Universal Music Grp U/Adr

Good evening and welcome to Universal Music Group's third quarter earnings call for the period ended September 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 being 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 headphone keypad. If you would like to explore your question, please press star 1 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 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 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, Lucian. You now begin your conference.

Thank you, and good morning to everyone. If I'm a little congested, I apologize. I got a cold this morning, but not important. Let me begin with a quarter. UNG's total revenue grew by 12%. Core revenue grew 5%, excluding downtown. Our margins increased by 40 basis points, driving adjusted EBITDA growth of 7% to €729 million. Subscription streaming grew 9.5% and 19.2%, including downtown. Downtown is the most important acquisition UMG has made since VMI. This was a timely, strategic move and we are only just beginning to realise the full benefits. The numbers are already proving why we made this deal and we continue to capture upside in terms of additional capabilities, revenues and synergies. While quarterly results provide a useful snapshot, our focus is to keep evolving how we serve our artists and songwriters whilst delivering sustained growth and profitability. Making great music is emotional, instinctive, as well as unpredictable. Building lasting careers takes discipline, investment, and a long-term view. But in another way, success takes a combination of EQ to understand artistry, and IQ to make sound commercial decisions. That balance matters even more in the age of AI. Generating tracks may be easier, but great art and great music cannot be made to order. Building a career people care about matters more than ever. Artists need a partner who helps them realize their vision, grow a fan base, and deliver commercial opportunities. and the vast majority of the music ecosystem value comes from career artists. We are building from a position of strength. The industry is healthy and growing. New fans, new markets and new ways to serve artists keep expanding the possibilities. That makes us more ambitious, not more comfortable. Let me start with the foundation of everything we do, creative success. Achieving it consistently is the hardest thing in music. It is also a defining strength of UMG. Year-to-date in the US, the world's largest music market, UMG artists hold seven of the top ten albums, including four of the top five. This quarter, Taylor Swift returned to number one, with Life of a Showgirl, The Encore, taking her to a historic 100 career Weeks at the top of the Billboard 200, making her the first solo artist to reach triple digits. Ariana Grande earned her seventh number one album with Petal, while Karol G secured her fifth number one on the Top Latin album chart. At the same time, we're building a new generation of global stars, including Olivia Rodrigo, Niall Khan, More Than More Than, and Olivia Deen, all of whom delivered strong carryover performance this quarter. and great music as we know is Evergreen. Fifteen years after its release, Katy Perry's The One That Got Away was named TikTok's global song of the summer. Charms capture a moment. We helped turn that moment into deeper fan engagement and greater value while building the catalogue of tomorrow. That is why sustained investment in artist development is the lifeblood of our business It drives future returns, powers the growth of streaming services, and gives UMG a stronger voice in how the economics around the music evolve. Streaming has many years of growth ahead. The model is working, but it can work better. At our Capital Markets Day two years ago in 2024, we projected that global paid music subscriptions would hit one billion. By the end of 28, we're on track to exceed that target. Industry forecasts now point to 1.5 billion paid subscribers by 2035. Growth will come from both more subscribers and more value per subscriber. In India, for example, UMG launched premium early access this quarter. Giving paying subscribers access to selected releases 72 hours before they've reached ad-supported services. That is something we pioneered. We will pursue more market-specific innovation like this, where music engagement is high, but paid adoption remains low. There is also room to earn more by giving fans more differentiated subscriptions, better experiences, and benefits they value. That is one component of Streaming 2.0. Another is integrity. Making sure compensation morally fully reflects the value artists and their music bring to the platforms. Let me say more about what that means. When we launched our artist-centric initiative in 2023, we were the first company to speak out about the proliferation of lower quality functional content but in some cases, barely passes for music. We saw the wave of AI slot heading towards the music ecosystem. In early 2025, roughly 10,000 AI generated tracks were arriving each day. Today, more than 90,000 fully AI generated tracks are uploaded daily. The volume is growing faster than the safeguards. We have made real progress. We introduce first-of-their-kind anti-dilution protections in our platform agreements. We are helping establish AI labeling and chart standards for licensed human-led recordings. We helped launch the Screening Integrity Initiative and have taken legal action against bad actors while supporting legislation that protects artists and their livelihoods. Many of our DSP partners are also taking meaningful steps, and we welcome that progress, but the scale of the problem is still outpacing the guardrails. Let me illustrate this with an example. Look at the blues charts. The blues represents only a tiny fraction of total music consumption, but its cultural and historical importance is enormous. On some major DSPs, blues charts, As many as five of the top ten albums are attributed to AI-generated acts, without clear labeling or disclosure. The blues is a north star of authenticity in music, born from deeply personal human experience, yet its charts are being polluted by AI content that synthetically imitates that emotional impact. Let me be clear, this isn't an argument against AI. It's an argument for licensed innovation, transparency, and fair economics. Because this is not harmless clutter. AI slot degrades the fan experience and diverts value from real artists. It says no one. Not artists, platforms, or consumers. We know how to build win-win agreements with our DSP partners. and the shared problem now demands shared action. We will enforce our contractual protections and insist on clearer labeling across the ecosystem. Our research is clear. Fans do not want undisclosed AI slob in their music experience. There is also plenty of evidence that some of that consumption is fraudulent. That raises the basic question, What does market share mean when AI slop and music by real artists are counted as the equivalent? The uniform application of pro rata payments makes the problem worse. By treating AI slop as the same as the greatest songs in the world by some of the greatest artists, it incentivizes industrial-scale content production and dilutes the compensation earned by real talent. Put plainly, Unethically generated AI tracks should never be compensated on the same basis as music that creates real and lasting demand. And why would a music service need more to host them? Career artists and songwriters create the vast majority of the music ecosystem's value. They build lasting connections with fans. They bring subscribers to streaming services and give them a reason to stay. That demand extends beyond streams into concert tickets, vinyl CDs, merchandise, and committed fan communities. No company has done more to develop and sustain those careers than UMG. We've represented nearly 70% of the world's best-selling artists over the last decade. And UMG artists produce nearly half of the 900 music tracks streamed more than 100 million times in the US just last year. Streaming services depend on those artists and the music that attracts subscribers and keeps them engaged. That's why the structure of our BSD agreements has to change so the compensation better reflects the value different content creates. The larger opportunity is still ahead. More subscribers, more value per subscriber, A better fan experience and economics that reward the artists and music that creates lasting demand. And the opportunity expands beyond streaming. We also see opportunities for long-term growth by doing more for more artists from expanding our menu of label services and growing our geographic reach to building additional capabilities in direct-to-consumer sales and merchandise to create new life experiences and super-fan products. These strategies are interconnected. They do build on one another. Virgin Music Group is already the industry's second-largest artist and label services company. Our ambition is to become the leading partner to independent labels, entrepreneurs and DIY artists, giving them a way to work with Virgin on terms that fit their ambitions. That broader reach gives us a sharper view of where talent and demand are emerging, especially in fast-growing markets where large audiences and dynamic local music companies are not yet fully reflected in market value. As that network grows, so does our ability to deepen fan relationships. For example, our recent agreement with Apple Corp Expand merchandise licensing and e-commerce around the Beatles. Our partnership with a tech startup, Hulk, gives fans a licensed way to remix and share the music they love. With attribution and compensation built in, different partnerships, same goal, help artists turn attention into participation, community, and long-term value. can extend that further, giving artists and fans new ways to create and participate. Here again, two approaches strengthen each other. Protect human artistry and embrace innovation. Our partnership with Eleven Labs is the latest step in a broader artist-centric AI strategy. Eleven Labs, Spotify Audio and Play are developing new licensed forms of fan creativity. Stability A and Splice are developing professional tools for artists. and NVIDIA is helping us advance music discovery and engagement. Across these partnerships, the standards are the same. Artists and songwriters opt in whenever their voice, image, name and likeness, lyrics or compositions are used and the creative community shares fairly in the value that's created. We are moving from principles to products and from products to revenue. We expect these partnerships to begin generating incremental revenue in fiscal 27. More artists, more markets, new fandom, new tools for creativity. We're still early. The economics will compound as these opportunities connect. We will pursue them all with discipline. Each must address a real need for artists, provide a best-in-class solution, and earn an attractive return on the capital we commit. To capture those opportunities, UMG itself must keep evolving. We will continue to reduce costs, operate more efficiently, and improve margins. That is a clear financial objective. At the same time, we will sustain what drives this business. Investment in great artists, songwriters, and catalogs. An enhanced operating model will also give us more capacity to invest behind greater success and the next wave A wave of growth. When we announced our strategic organisation redesign in February of 24, we committed to delivering 250 million euros in annual run rate savings by the end of 2026. We also committed to strengthening what makes UMD distinctive. Our leadership in artist development, the individual creative identities of our labels that help us to track the widest range of the world's most successful artists, and the entrepreneurial culture that drives that innovation, that program is now complete. You can see the results in our cost structure. Excluding share-based compensation, SG&A as a share of revenue has declined by more than two percentage points since we've begun the reliance, even after reinvesting some of those savings in the business as we discussed last quarter. Over the same period, We paid a growing share of revenue to artists, songwriters and label partners. This increase reflects the broader ways in which we work with artists and the associated deal structures, as well as the growth of our artists and label services business, including Virgin, which provide a different range of services and pays a higher share of revenue back to artists and label partners by design. Looking ahead, our continued transformation will allow us to expand our margins by levering technology to redesign processes and bring together non-creative functions currently spread across labels and regions. That work is already underway. Our approach is straightforward. Strengthen what makes UMG distinctive, simplify where a scale improves service and lowest cost, and invest where we can create the most value and build durable advantage. That means keeping creative judgment local, leveraging UMG's global reach, and empowering our best duplicators. Frank Breedman is one example. He's led our business across Central Europe and the Nordics for many years, helping artists build long-term careers through creative leadership, commercial judgment, technological expertise, and respect for each individual local culture. That track record is why I ask them to take on a broader group of markets. He now oversees Canada, Australia, and New Zealand, along with the majority of Europe. His expanded remit will bring these markets closer together, speed collaboration, and help more artists reach audiences across borders while preserving what makes each market distinct. Scale matters when it makes artists, songwriters, and local teams stronger. That is why we are adding company-wide expertise in data, AI, operations, and Partnerships. Anna Propperol, our Chief Data Officer, joined from the New York Times and recruited Oscar Selmer, our Senior Vice President of Applied AI and Machine Learning. Oscar brings experience in music discovery and personalization, including at Spotify. Together, they are building a central team to sharpen audience insight and improve talent discovery tools. Tseyin Foo, our President of Global Supply Chain, brings experience from Nike and Skechers. She's strengthening execution across our digital, physical, direct-to-consumer and merchandise operations. Libby Bush, another, joins us next month from CAA as President of Global Brands and Commercial Partnerships. Her remit includes improving economics and add supportive music by connecting UMG's premium artist content, fan insight, and global brand relationships. The goal is simple. Better insight, faster execution, and more opportunity. Through all of it, music and artist development remain our center of gravity. I'm committed to extending our leadership in the years ahead by continuing to invest and develop career artists and securing win-win partnerships with BSBs that properly reward their work and ours. With that in mind, we've begun the next phase of our transformation, which will run through to the end of 2028. We'll build on the organizational redesign and look closely at how we negotiate, price and execute platform agreements, how our central commercial organization operates, how our labels and international business is structured, and how we use data across the entire company. We'll share more about its scope and financial objectives when we report our full year results. Thank you for that and now Matt, I'm going to turn it over to you. Thank you Lucian.

We're encouraged by the progress we've made in several areas of the business this quarter, while recognising that there is still important work ahead of us. As Lucian discussed, we recently completed the actions that will pass our €250 million organisational redesign. We know there are additional opportunities to improve efficiency and strengthen our financial performance, and the next phase of this work to build the UMG of the future will focus on both further improving our cost structure and accelerating growth across the business. We look forward to sharing more details with you soon. For now, let me walk you through the quarter. As in prior quarters, I'll discuss our results on a constant currency basis and I'll also provide the underlying performance excluding the contribution from Downtown. The integration of Downtown is well underway and it's contributing to our business as we expected it would when we agreed to deal. We passed an important milestone in the integration a few weeks ago and our Virgin and Downtown employees are now working within the same people systems. We have already delivered the initial synergies target on a run rate basis and the team sees additional opportunities. Our token revenue for the quarter grew 11.7% euro per year to 3.4 billion euros. Downtown contributed €195 million of revenue during the quarter. Excluding Downtown, revenue grew 5.3%, driven by healthy growth in recorded music. Adjusted EBITDA grew 9.0% to €729 million. Downtown contributed €13 million of adjusted EBITDA during the quarter. Excluding Downtown, adjusted EBITDA grew 7.0%. with adjusted EBITDA margin improving 40 basis points to 22.4%, driven by margin expansion in recorded music. Let me turn to our segment results. Recorded music revenue grew 14.7% for the quarter, with downtown contributing €162 million. Excluding downtown, recorded music revenue increased 7.4% year over year. Recorded music adjusted EBITDA increased 14.9% and grew 12.7% excluding downtown. Margin expanded 1.2 percentage points to 26.2%. The benefit of revenue growth and lower relative ANR, as well as improved cost discipline across marketing and overhead, more than offset pressure from revenue and repertoire mix. Looking further at recorded music, Year-over-year subscription revenue growth accelerated compared to the first half of the year, up 19.2%, or 9.5% excluding downtown. Growth continued to benefit from streaming 2.0 pricing initiatives, which contributed slightly more than the 3.5 percentage points we saw in Q2, thanks to a partial benefit from Apple's recent retail price increase. Market share remained a headwind, although the drag moderated this quarter. The remainder of the growth reflects the underlying healthy subscription performance of the industry and other recurring items such as minimum guarantees, orders, and accruals. Ad-supported streaming revenue increased 13.5%, or 4.7% excluding downtown, with growth across several of our key video and digital partners. Better per-play rates more than offset the ongoing shift in consumption to short-form platforms. Physical revenue. which had no contribution from Downtown, continued to be strong, growing 17.4%. Performance was broad-based across North America, Japan, and Europe, and across Frontline and Catalog. Releases from Mrs. Greenapple, Stray Kids, Olivia Rodrigo, The Beatles, Rolling Stones, and Ariana Grande all performed strongly, and more than offset the pre-release sales of Taylor Swift's album last year. The strong level of physical sales we've delivered this year across both artists and geographies gives us continued optimism about the contribution from this category going forward, although the fourth quarter will be lapping exceptional volumes from last year. Licensing and other revenue excluding downtown declined as growth in synchronization and audio-visual revenue is more than offset by lower live and related income. Turning to music publishing, Revenue grew 7.5% or 1.5% excluding downtowns. Excluding downtowns, digital revenue grew 3.9% as subscription growth more than offset software ad-supported revenue. Synchronization revenue declined 4.7% as lower than anticipated film and television activity in the period more than offset improvements in advertising checks. Adjusted EBITDA declined 3.5% or 4.3% excluded in downtown, impacted by the timing of expenses in the prior year period. As we've discussed in recent quarters, music publishing results can be affected by the cadence of industry distributions and the timing of synchronization activity which creates variability in quarterly growth rates. That said, growth this quarter was below the level we expect from this business over time. We continue to believe this will be a mid-single-digit growth business in 2027. Turning to merchandising, revenue declined 4.6% year-over-year. Direct-to-consumer revenue grew as we broadened the roll-out of our ship-to-home program for merchandise and certain tours. However, this was more than offset by lower touring income due to a larger number of high-profile tours in Q3 last year. Adjusted equal guard declined €2 million to €11 million due to lower revenue, while margin contracted 60 basis points year-over-year. who was up nearly 10 percentage points compared to the first half results. As we've discussed, we continue to make structural changes to this business with a particular focus on strengthening our direct-to-consumer capabilities and improving profitability over time. Overall, we're encouraged by the progress we saw in several areas this quarter, including the acceleration in subscription revenue, continued strength in physical sales, and improved profitability. At the same time, we recognize that there is more work ahead of us. As you heard from Lucian, that work is underway. We're focused on building on our progress, addressing the areas where there are opportunities to improve, and driving stronger growth and profitability over time. With that, Lucian, Michael, Boyd, and I will be happy to take your questions. Operator, please open the line for Q&A.