conference.

Thank you, and thank you all for joining us today to discuss our second quarter performance. For the quarter, UMG in its entirety grew total revenue by 13% of which was 6% excluding downtown. Our adjusted EBITDA in its entirety grew by 1.5% to 674 million euros. For the half year, adjusted EPS grew 4%. We recently completed our first 500 million Euro buyback program and declared an interim dividend of 432 million euros. Matt will take you through the numbers in greater detail later. This quarter, there were areas where we performed well and areas where I expect us to improve. While I'm pleased with our strategic progress and aspects of our financial performance, we know where we can accelerate our growth and operate more efficiently. Our confidence starts with the fact that music is the world's most enduring and accessible form of entertainment, and every wave of innovation has expanded its reach as well as its appeal. And this one will too. But what gives me the greatest confidence is the broad strength of UMG. No other company brings together the three things I'm about to describe. Together, They create a competitive advantage that positions us to lead the next phase of growth. I'm very confident in what we're doing and where we're going. First is the strength of our core business. UMG develops, elevates and sustains more of the world's most successful artists and songwriters than anyone else. Second, is our leadership in shaping a more valuable ecosystem through initiatives such as Streaming 2.0. Third, are the significant opportunities still ahead of us from artists and label services and high growth markets to super fans and of course AI. So let me start with how we continue to strengthen our core business. Our chart performance is undeniable. and has regained momentum after a lighter release schedule earlier in the year. We expect that momentum to continue into the second half with new releases from Ariana Grande, Cat's Eye, Sam Smith, Mrs. Green Apple and some other very exciting things yet to be announced. Over the past 10 years, on the IFPI's annual list of the world's best-selling artists, UMG has averaged just under 14 of the top 20. Put a different way, UMG artists have accounted for nearly 70% of the world's most successful stars for the last decade. And if you look across our roster over the past three months, you'll see the range of our results. Here are a few results of those and examples. Sam Fender earned his first number one single in the UK, which was a duet with Olivia Dean, which went on to tie the record for the UK's longest running number one ever. Olivia Rodrigo, Noah Khan and Gracie Abrams all celebrated number one albums in the US with career best first week sales globally. and our success spans every stage of an artist's career, including legends such as Paul McCartney, whose latest album was his 22nd top 10 album in the US, and the Rolling Stones, who hit number one in 11 countries with their 25th studio album. Every new release by a successful artist lists their entire body of work. It also expands opportunities to build lifelong fans across merchandise, Touring, Brand Partnerships, Film, Television, and so on. At the same time, each successful release by an exciting, newly signed artist is building the value of tomorrow's catalogue. And I know our artist roster acts as a magnet for the next generation of talent. We see that all of the time. This virtuous cycle is where we invest for decades. Not just quarters. Next, our leadership is shaping a more valuable music ecosystem. Subscription revenue grew 16.6% or 6.7% excluding downtown. A key component of our Streaming 2.0 strategy is to continue accelerating customer acquisition while striving conversion of free tiers to paid and then adoption of new super premium tiers. Let me remind you, we anticipated the rise of AI slop and we anticipated the potential for fraud. So our 2.0 agreements have built in protections against royalty dilution. This is important work and it will be ongoing. We now have streaming 2.0 agreements with almost all of our major streaming partners including subscription services Spotify, YouTube, Amazon and Deezer. This quarter we announced a new strength and deal with TikTok and today I'm happy to share we've completed our agreement with Pandora, a top 10 partner. I'm pleased that all these partners share our commitment to protecting human artistry. Music platforms should reward creativity and guard against illegally trained AI models pumping AI slop or fraud designed to divert royalties from artists, songwriters, labels, and music publishers. Fans don't want AI slop, and there's no justifiable reason that this content should be algorithmically served to audiences on streaming platforms or siphoning money from human artists. Leading the industry in growing the value of music requires bold decisions, especially in local markets. Streaming 2.0 provides a repeatable framework for doing exactly that. I'll come back to this in a second. Leadership isn't just about strategy. It's about disciplined execution. including our capital allocation. As promised last quarter, we'll take you through our investment returns across ANR advances, catalog and M&A. Our track record from EMI in 2012 and frankly for many years before that to downtown this year and many more demonstrates our ability to create significant upside. Whether we're investing in artists and songwriters, catalogues, emerging markets or the independent services sector, we deploy capital under rigorous financial framework. As a result, since our public listing, we have exceeded our target hurdle rates. We're also sharpening our focus on the highest return investments and improving efficiency across the entire company. The bottom line is that we're determined to translate the strength of our business into stronger earnings per share and stronger free cash flow. That brings us to an update on the four areas where we see significant opportunities to widen our advantage. First, artists and label services. Serving the independent community is central to our strategy. We've been building these capabilities for more than a decade. Just as we do with artists and songwriters, we've invested patiently, developing the business for long-term success. In 2013, we relaunched Caroline, the independent services business of EMI. In 2019, we acquired the remaining 50% of Ingrooves. In 2022, we bought the two together. under the newly launched Virgin Music Group with new leadership. This year, with our acquisition of Downtown, Virgin offers a best-in-class suite of services spanning high-touch support to self-service solutions. With the deal approved and the combined leadership team in place, our focus has been fully on execution, and therefore I'm proud to say that are now the second largest operator in this fast-growing space. And we're seeing extremely encouraging momentum. Downtown's contribution to our revenue this quarter is just the beginning and we expect it to create increasing strategic and financial value with opportunities for greater efficiencies moving forward. Next, high potential markets. While other companies have been pulling back from new frontiers, We've continued investing in the countries, genres, and artists that will produce the next generation of global stars. Last quarter I talked about Indonesia. Today I want to focus on how we're building healthy music markets in the world's two most popular countries, China and India. Both have extraordinary creative talent, vast smartphone adoption, and all the ingredients for long-term growth. Over the past five years, We've transformed our business in China through a multi-label strategy. In 2023, we decided we needed to refresh and strengthen our local management, and we brought in Tim Hsu to lead our Greater China region. And just this past quarter, we signed one of China's biggest stars, Jason Zhang, and acquired Carrier Creative, home of the legendary group Little Tigers and one of Mando Pop's most important catalogs. These investments have strengthened our ability to discover and develop Chinese artists while connecting them to audiences around the world through UMG's global network. At the same time, we help build a more valuable music ecosystem. In 2019, we worked with major Chinese DSPs to put domestic and international music behind the paywall. In close collaboration with our partners, We carefully escalated the staging of this initiative over time until we significantly transformed the market. Many skeptics predicted it would have a negative impact and that we shouldn't do it and that it would affect music consumption and the market development. Exactly the opposite happened. By 2025, China had overtaken Germany to become the world's fourth largest recorded music market Driven by premium subscriptions and new superfan experiences, revenue grew more than 20% year over year, making China the world's fastest growing major music market and the second largest digital market after the US. Now we're applying the lessons we've learned in China to India. Tailored to the diverse and dynamic Indian market, we've also built a multi-label system to cater to the many different genres and Dialex. We've also expanded our capabilities through strategic investments and acquisitions across artist management, live entertainment, film and television and regional repertoire. So important there. Now we're taking the next step. Pleased to announce today that beginning at the end of August, UNG's new releases from major domestic and international artists will be launched exclusively to paid streaming subscribers for their first 72 hours on both global and regional streaming services. After that, they will become available on ad-supported services too. Fans will still have access to the music they love, and artists will see the benefit of improved compensation. China has shown what's possible when healthy music ecosystems take hold. We want India to follow a similar path. and believe many other potential markets will do too. As I've said before, superfans represent one of the greatest opportunities to help artists build longer, more valuable careers. Today's biggest fans want more than just the music. They want community, physical products and deeper relationships with the artists they love. As a result, we're helping grow an entirely new category of superfan experiences. Our direct-to-consumer channels represent up to 50% of first-week physical sales for this quarter's biggest releases. That's one reason we've been reorganizing our merchandise operations, creating an improved platform to serve artists and better capture this growing opportunity. And beyond music itself, We're creating new ways for fans to experience artists and their stories. Sinatra the Musical recently opened in London's West End, while UMG Productions accounted for three of the top four most watched music documentaries in the mid-year rankings. These are films about Noah Khan, Red Hot Chili Peppers, and Paul McCartney on platforms such as Netflix and Amazon. And we have and several other projects, which I'm equally excited about to come further down the pipe. And now, of course, AI. Licensed innovation is replacing unlicensed exploitation. That is our North Star. Our responsible AI strategy is being brought to life through partnerships with startups such as Udeo and Clay, Creative platforms like Splice and Stability and tech giants like NVIDIA. This quarter, Spotify and UMG announced an industry-first framework that will enable fans to use generative AI within Spotify's self-contained environment to create covers and remixes of songs from those artists who've opted in. Industry standards are improving too. with a new industry labeling initiative distinguishing between AI generated and AI assisted tracks, as well as chart eligibility principles requiring AI assisted recordings to be properly authorized, substantially human made, and free from fraud concerns. I've been doing this a long time. Every generation invents new instruments. Great artists show us what's possible with them. AI is a new instrument and not the next artist. I'll conclude with this. Music has never been more global. Artists have never had more ways to reach fans. And fans have never had more possibilities to engage with the artists they love. Those trends are creating extraordinary opportunities. But as I said at the beginning, what gives me the greatest confidence is UMG itself. And on that note, I'd like now to hand over to Matt, who's going to run through in more detail the numbers for you. Thank you.

Thank you. As Lucian has outlined, we're confident that our strategic plan will drive healthy top and bottom line growth over a multi-year horizon. That said, there are aspects of our quarterly results that we're pleased with and other areas that we're not satisfied with and already at work to improve. For the second quarter, total revenue grew 13.3% euro per year to 3.3 billion euros. In recorded music, downtown, physical sales, streaming 2.0 pricing, audiovisual, and live and related all contributed to revenue growth. Downtown contributed €202 million to total revenue. Excluding Downtown, total revenue grew 6.4%, recorded revenue grew a solid 8.7%, music publishing grew 2.7%, and merchandising declined 10.7%. Q2 adjusted EBITDA grew 1.5% to €674 million, with €10 million from Downtown. Excluding downtown, adjusted EBITDA was flat year over year and would have grown 2.2% if not for the settlement with an internet service provider we disclosed in Q2 last year. Excluding downtown, adjusted EBITDA margin declined by 1.3 percentage points to 21.5%. Because of revenue and repertoire mix and recorded music, the settlement I just mentioned, which helped last year's margins by 30 basis points, and a loss in merchandising, which I will cover in more detail later. In addition, we had an increase in corporate overhead that included higher professional legal fees. While we remain on schedule with our 250 million euro cost savings program, some of the cost savings in the first half of this year were reinvested into areas of growing importance to our business, such as AI, for example. For the half year, total revenue grew 10.8% or 5.7% excluding downtown. while adjusted EBITDA grew 2.7% or 1.6% excluding downtown. Operating profit declined 0.8% excluding downtown with EBITDA growth and lower restructuring charges more than offset by an increase in depreciation and amortization and higher integration and business transformation costs. The higher amortization is software related or the higher depreciation is related to real estate projects. adjusted net profit grew 3.9% and adjusted diluted EPS grew by 4.3% to 47 euro cents a share. The decline in operating profit combined with higher interest expense was more than offset by an increase in income from equity affiliates. The higher interest expense is largely the result of higher net debt due to the closing of the downtown acquisition and the implementation of our share buyback program partially offset by the sale of a portion of our Spotify shares. We bought back 485 million euros of shares as part of our first 500 million buyback program, which was completed during July, and 250 million euros from our second 500 million authorization to participate in the shares sold by Pershing Square in June. While the share buybacks will ultimately be primarily funded by the sale of a portion of our Spotify shares, that share sale is still in process. during the first half we sold just under a third of our planned 50% stake sale for gross proceeds of 403 million euros. Now let me turn to the second quarter results from each segment. For the quarter recorded music revenue grew 16.2% and adjusted EBITDA grew 2.8%. Downtown added 162 million euros of revenue and 7 million of EBITDA in the quarter. Excluding the contribution from downtown, recorded music revenue grew 8.7% and adjusted EBITDA grew 1.6% with adjusted EBITDA margin down 1.8 percentage points to 24.9%. EBITDA margin was affected by both revenue and repertoire mix but also by the inclusion last year of the high margin settlement I mentioned. This was booked in other digital revenue and accounted for 31 million euros of revenue and 15 million of EBITDA. The margin effect from revenue mix was due to outside growth in lower margin audiovisual and live and related income, as well as strong physical revenue growth, while the repertoire mix pressure was driven by healthy growth from Virgin Music. Looking further at recorded music revenue, subscription revenue grew 16.6%, or 6.7%, excluding the €116 million contribution from Downtown. This underlying growth reflects 3.5 percentage points of pricing benefits from Streaming 2.0 agreements, partially offset by 1.5 percentage points of headwind from market share. It's worth noting that we recorded improved market share as the quarter progressed and ended the period with good momentum thanks to strong releases from our artists. In addition, the year-over-year growth reflects the normal variability of each quarter. were items such as minimum guarantees, accruals, audits, and catch-up payments can impact year-over-year comparisons. This quarter, these types of movements created a one percentage point headwind to growth. The remainder of the differential compared to first quarter growth was a result of the typical fluctuations in subscriber growth related to timing of promotions and price increases. We do not see any meaningful changes in industry trend lines, and industry subscriber growth remains healthy. In physical, revenue grew 16% in the quarter, with a minimal contribution from downtown, as strength in the US and Europe, led by Olivia Rodrigo and Noah Kahn, was only partially offset by a decline in Japan, which benefited from significant local releases last year. These strong results support our conviction around the growing opportunity to monetize music culture and fandom through vinyl and other collectibles, which remains a key component of our Superman strategy. Turn into music publishing, revenue grew 9.8% in the quarter or 2.7% excluding 40 million euros from downtown. Healthy live performance revenue growth was partially offset by a decline in sync revenue, which was largely related to the timing of deals. Digital revenue growth reflected strength in subscription, partially offset by softer ad-supported streaming, similar to the trends in recorded music. Excluding the 3 million euros contributed by downtown, adjusted EBITDA grew 1.6% and margin was down 20 basis points to 22.6% largely due to higher legal fees. Much of the slowdown in music publishing growth the past three quarters stems of anniversary new deals which we talked about last year or the timing of various industry payouts in addition to the secular slowdown in radio and linear TV performance revenues. And within music publishing digital revenue Ad-supported streaming faces the same pressures we are seeing in the recorded music business. As a result, we expect music publishing to be a mid-single-digit growth business rather than high single-digit for the immediate future. Moving to merchandising and other, which is not impacted by the downtown acquisition. For the quarter, revenue is down 11% due to declines in touring merch and direct-to-consumer sales, both of which were largely related to the timing of artists' touring and album release cycles. Adjusted EBITDA fell 6 million euros year-on-year to a loss of 5 million euros due to a timing-related increase in ANR costs. We are making some structural changes to our merchandising operations, which we believe will produce improved performance over time, and we expect 2027 to show improvement over 2026. Turning now to cash flow, for fiscal year 2026, in response to shareholder feedback, We've revised our free cash flow definition to better represent the cash that's available for strategic investments and capital return. Our new definition is before our discretionary strategic investments in catalog and M&A, which better aligns with how we view the business and will give investors a clearer view of the cash available to fund our long-term growth. A fact sheet with our historical results in this new presentation can be found on our IR website. As you know, our 2023 to 28 guidance framework includes an adjusted EBITDA conversion target. With this new definition, our conversion range remains 60 to 70%, but will now be the conversion from free cash flow, rather than our prior free cash flow before investments entry. You'll notice that these numbers are very similar. After the definition change, our first half 25 free cash flow increased from an outflow of 179 million euros under the prior definition to an inflow of 163 million euros under the new definition. In the first half of 2026, net cash provided by operating activities before income tax amounted to 408 million euros compared to 488 million in the first half of 2025. This included net royalty advance payments of 292 million euros down from 377 million in the first half of last year due to the timing of deals and a higher recruitment. The decline in net cash provided by operating activities is largely the result of unfavorable working capital movement with a higher share of sales from our distribution business and payment of certain live event costs accrued last year. CapEx rose to 44 million euros and 23 million in the prior year. This was mainly due to the real estate projects we discussed on our 2025 year-end earnings call and we expect the spend to pick up in the second half of the year. Free cash flow amounted to 24 million euros compared to 163 million in the first half of last year. This decline was primarily the result of the working capital movement. As usual, we expect free cash flow in the second half of the year to be stronger than the first half. As Lucian mentioned in his remarks, I'd like to provide our shareholders more color on the performance of our investment framework in recent years. It's worth distinguishing between the two types of capital of work in our business. because they sit on different sides of our new free cash flow definition. First is the recurring investment required to operate and organically grow the business, principally the advances we make to artists, songwriters, and partners, which are recouped as royalties are earned. We view these advances as working capital, short-term investments that drive revenue and scale the growth of our business. And second is the investments our free cash flow enables us to make under our capital allocation framework across catalog acquisitions, core M&A, and other M&A investments, and also to return cash to shareholders. Of this discretionary and opportunistic investment, from 2022 to 2025, approximately 60% went to catalog, 20% to core M&A, and 20% to other M&A, while we returned $3.6 billion to shareholders in the form of dividends. And additionally, in 2026, we've authorized and a billion euros in share buybacks to enhance our investor return profile. We apply a disciplined risk-adjusted return space framework to both the advances and the discretionary investments we make with each project assessed against its appropriate hurdle rate and time horizon. Let me first walk you through the framework and then I will discuss our actual returns in these areas since our public listing. I'll start with advances. We underwrite advances at a project level with risk-adjusted RR hurdle rates based on artist stature, deal structure, and terms. We target overall portfolio pre-tax returns of at least 15%, with project level hurdle rates ranging from 10% to 20% based on risk. For example, we use the lower end of those hurdle rates for proven superstars and higher hurdle rates for developing artists. The secondary of our framework relates to catalog acquisitions. These are investments in recording, and Music Publishing rights with predictable long-term cash flows. Our catalog deals target pre-tax IRR hurdle rates of at least 10%, improving as we further monetize the assets. Our industry-leading global reach across marketing, sync, audiovisual and branded content enables us to amplify the rights we acquire and to grow their income. Our partnership with Cord further expands our capacity to invest in this area. Cord is designed to attract long-term institutional capital by combining UMG's operational expertise with an asset class that offers investors stable, long duration cash flows, enabling the vehicle to continuously grow to acquisition capacity. Core targets mid-teens returns and has invested over $2.6 billion in catalog acquisitions that are then managed and cultivated by UMG. Third, our core M&A acquisitions are focused on scaling attractive businesses, expanding into new geographies, and adding strategic capabilities. These investments include the purchase of consolidated companies, equity affiliates, or financial assets. We deployed about €530 million in this core M&A category from 2022 to 2025. For example, in Maven and Piast. Our target IRR hurdle rates are at least 10% to 20% for these investments, depending on factors such as geography, revenue concentration, business maturity, and integration risk. And finally, other M&A represents venture-like investments in innovative adjacent businesses, as well as other less typical investments that are complementary to our core business. Our evaluations of these opportunities reflect broader benefits to UMG alongside near-term financial return. Total rates on these investments have a broad range of 10 to 25 plus percent depending on risk. Now let me turn to the actual performance of our investments since our listing. The results reinforce our conviction in our approach and our capabilities of our team to successfully invest and generate attractive returns. Our investments in recorded music and publishing advances have generated blended IRRs in the high teens. which is above our 15% portfolio target. On catalog acquisitions, we are acquiring assets at an average entry multiple of 16.6 times EBITDA with run rate EBITDA multiples improving to approximately 13 times, reflecting our expertise underwriting and the additional value we capture through active management. And touching on Cord, since our initial investment in early 2024, we have invested a total of 342 million euros booked in investments in equity affiliates. This includes our upfront payments of €238 million to buy into the pre-existing fund, as well as an additional €104 million we invested in 2025 to fund incremental catalogue purchases and maintain our share. Cord's portfolio has delivered mid-teen returns in line with their targets, while generating additional returns to UMG as manager of those rights. Turn into core M&A, our investments in this category are generated blended IRRs in the mid to high teens in line with our objectives. The category we call other M&A primarily relates to two investments, our stake in the entity that acquired the Capital Records Tower in LA and our minority investment in Complex Network. The Capital Tower is an iconic cultural landmark with strategic value to UMG. This transaction is captured in investments because of its deal structure. They should be viewed more as capex for a long-lived real estate asset that supports our operations. And our stake in Complex Network is a growth equity investment tied to the opportunity we see in the SuperFan ecosystem. These two transactions were unique and going forward our investments in other M&A are expected to moderate. Since the listing, the vast majority of our growth has been organic. Between 2021 and 2025, we have grown EBITDA at a 12% CAGR, including organic EBITDA growing at 11% and acquisitions contributing one percentage point of growth. And the acquisition benefit to our revenue growth CAGR is less than 1%. Most of the inorganic contribution has come from catalogue acquisitions. We expect our M&A investments to contribute over time. Additionally, a significant portion of our investments are not consolidated and the impact is below EBITDA with CORD being the largest example. In summary, we are fortunate to have an abundance of attractive investment opportunities and we take a financially disciplined and highly selective approach consistent with our capital allocation framework. We will continue to invest in areas where we see our greatest comparative advantages and attractive rates of return. With that, Lucian, Boyd Muir, Michael Nash and I will now take your questions. Operator, please open the line for Q&A.