Warner Music Group Corp (WMG) 2013 Q3 法說會逐字稿

Welcome to the Warner Music Group's third quarter 2013 earnings call for the period ending June 30, 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 this time.

As a reminder, there will be a question and answer session following today's presentation and at that time you may press *1.

If you have a question you will be prompted to speak your name in order for your question to register.

And now I'd 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 third 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 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 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.

Good morning, everyone.

Welcome to our fiscal third quarter earnings call.

I would first like to give an update on our acquisition and integration of the Parlophone Label Group.

We completed the purchase on July 1 and are delighted to have officially welcomed Parlophone's extraordinary artists, its legendary catalog, and talented management team to the Warner Music family.

For the past several months we have been working very closely with Parlophone's leadership towards the swift and efficient combination of the two companies.

This preparation ensured that we have been able to make good progress in the six weeks after closing across the range of initiatives such as the identification of key leadership and supply chain integration.

We will continue to update you on our progress as appropriate.

We remain on plan and focused on strategic priorities that will accelerate the growth of our combined company.

First, we will be investing in Parlophone's frontline A&R to build upon the label's world class reputation for developing artist careers and to ensure it flourishes as a creative force alongside Atlantic and Warner Brothers.

Its impressive roster of artists currently includes Coldplay, Tinie Tempah, David Guetta, Kylie Minogue, and Blur.

We were pleased to announce that Miles Leonard who has been instrumental in the careers of many of the UK's most acclaimed artists will continue to lead Parlophone UK as its Chairman while assuming additional responsibilities as Co-Chairman of Warner Brothers Records, UK.

Second, following our acquisition of EMI Classics and Virgin Classics, we are reinvigorating our approach to classical music under the Warner Classics banner.

We have ambitious plans for this business in catalog as we attract the best new classical talent and grow the popularity of established stars including trumpet player, Alison Balsom, mezzo soprano, Joyce DiDonato, Conductor Antonio Pappano, and countertenor, Philippe Jaroussky, among others.

Third, having also acquired EMI's music operating companies in Belgium, the Czech Republic, Denmark, France, Norway, Poland, Portugal, Slovakia, Spain, and Sweden, we are increasing the size and diversity of our European recorded music business at a time when the demand for local repertoire has never been stronger.

Spanish superstar Pablo Alborán, French singer/songwriter, Matt Pokora, and Portuguese singer, Mariza, are among the additions to our leading international artists.

And fourth, we are refreshing our global catalog strategy to capitalize on the many creative and commercial possibilities produced by uniting Warner Music's and Parlophone's repertoire, now including legendary recordings from artists such as Radiohead, Jethro Tull, Kate Bush, Edith Piaf, Daft Punk, Tina Turner, Pet Shop Boys, and Iron Maiden.

Our catalog is one of the most impressive collections of music ever assembled.

As we proceed with the integration, we continue to anticipate achieving the previously disclosed annual cost savings and synergies of around $70 million.

We intend to move quickly and take actions to achieve the bulk of these synergies over the next 12 months in order to realize the benefits over the next 24 months.

Given that the acquisition closed on July 1, no results from Parlophone are reflected in our 10-Q for this quarter ended June 30.

Later this year when we issue our 10-K we will, for the first time, report results that include Parlophone from the date of our acquisition.

As you might expect, we are taking a long term view of this landmark acquisition and we look forward to updating you over time on the many benefits this powerful combination will yield for our Company and our artists.

Now let's turn to the results for this quarter.

I'm pleased to report that we continued to deliver a number of positive metrics.

We grew total revenue by 4%, marking our fourth consecutive quarter with constant currency revenue growth.

We increased digital revenue by 13% in constant currency and we improved both OIBDA and OIBDA margins due to revenue growth and cost management.

These accomplishments were attributable to several successful new albums and strong performance from carryover releases as well as ongoing financial discipline and outstanding execution by our operators.

First, before going through the details of our quarterly performance, let me offer some color on the recorded music industry as a whole.

Following calendar 2012 when the global music market grew a modest 0.2%, we are seeing a mixed picture in key territories thus far in 2013.

This quarter in the U.S., track equivalent album sales were down 5% year over year according to SoundScan and in the UK, album unit sales were down 5% according to official chart company data.

We believe that these declines were in part driven by a softer industry release schedule coupled with weaker catalog sales.

At the same time, we continue to see encouraging signs for the future.

We are witnessing a promising continuation of the acceleration of the growth in music streaming.

For example, in the U.S. during the first half of calendar 2013, the volume of music streams was up 24% over the same period last year.

The industry's experience in smaller markets such as Scandinavia shows that streaming services can help grow not just the overall digital opportunity but the entire recorded music market.

In Sweden, total recorded music revenue was up 12% during the first half of calendar 2013 with digital accounting for 75% of revenue, 94% of which was from streaming.

In Norway, streaming revenue helped drive total recorded music revenue to a 17% gain in the first six months of calendar 2013.

Furthermore, that increase follows a 7% gain in calendar '12, the first year of growth since 2004.

At the same time, music piracy in Norway has plummeted 83% over four years according to Ipsos MORI, a well-respected UK market research company.

We believe continued development of streaming services holds promise for other markets as well.

As a result, we are encouraged to see an increasing number of services competing to drive this category forward on a global basis.

This quarter alone saw two of the world's biggest technology companies announce the addition of new streaming capabilities to their existing music offerings.

Apple unveiled plans for its ad supported iTunes Radio due to arrive in the fall while Google launched its subscription service, Google Play Music All Access, in the U.S. in May and just today, rolled it out across nine European companies.

Now returning to our results, our recorded music and music publishing businesses both delivered solid performances this quarter.

In recorded music we grew revenue 5% on a constant currency basis.

Total digital revenue was up 11% in constant currency, representing 44% of total recorded music revenue and OIBDA improved by 5%.

In music publishing, while total revenue fell 2% we increased digital revenue by 38% on a constant currency basis and music publishing's OIBDA margin improved by four percentage points to 21% from 17% in the prior year quarter.

So with that in mind, let's look at some of our recent milestones beginning with recorded music.

In the U.S., our track equivalent album unit sales grew 2% year over year in the quarter, again significantly outpacing the industry which was down 5%.

Our track equivalent album share grew to 20%, our highest quarterly share in nearly three years.

Meanwhile, in the UK we increased our share of album unit sales two percentage points to 13% in the quarter.

Warner Music UK had three of the top ten albums in the quarter including the second biggest selling album, Michael Bublé's, To Be Loved.

Released in April, Michael's eighth studio album was one of our best sellers worldwide during the quarter and it topped the charts around the world including Australia, Canada, Hong Kong, the UK, and the U.S.

Among our other top sellers were albums from Paramore and Wale who each celebrated their first number ones on the Billboard 200.

Our biggest international sellers included Christophe Maé, who marked his fourth number one album in France, Rudimental, who achieved the biggest first week sales of the year for a debut album in the UK, and Kyary Pamyu Pamyu, whose sophomore album became her first number one in Japan.

Our top carryover releases in the quarter were Blake Shelton's, Based on a True Story, and Bruno Mars', Unorthodox Jukebox, both of which continued to perform very well.

While we expect strong carryover sales into the fourth quarter, it is worth noting that we have a lighter release schedule for the remainder of our fiscal year.

During the quarter we made three important moves to further strengthen our global footprint and leadership team.

First, we promoted Stu Bergen to President, International, Warner Recorded Music, to oversee the growth of our operations outside of the U.S. and the UK.

Second, we appointed Marco Albani, who most recently served as Chairman of EMI Italy to the role of Chairman and CEO of Warner Music Italy.

Third, we announced the acquisition of Gala Records Group, Russia's leading independent music company with activities in recorded music, distribution, music publishing and concert promotion.

Gala will continue to be run by its longtime CEO, Alexander Blinov, and will continue to nurture local talent as we amplify its success throughout our global network.

Turning to music publishing, we continue to position Warner/Chappell for long term growth by nurturing the best new talent, developing the careers of established songwriters, and investing in higher margin deals.

We are excited about some of our recent signings which include Mike WiLL Made It, who had a credit on nine songs that hit the Billboard Hot 100 this quarter alone, Liz Rose, our Grammy winning SESAC Nashville Songwriter of the Year, who has co-penned 16 songs with Taylor Swift including three number one hits.

Meanwhile, Warner/Chappell continues its impressive run of chart success in the U.S. Our songwriters have credits on 15 out of the 20 bestselling albums during the first half of calendar 2013 including the top two albums from Justin Timberlake and Bruno Mars.

Nate Ruess, from the Atlantic Records band, Fun, co-wrote the second bestselling track of the year to date, Pink's Just Give me a Reason.

Nate also claimed Song of the Year at the ASCAP pop music awards for Fun's global hit, We Are Young.

He joined other Warner/Chappell writers such as Katy Perry, Phillip Lawrence, and Ed Drewett, who together took home a total of 14 ASCAP pop awards.

International Warner/Chappell songwriters who topped their local charts during the quarter include Emmanuel Moire, whose third album became his first number one in France, Brit Award Winner, Tom O'Dell, whose debut album went straight to the top of the UK charts, and Xavier Naidoo, whose seventh album went to number one in Germany.

We're looking forward to the opportunities that lie ahead for our recording artists and songwriters and our newly expanded Company.

I'm confident that our strategy of artist development and digital innovation backed by disciplined financial management will continue to deliver long term success.

So with that, let me turn it over to Brian to detail our financial results.

Thank you Steve, and good morning everyone.

As Steve mentioned, we are pleased that the Parlophone acquisition is closed and we are moving forward with the integration.

We also feel good about that we were able to deliver a quarter with growth in our top line digital recorded music and OIBDA results.

Starting with a few comments on Parlophone, let me remind you that last quarter we entered into an amended term loan agreement with the acquisition.

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

The facility was drawn down on July 1 to fund the closing of the acquisition.

We also simultaneously repriced our existing term loan at the same rates.

Additionally, on May 9 we prepaid $102.5 million outstanding under out existing term loan and on June 21, we redeemed 10% of our senior secured notes due in 2021, representing a repayment of $50 million of dollar notes and $17.5 million of euro notes.

Following the Parlophone financing, our annualized interest expense will now be approximately $198 million based on existing rates on $2.88 billion of outstanding debt, lower than the $227 million we were paying on $2.17 billion of outstanding debt prior to the refinancing of our 9.5% notes in November 2012.

This lowers our cost of debt to 7% from 10.5%.

Turning to our results, this was a solid quarter for the Company.

We grew total revenue by 2%, driven by gains in digital revenue in both recorded music and music publishing.

In addition, we increased digital revenue by 12% in total, 8% in the United States and 16%, internationally.

On an as-reported basis, recorded music revenue rose 3% with 9% growth in digital revenue while sending a 6% decline in physical revenue.

While U.S. recorded music revenue was flat, international revenue rose 6%, led by growth in the UK, France, and Latin America.

Artist services and expanded rights revenue had a positive impact this quarter, reflecting the timing of European concert promotion activities and tours in Japan.

In music publishing, revenue fell 3% on an as-reported basis.

We continue to concentrate on the successful execution of our A&R investment and acquisition strategy, focused on investing our resources in higher margin assets.

Digital revenue grew 47%, driven by the acceleration in streaming and subscription revenue as well as continued growth in download revenue.

This growth was more than offset by declines in performance synchronization and mechanical revenue.

Total OIBDA for the quarter was $69 million versus $66 million last year.

Total OIBDA was impacted by $7 million integration costs related to the Parlophone acquisition and $5 million of severance charges.

Last year, reported total OIBDA included $17 million of severance charges.

It is worth noting that the $50 million to $65 million targeted nine quarter cost saving program that we began in July 2011 following the Access acquisition of Warner Music Group, is now complete one quarter early and favorably impacting our OIBDA.

Recorded music OIBDA improved to $61 million from $58 million last year and OIBDA margin improved slightly.

This improvement was due to higher revenue and decrease in SG&A expense.

In music publishing, OIBDA and OIBDA margin also improved in the quarter to $28 million or 21% of revenue versus $24 million or 17% of total revenue last year.

The increase in OIBDA margin reflected our focus on higher margin deals.

We also recorded a decline in SG&A expense, reflecting the success of our cost savings program.

Turning to our balance sheet and cash flows, we finished the quarter with $102 million of cash compared to $294 million as of March 31, 2013.

This reflected the repayment of approximately $175 million in debt during the quarter which I mentioned earlier.

Our total long term debt at quarter end was $2.066 billion compared to $2.211 billion in the second quarter of 2013.

This does not reflect the July 1 drawdown of $820 million to fund the closing of the Parlophone acquisition.

Operating cash flow improved to positive $22 million from negative $39 million in the prior year quarter and free cash flow improved to $21 million.

A reduction in cash interest to $64 million this year, down from $114 million in the prior year quarter was a key driver.

Please note that last year's quarter included proceeds of $12 million from the sale of a building.

This year over year improvement in operating cash flow was offset by an increase in cash use for investments in recorded music and music publishing assets including the Gala and Lionsgate acquisitions.

We are pleased with our strong year to date results.

We are also excited to be moving forward with the Parlophone integration and 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)

Our first question comes from Aaron Watts of Deutsche Bank.

Your line is open.

Brian, just a quick question on sort of thinking about the cash balance pro forma for closing Parlophone and putting in that new facility.

Has that moved a lot from, or was it impacted much from that closing?

No, not materially at all.

It's very close to what we've been talking about.

Okay, perfect.

And then, I said, I had a couple questions just on the publishing part of the house.

If I think about the mechanical declines in the quarter, down I think it was 2.9%, that is a pretty nice improvement from what I think we have been hearing the last several quarters.

Is that just a timing issue or have we seen maybe a move towards stabilization there?

I think in music publishing it's all related to timing especially as it relates to the flow of funds internationally on exploitation of U.S. repertoire on the mechanical side, Aaron.

You just end up with a bit of lumpiness in some of those distributions just given that it takes, in some case based on society distributions and then repatriation of that to the U.S. company, it could take up to 12 months to get it so it's really just related to timing.

On the synchronization revenues, I know you said you had that onetime settlement.

Kind of excluding that, that decline also would seem to have improved from the trend last quarter.

Is that again timing with the publishing side or is that just lumpy?

I think it's timing there as well.

We had that $4 million settlement in the prior year quarter as the comp to this quarter.

When you look at otherwise sync, we see the timing of the beginning part of the year was sort of a bit slower, a bit softer in the first part of the year.

We've seen a bit of improvement coming in the back part but we're still seeing some softness overall around sync primarily in the U.S. as it relates to some of the TV commercial markets.

You mentioned the move towards higher margin deals.

If I think back, I remember you had talked about exiting some, say, very low margin deals in the past.

Can you maybe just talk more about that shift that you're making and what you had gotten out of and what you're moving into?

I think we've talked a bit about it in the past around some of the low margin/high revenue deals that we got out of.

There was a Warner Brothers Studio deal, the MiJack deal in and of itself, that went to Sony, and then the focus that Cameron has had and has been executing against with his publishing team is in these higher margin film catalogs that we've bought -- we picked up Miramax and we picked up Lionsgate -- and also improving margins around lighters that are now being signed to Warner/Chappell.

Okay, perfect and last one for me, just as you think about some of the opportunities, obviously you just closed Parlophone, you mentioned Gala and Lionsgate.

How do you, as you look across the M&A landscape, what opportunities are there for you?

Can you maybe just speak to how active Warner Music might be on the acquisition side for the next six months to a year?

We are actively in the market looking at deals that are available.

We're not going to change our strategy around, trying to invest against what we believe could be growth assets for our business simply because we've picked up and are going to be integrating Parlophone -- very confident about our ability to integrate that business and we're going to continue to look at opportunities as they come up.

At this time I am showing no further questions.

Thanks, everyone.

I hope you have a wonderful end of summertime and have a great Labor Day and we'll talk to you in a few months.

Bye now.

Thank you.

That does conclude today's conference and you may all disconnect at this time.