Warner Music Group Corp (WMG) 2013 Q2 法說會逐字稿

Welcome to the Warner Music Group's second quarter 2013 earnings call for the period ended March 31, 2013.

At the request of Warner Music Group, today's call is being recorded for replay purposes, and if you object, you may disconnect at any time.

As a reminder, there will be a question and answer session following today's presentation.

(Operator Instructions)

Now I would like to turn today's call over to your host, Mr. James Steven, Vice President Communications and Marketing.

You may begin.

Good morning, everyone.

Welcome to Warner Music Group's fiscal second quarter 2013 conference call.

Both our earnings press release and the Form 10-Q we filed this morning are available on our website.

Today our CEO, Steve Cooper will update you on our business performance and strategy, and our Executive Vice President and CFO, Brian Roberts, will discuss our financial condition and results.

And then both of them will take your questions.

Before Steve's comments, let me remind you that this communication includes forward-looking statements that reflect the current views of Warner Music Group about the future events and financial performance.

All forward-looking statements are made as of today, and we disclaim any duty to update such statements.

Our expectations, beliefs and projections are expressed in good faith and we believe there is a reasonable basis for them.

However, there can be no assurance that management's expectations, beliefs and projections will result or be achieved.

Investors should not rely on forward-looking statements because they are subject to a variety of risks, uncertainties and other factors that can cause actual results that differ materially from our expectations.

Information concerning the factors that could cause actual results to differ materially from those in the forward-looking statements is contained in our earnings press release and Form 10-Q and other SEC filings.

We plan to present certain non-GAAP results during this conference call.

We have provided schedules reconciling these results, to our GAAP results in our earnings press release posted on our website.

With that, let me turn the call over to Steve Cooper.

Thanks, James.

Good morning, everyone, and welcome to our second quarter earnings conference call.

Before we get to our quarterly results, I will provide some updates on our acquisition of the Parlophone Label Group.

We have achieved a number of significant pre-closing milestones since the deal was signed on February 6. First, we completed the next step related to the acquisition's financing last week.

Working with our five lead banks, their commitment was successfully syndicated.

Brian will give you the details in his part of the presentation.

Second, we have already received regulatory approval for the transaction in the US, Brazil and Austria, and the only remaining merger review process in the EU is proceeding on schedule.

Third, we are actively planning for the combination of our existing business with Parlophone, the implementation of which will follow the closing of the transaction.

In connection with the syndication process, we disclosed that this combination is expected to result in annual cost savings of around $70 million.

We continue to refine our integration plans, so that we remain in the best possible position to merge the two businesses as quickly and efficiently as possible following the closing.

Obviously, the social and legal processes in each individual European territory will determine how quickly we can execute our plans and realize the synergies.

We remain on track to close the Parlophone transaction by the middle of this calendar year.

Now turning to our results for the quarter.

This was a great quarter for us and we achieved a number of very positive metrics.

We grew constant currency revenue by 10%.

We increased OIBDA by 37%, and improved OIBDA margin by nearly 4 percentage points, and we grew our free cash flow to $121 million reflecting our continued focus on cash generation.

In addition, in the US according to SoundScan, our track equivalent album units sales grew to 7% year over year, significantly outpacing the industry which was down 4%.

And our track equivalent album share grew 2 percentage points to 20%, our highest quarterly share in 2.5 years.

We accomplished all of these positive metrics, thanks to really great execution by our operators.

This execution included a very strong release schedule, solid performance from carryover releases, and continued financial discipline.

Before diving into some of the details of our quarterly performance, let me first give you an overview of the Recorded Music industry.

In the US, Recorded Music revenue declined less than 1% in calendar 2012 as reported by the IRAA.

Digital Revenue was up 14%, and accounted for 59% of total US Recorded Music revenue.

Subscription, streaming and digital radio services accounted for 15% of total US Recorded Music revenue in calendar 2012.

That is up from 9% in 2011.

Worldwide Recorded Music revenue increased for the first time since 1999, up 0.2% in calendar year '12 as reported by the IFPI.

9 of the world's top 20 markets posted growth in 2012.

Worldwide Digital Revenue was up 8%, and accounted for 35% of global Recorded Music revenue.

And in 5 of the top 20 markets, Digital Revenue accounted for more than 50% of overall Recorded Music revenue.

Notably, the UK overtook Germany as the world's third largest market in calendar '12, despite experiencing a 6% decline in Recorded Music revenue.

In the first calendar quarter of 2013, the UK market improved.

Quarterly revenue increased for the first time since Q4 of '09, thanks to 18% growth in digital download revenue.

Now returning to WMG's results.

Our Recorded Music and Music Publishing businesses both delivered solid performances this quarter.

In Recorded Music, we grew constant currency revenue by 12%, with growth in both physical and Digital Revenue.

Digital Revenue represented 58% of US Recorded Music revenue and 47% of worldwide Recorded Music revenue.

And we grew OIBDA by 78%, and improved OIBDA margin by 6 percentage points.

In Music Publishing, we grew constant currency revenue by 1%, helped both by performance revenue and Digital Revenue, with Digital Revenue up 50% in the quarter.

So in that context, let's look at some of our recent successes beginning with Recorded Music.

Bruno Mars' second album, an Unorthodox Jukebox, a Q1 release was again a top seller this quarter.

Following the success of the singles, Locked Out of Heaven and When I Was Your Man, Unorthodox Jukebox reached number one on the Billboard 200 chart, marking Bruno's first number one album in the US.

The album has already been certified platinum by the [RIAA], commemorating US sales in excess of 1 million units.

It has also received platinum certifications in the UK, Canada, France, Hungary, Ireland, Australia and New Zealand.

Multi-platinum recording artist Josh Groban had his first debut at number one on the Billboard 200 chart with his latest album, All That Echoes, released in February.

Josh who is also a Warner/Chappell songwriter co-wrote 7 of the 12 tracks that appear on the album which was produced by Warner Bros.

Records' Chairman Rob Cavallo.

Blake Shelton's, Based on a True Story, which has been certified gold in the US, generated his greatest first week album unit sales ever.

This was his third consecutive album to debut at number one the Billboard top country albums chart.

Both Josh Grogan's and Blake Shelton's sales skewed more heavily to CDs, which boosted our physical sales in the quarter.

Excuse me.

Turning to Music Publishing, we continue to position our publishing company for greater growth.

In February, Warner/Chappell entered into worldwide administration agreement with 17-time Grammy winner Jay-Z, which included his number one albums the Blueprint Three and Watch the Throne, and worldwide hit singles such as Empire State of Mind, Run This Town and No Church in the Wild.

We also forged a separate agreement with Jay-Z's entertainment company, Roc Nation, which owns and controls an impressive list of hit songs such as Flo Rida's Right Around, Kanye West's Power and 50 Cents' My Life.

Additionally, Warner/Chappell signed a worldwide administration agreement for 17 time Grammy winner, Beyonce, with respect to her future songwriting including her much-anticipated next album.

Warner/Chappell has been making meaningful efforts to build up its film and TV music business.

Not only is this type of music a fantastic addition to our library from a licensing perspective, but it also enhances our margins.

Last year you might recall, Warner/Chappell acquired a Miramax film music catalog.

We are delighted to have recently signed a global agreement with Lionsgate for the publishing and master recording rights to its library of music from its films and TV shows.

Warner/Chappell has acquired rights to numerous titles, and we have formed a co-publishing partnership with Lionsgate for the remaining works.

The deal covers publishing or co-publishing rights to music from many successful motion picture and television properties including the Twilight film franchise, Mad Men, The Hunger Games and The Expendables, as well as future Lionsgate releases.

The agreement will enable Warner/Chappell and Lionsgate to work together to find new opportunities for our respective businesses around the world.

We are also pleased that the Warner Music Group was recently named to Fortune Magazine's 2013 list of the world's most admired companies.

This is the second time we have been featured on the list, and we are the only music company ever to have been named.

And so with the very healthy first half of the fiscal year, and the exciting and transformative Parlophone transaction expected to close mid-calendar year, we remain confident in our strategy, and optimistic about what lies ahead.

We continue to make sustained investments in artist development, to work for greater innovation in the digital space and to focus on revenue diversification, all against a backdrop of prudent cost management.

Finally, before I turn it over to Brian, I wanted to take this opportunity to personally thank Edgar Bronfman, Jr.

for his service to Warner Music Group over the past nine years.

Edgar stepped down from our Board of Directors last week, in order to spend more time on his other business endeavors.

His contributions to this Company and the music industry as a whole have been enormous.

The Warner Music Group would not be the dynamic pioneering force we are today, without his tireless commitment to the Company, its employees and its artists.

Suffice it to say, he will be greatly missed as a member of our family, and we wish him well in his future undertakings.

Now let me turn it over to Brian to detail our financial results.

Thanks, Steve, and good morning, everyone.

As Steve mentioned, we are excited about the Parlophone transaction and pleased with our results this quarter.

I would like to make a few additional points regarding our recent financing activities and changes related to our capital structure.

Last week as Steve mentioned, we entered into an amended amendment to our term loan in connection with Parlophone transaction.

This provided for an $820 million senior secured incremental term loan facility priced at LIBOR plus 2.75% with a 1% floor.

The facility won't be drawn down until the closing of the transaction.

As part of the financing process, I am happy to say we also reduced the pricing for our existing term loan and our revolving credit facility to correspond with the lower pricing of the new incremental term loan.

As part of the term loan amendment, the existing term loan facility was repriced to LIBOR plus 2.75% with a 1% floor, from the original terms of LIBOR plus 4% with a 1.25% floor.

Our revolver was repriced at LIBOR -- which was priced, excuse me, at LIBOR plus 3.5%, is now at LIBOR plus 2%.

Additionally, on May 9 we used $102.5 million of cash available to pay down a portion of our existing term loan.

The remaining principal amount of the existing term loan is now $490 million.

Taking a step back to look at our capital structure over the last couple of years, we have significantly reduced our interest payments and cost of capital, as we work to maximize our operating flexibility.

Currently, pro forma for the draw down of the $820 million incremental term loan, the repricing and pay down of our existing term loan, we expect to have annualized cash interest expense of approximately $202 million on $2.95 billion of outstanding debt.

This compares to approximately $227 million of interest on $2.17 billion of debt following our Access -- following our acquisition by Access in July of 2011, and approximately $184 million of interest on $2.24 billion of debt following our November 2012 refinancing.

As a result, we have seen our weighted average cost of debt decrease from 10.5% in July of 2011, to 8.3% in November of 2012, to an expected rate of 6.8% following the closing of the PLG transaction.

On May 13, we issued an irrevocable notice of redemption relating to $50 million of our currently outstanding 6% secured notes which are due in 2021, and EUR17.5 million of our currently outstanding 6.25% senior secured notes, also due in 2021.

After this pay down, we expect to have annual interest -- annualized interest expense of approximately $198 million on $2.88 billion of outstanding debt.

Turning back to our results, this was an impressive quarter for the Company.

From a revenue perspective, both physical and Digital Revenue showed growth.

In Recorded Music, total physical and Digital Revenue grew 15%, with 12% growth in physical revenue and 18% growth in Digital Revenue.

Our fiscal revenue performance was helped by some of our top sellers this quarter, including particularly, Josh Groban and Blake Shelton.

Digital Revenue performance was driven by growth in streaming and subscription revenue, as well as continued growth in download revenue.

Our artist services and expanded rights revenue declined 17% primarily as a result of the timing of tours.

Music Publishing Digital Revenue grew 50%, and as in Recorded Music, benefited from growth in streaming and subscription revenue and download revenue.

Music Publishing performance revenue grew 4%, largely as a result of our recent investments in film and TV assets, while synchronization revenues declined 16% reflecting lower demand in commercials and video games.

Mechanical revenue declined 16% as a result of the continued transition from physical to digital sales in the Recorded Music industry.

Our notable performance this quarter with growth in total OIBDA, Recorded Music OIBDA, and OIBDA margin was due to a very strong release schedule, solid performance from carryover releases, the benefits of the transition from physical to digital sales, and continued financial discipline.

Our Music Publishing business maintained OIBDA and OIBDA margin as compared to the prior-year quarter.

Turning now to our balance sheet and cash flows, we finished the quarter with $294 million of cash, compared to $189 million as of December 31, 2012.

Operating cash flow improved to $135 million from $121 million in the prior-year quarter, and free cash flow grew to $121 million from $103 million.

The largest driver of this growth was our strong operating performance.

We are very happy with our results this quarter, and for the first half of our fiscal year.

We believe we are making the right investments to grow our business, support our artists, deliver strong margins and generate meaningful cash flows.

With that, operator, please open the line for questions.

(Operator Instructions)

The first question is from Andrew Finkelstein from Barclays.

Okay, good morning.

Good morning, Andrew.

A few questions for me.

One, on just a couple big picture items, I was wondering if you could give comments on.

I guess, there was an article on Billboard today on Universal may be striking a deal with Apple, iRadio.

And so, I was wondering if you could comment on where you think that product is, and what your involvement might be?

And also if you can give us an update on the performance royalty in radio to date.

There has been some more noise out of Washington on that.

Well, Andrew, on the first, we have seen the same articles about Universal.

I think the -- we, I think, as well as the rest of the industry would welcome Apple's entering into the digital radio business.

I think we have a view that it would lead the charge for other entrants, and would accelerate also the growth of simulcast and digital radio from terrestrial participants.

So hopefully, Universal, Sony, we and others in the industry will come to terms with Apple in the near future.

With respect to Washington, I will turn that over to Brian.

I think our view there, Andrew, is that we actually are supportive clearly, of a performance right in the terrestrial radio for the Recorded Music industry.

There has a bit been a lot of talk about it.

There is a lot of talk around overall rates in general, both on a digital front and the terrestrial front.

We will just continue to monitor what is going on down there, and see what happens.

But from an industry perspective, we are very supportive of getting that right.

Okay.

And then the Recorded Music obviously had a great quarter here, well exceeding the industry in the US at least as you mentioned.

One, could you talk about what you think the prospect for outperforming for the rest of the year would be?

Or is it just a sort of clustering of your releases so far?

And then also, could you give us a breakdown in the recorded digital side of downloads, versus some of the other big buckets in the digital?

Andrew, I will take the second part, and I will let Steve hit the first part.

If you look at the Q now, we give you a breakdown of the elements of growth from a digital perspective.

We have actually broken out some of the other elements too, around some of the licensing stuff.

So if you would take a look there, you will see that.

With respect to the balance of year entry, we typically don't provide guidance given the nature of our release schedule, and the way it can move.

That being said, we had early in the third fiscal quarter, Michael Buble's release, and it is doing very well worldwide.

We had a release of the Paramore album, and it is doing very well.

And obviously, we expect some meaningful carryover from releases that came out in either the first or second quarter.

So while I don't want to give you any forecasts for the balance of the year, I do believe that with our current and planned releases in the future, that we will be able to keep the momentum that we have generated in the first six months going.

Okay.

That's great.

And just one more for me, I think in the public filings on the Parlophone deal.

I am not sure if you can talk to it, but the synergy number that was put in there.

I think it was $70 million against roughly $100 million of EBITDA.

So it does appear to be a pretty large number.

Although I was thinking some of those synergies might come out of the Warner side as well.

I was wondering if maybe you could talk about the expected synergy number, and maybe also how long it would take to achieve?

Well, given that -- and I am sure you can appreciate this, given that we haven't gotten EU clearance yet and the deal hasn't closed.

And obviously, we are -- we have to work our way through the various legal and social processes in Europe, that at this point I would be uncomfortable in saying anything specific, other than the number that you mentioned, we are relatively confident that, that's a very reasonable target.

And we hope to achieve it as quickly as permitted under the legal and social guidelines as dictated by the countries we will be operating in.

Okay.

Thanks a lot.

(Operator Instructions)

The next question is from Aaron Watts from Deutsche Bank.

Hello.

Just thinking about some of the geographic areas that were stronger for you and contrasting them to those that were weaker.

I guess you called out parts of Asia and Europe, Japan, Italy.

What is going on in the weaker geographic locales that -- is it more to do with just macroeconomic issues there?

Or can you call out any other kind of particular things going on that is pressing down sales?

Well, I think that, particularly in Japan, most of our business this year, Aaron, has been tracking pretty well in all parts of the world.

Japan, we didn't get the carryover from a number of our very, very prominent Japanese artists that we expected after their releases in the fourth quarter of fiscal '12.

So that has been somewhat disappointing.

And we also historically have not had the broad and deep Japanese catalog of some of our competitors.

We are looking at obviously, ways in which we can improve that business, and hopefully we will have a better handle on it over the coming quarters.

But I don't think it is really any macro trends.

The macro trends are actually -- knock on wood -- pointing in the right directions, both on a domestic and a global basis.

I think we have just had an unfortunate number of circumstances which has depressed over the last six months, our Japanese business.

Okay.

Got it.

And then just one more for me, maybe it is a little bit of a follow-up.

But assuming Apple does introduce a digital radio streaming service, as you think about it as a content provider, and Apple also being kind of the dominant download store, how do you -- is it a threat to Warner Music as people use Apple streaming radio service versus downloading songs?

And maybe can you just talk a little bit about that?

Whether it is an opportunity, or if it is in fact somewhat of a threat that people aren't going to download music versus stream and listen to the radio offering?

Well, as -- I guess, two things.

One, I try never assume, particularly about our counter parties business.

But even with other digital radio services that have become very, very prominent -- Pandora, I guess is one of the lead examples.

We haven't seen any meaningful shift in consumer behavior away from collecting music.

And again, I wouldn't want to assume Apple's -- what Apple's long-term plans are.

But it does seem to me, that what Apple does is continue to build and complement all of the facets of its ecosphere.

And it seems to me, that they believe in -- and probably having more information about consumer behavior and preferences than anybody on the planet, that they have also noticed that radio hasn't eroded the consumers' preference to collect music, and want to control and collect that in their own way.

So I suspect, that they suspect this will be complementary, Aaron, as opposed to creating erosion in the overall demand for either downloads, or the collecting of music in other forms.

Okay.

That's helpful.

I appreciate you taking the questions.

Thank you.

I would now like to turn the call back over to the speakers for the closing comments.

Well, thanks, everybody for joining us today.

I appreciate you taking the time.

Have a wonderful Memorial Day and a great summer, and we will talk to you in a few months.

Bye-bye.

That concludes today's conference.

Please disconnect at this time.