Q4 2021 Warner Music Group Corp Earnings Call

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They actually have watched us at all.

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I am turning big girls.

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I believe that milestone.

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All the rumors are true yeah, what you heard that's true.

Kim Ann.

If you believe that do that have come from how old are the UCL in D C.

Not an old Sharma, Sumit, which I don't give two ships at a room of docs.

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Thanks, Nick.

Sure Ross.

Yeah.

Welcome to Warner Music group's quarterly earnings call for the period ended September 30th 2021 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 now.

Now I would like to turn today's call over to your host Kareem Chin head of Investor Relations you may begin.

Good morning, everyone welcome.

Welcome to Warner Music group's fiscal fourth quarter and full year earnings conference call. Please.

Please note that our earnings press release and earnings snapshot are available on our website and we plan to file our 10-K during the week of November 20 <unk>.

On today's call our CEO, Steve Cooper, who will provide you with an update on the quarter and the full year.

Eric <unk>, our CFO is on medical leave and as a result, our acting CFO and corporate controller loop Dickler will take you through our financial results.

Steve Lou and I will then answer your questions.

Before our prepared remarks I'd like to refer you to the second slide of the earnings snapshot to remind you that this communication includes forward looking statements that reflect the current views of Warner music group about future events and financial performance.

We plan to present certain non-GAAP results during this conference call and in our earnings snapshot slides.

We've provided schedules reconciling these results to our GAAP results in our earnings press release.

All of these materials are posted on our website.

Also please note that all revenue figures and comparisons discussed today will be presented in constant currency unless otherwise noted.

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 to 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 filings with the SEC.

And with that I'll turn it over to Steve.

Thanks, Craig and good morning, everyone and thanks for joining us.

As we all know the world's been through a very dark time over the last 18 months.

All been challenged both personally and professionally and ways, we could not have imagined.

But with vaccination rates continue rates continuing to rise.

In many territories beginning to return to some kind of normality.

Slight there is light at the end of the proverbial tunnel.

If there is anything that our company has learned during this pandemic.

Now for billions of people across the Globe Musa.

Music is essential to our wellbeing.

Permeates, our lives and gives us inspiration and home.

It gives voice to our anxiety or sadness and our joy and short music punches hard just like no other ardmore.

When concerts and live appearances, we're nearly impossible at this stage.

Our ability to super serve our artists and songwriters. During this extraordinary time was made crystal clear.

Our global resources creative expertise and commercial commercial reach makes us an absolute.

Taxable component that is critical to the entire music value chain.

Six years ago.

Warner doubled down on stream.

We became the first music nature to make at our largest revenue source.

Today, our business is no longer driven by linear format shifts is multifaceted and expanding in all directions.

From social media gaming and home fitness to BR, where at the heart of virtually every consumer experience.

The increasing complexity of our industry goes hand in hand, with the ever growing potential of our economy.

Not merely embracing our future we're creating them.

With that let's get to an overview of our fourth quarter results.

Total revenue increased by 22%.

On an as reported basis and 21% on a constant currency basis.

Adjusted EBITDA, we stopped by 34% with margin improvement driven by strong revenue growth.

In our recorded music revenue increased by more than 21%.

Digital grew 17% and streaming grew 20%.

Meanwhile, revenue sources that were severely impacted by Covid.

Most notably artist services, and physical recovered nicely growing 70% and 22% respectively.

In publishing we delivered revenue growth of over 19%.

Digital mechanical and same all had double digit growth.

It was also very good news the performance revenue appears to have bottomed out.

And has returned to modest growth as consumer venues across the board continue to recover.

Okay.

As new capital into our sector, we're even more confident in our position.

We have the expertise and capabilities to increase market share not merely the financial resources to buy it.

We're highly selective and only pursue deals that through our active management of assets will be accretive to shareholder value.

Our track record of making financially disciplined investments as evidenced by the rate at which we converted adjusted OIBDA to free cash flow.

Now, let me drill down into the key tenants of our business.

A few examples of the progress we're making.

While case trends in tactical change artists and songwriters will always be our driving force.

Pride ourselves on our ability to work with <unk> at all stages of their careers and across a wide diversity of genres generations and geographies.

We're developing and nurturing the next generation of recording artists such as the Uk's and Pam for Us and Joel Corey.

Argentina's chiller.

And the U S as Tom Oliver Who's Alpha debuted at number one on the top album sales charges that Billboard.

We're also trusted by iconic recording partners to manage their life's work.

And just in the last several months, we've struck career spanning deals with Coldplay Macdonough, David Guetta NDA stage with David Paul.

On the publishing side Big signings include chairman wrapper in RMB starting June AIP.

Rock Legend Williams, Patrick Corrigan and Grammy Award winner Daniel saves are we.

We also welcome pop icon, Sam Smith, who rejoined publishing agreement with <unk> news.

Many artists also sees the value in having Warner as their own for both recorded music publishing.

Like Chaplin, Bruno Mars, Madonna Sweetie, Thompson, I, Cardi, B and litho to name just a few.

While our artist and song writers are at the center of all that we do.

<unk> really does need com.

More than ever talent needs help to cut through the noise. Our mission is to elevate great artists amplify their music and help their voices and move the world.

<unk> is the only true global language and I'm, a big believer in the principal.

That success can come from anywhere and translate everywhere.

Simultaneously music is becoming hyper localized in Japan, Germany, and France, the three biggest non Anglo markets.

Domestic repertoires on average over 65% of the business.

We're now operating in over 70 countries and expanding our resources and reach in a number of key growth markets and.

In the past year alone.

We've made a number of strategic moves to strengthen our anr presence across the globe.

We launched Atlantic Records in both Russia, and Benelux and Anda, our indie label services group expanded into Russia, as well as Italy.

We continued our expansion into Africa by acquiring the leading independent label collapsed.

We further expanded our Asian, and Chinese footprint with our hip hop labels Adriatic can choose and our dance label web.

And we forged an important new alliance with proton and user.

The Arab world's leading independent label.

We also established through local water company Houston.

Important distribution partnerships with <unk> in Malaysia.

Sky digital in India, and or a fine video box and worldwide Records in Mexico Bear.

Barry May in Cambodia, and Yang media in Vietnam, and same same records in Australia.

Here's a great example of our strategy in action.

We signed Nigerian artist CK to Warner Music, South Africa. After he was discovered through our partnership with Chocolate City.

And an unprecedented achievement CK made history.

By scoring the most watched video in the world on Youtube with his song Love <unk>.

The biggest solid to ever come out of Africa. This is also one of the most popular tracks on Instagram Tictoc and also on Spotify.

It now has over 180 million streams.

Bloomberg recently took note of this calling it a watershed moment for African pop.

Let's now turn to our progress with innovation and revenue diversification.

Not so long ago people question the outlook for streaming growth.

Today, it's clear from our results the subscription streaming still has tremendous runway ahead of it.

Bolstered by price increases in developed markets and increasing penetration in emerging markets.

That growth is being supplemented by emerging platforms that are incorporating music and <unk>.

A critical feature of their user experiences.

To that end, we're positioning ourselves at the intersection of social gaming fitness VR in Houston.

We continue to lead the sector by being the first nature to partner with disruptive players.

It is dynamic and rapidly growing space.

And another pioneering move we are to date, the only music nature to form a partnership with Twitch paving the way for even greater collaboration in the future.

We've also continued to grow our own unique network of consumer media brands, including <unk> <unk> song kick in hip hop Gx.

We've expanded our reach through the development of outlets such as the pit and in the mix tape and.

And we continue to manage nearly 5000 unique artist Youtube channels.

As a result, our AD based revenue grew significantly in Q4, which sustained gains across these owned and operated properties.

Our network of consumer media brands as a strategic focus for us and has significant growth potential.

Beyond the lookout for an exciting announcement later this week, which we'll tell you how we intend to prudently turbocharge this area.

None of this however, as possible with our great people in place to make it all happen.

We continue to strengthen our executive branch promoting from within as well as hiring great talent from the outside.

Over the past year.

We've installed our next generation of digital savvy leadership in many key territories.

These include Canada, China, Germany.

France, Latin America, South Africa, Poland, the Philippines, Taiwan and Indonesia.

We also have a new leader of Ada worldwide, along with separate U S and international aviation hubs, making us even more capable of serving and the artists and labels everywhere.

Without a doubt we have the best team in the business, one that positions us exceptionally well for the.

This new Golden age and views.

With our new head of ESG in place since August we plan to issue. Our first annual report in early 2022.

It will provide a detailed update on our progress in sustainability in DPI among other topics.

This past June we published our first impact report from the Warner Music Group Lobotomy family Foundation, Social Justice pump.

Established last year. The fund has focused its grant making on three key pillars.

Education Criminal Justice reform and Arts and culture.

It's already committed funds and resources to a number of amazing organizations with many more grand saw anyway.

Fiscal year 'twenty, two is already off to a strong start.

<unk> placed new album with certain night number one in the UK, while at <unk> and has the fastest selling album of 2021, so far.

So sonic for Bruno Mars, and Anderson <unk> duo dropped their new album and evening with Subsonic last Friday.

We also have an amazing slate of holiday releases from Kelly Clarkson, Michael food late.

<unk>.

Rob Thomas Brett <unk> and others.

And today's detention economy.

Our business not only demands an ever increasing solar grade user.

But also ever growing levels of service to great artists and songwriters.

Warner achieved staff mix better than any other company in the world and we look forward to raising the bar, even further in the coming year and beyond.

Before I turn it over to you there is one final matter I'd like to mention.

While major music companies, such as Warner Chappell negotiate direct license with streaming services.

In the United States. There is a portion of the revenue from traditional audio streaming services.

Typically mechanical revenue.

Which is subject to a compulsory license at rates set by the copyright royalty board.

You may have read about photo records for <unk>.

Which is the name of the ongoing U S digital mechanical royalty rate proceedings before the CRB.

It will determine what music publishers and songwriters will be paid by the traditional services.

Between 2023 and 2027.

There's been a lot of controversy in your music press on this topic.

But there should be nothing controversial about music publishers and songwriters getting paid fair market rates to which they're entitled.

We fight hard for the rights of our song writers.

For instance song writers are at the very beginning of the SaaS value chain.

And there would be no music business without.

We fully support the Npa's advocacy efforts and the current rate proceeding and we look forward to a positive outcome for Warner Chappell music and songwriters.

And with that I'll turn it over to Lou.

Thank you, Steve and good morning, everyone.

'twenty, one was an incredibly challenging year to navigate and our results only continued to validate the strength and resilience of our business model.

In Q4 total revenue was up approximately 21% on a constant currency basis and up over 22% on an as reported basis. These results are underpinned by growth across almost all of our revenue lines.

For the full year, our total revenue increased by over 15% on a constant currency basis, and almost 19% on an as reported basis.

Our strong operating performance was evidenced by the healthy growth in adjusted OIBDA and adjusted EBITDA, We saw in both the fourth quarter and the full year.

In Q4, adjusted OIBDA increased by over 25% to $118 million.

With margins improving from 15, 5% to 15, 8% adjusted EBITDA, which reflects the pro forma impact of future cost savings and transactions completed in the quarter.

<unk> increased by 34% to $237 million with margin improving from 15, 7% to 17, 2%.

I want to note that both metrics reflect adjustments for approximately $15 million of restructuring costs, primarily driven by severance costs associated with the leadership and related organizational changes that Steve referenced earlier.

For the full year, adjusted OIBDA, and adjusted EBITDA increased by approximately 29% and 30% respectively.

You can find the calculations and reconciliations related to adjusted OIBDA and adjusted EBITDA in our press release.

Accordingly music revenue increased by over 21% in the fourth quarter for digital revenue increased by 17% driven by continued strength in training revenue, which grew approximately 20% year over year.

All components of streaming revenue experienced robust year over year growth.

Recorded music revenue from emerging streaming platforms remain at $235 million on an annualized basis, but grew meaningfully year over year. As we have said previously we expect the growth cadence for this revenue source to mirror, the timing of significant new deals and renewals with scaled platforms.

We also saw a meaningful recovery in several of our revenue streams that were impacted by Covid.

Artist services and expanded rights revenue, which includes merchandising grew by 70%, reflecting an increase in merchandising and concert promotion revenue as Turing is presumed.

Physical revenue grew by 22%, primarily driven by the strong demand for vinyl or across the globe.

Licensing revenue declined 9%, mainly due to onetime licensing settlements in the prior year, partially offset by higher synchronization revenue as businesses continued to recover from Covid disruption.

Adjusted OIBDA was $204 million or 27% increase over the prior year quarter with margins improving to 17, 4%.

This growth was driven by higher overall revenue some of which came from recovering lower margin areas like artist services, resulting in more muted margin growth.

For the full year accordingly at hip revenue increased by 16% driven by growth across almost all revenue streams adjusted OIBDA increased by 29% with margin improving by one seven percentage points to 21, 5%.

Music publishing revenue increased by over 19% in Q4, reflecting growth across all of its components. This performance was led by digital revenue growth of around 19% driven by the continuing growth in streaming across traditional and emerging platforms.

Digital revenue growth in the quarter was impacted by a favorable one time settlement in the prior year quarter. There was also a shift in the collection of greater share of U S. Digital performance income certain digital service providers, which will affect the next couple of quarters. The impact of this change is a reduction in our revenue offset by a reduction in our writers royalty expense.

Resulting in a modest benefit to our margin.

Sync revenue increased due to higher motion picture and commercial income at a one time licensing settlement.

<unk> and performance revenue increased as business has continued to recover of COVID-19 disruption with mechanical with only covers physical sales benefited from an increase in their sales.

Music publishing adjusted OIBDA increased 14% to $49 million, while margin decreased one five percentage points to 23, 9%.

For the full year music publishing revenue increased by 13% and adjusted OIBDA increased by 12% with margin declining from 24, 4% to 23.

Yes.

For both Q4 and the full year the decline in adjusted OIBDA margin was attributable to revenue, including the Covid impact the higher margin performance.

Operating cash flow increased 30% to $228 million.

38% to $638 million for Q4, and full year, respectively. We have revised our free cash flow definition to be more aligned with how we evaluate the operating performance of the business and to better reflect cash flow available for acquisitions and vessels and return to shareholders going forward references to free cash flow.

Be calculated as operating cash flow minus capex.

On this basis, our free cash flow grew 39% to $193 million in Q4, and 44% to $545 million for the full year.

This translates to an impressive free cash flow conversion rate defined as the ratio of adjusted OIBDA to free cash flow of 89% and 54% for Q4 and full year respectively.

These metrics underscore the strong operating performance within our business as well as our financially disciplined ROI focused investment strategy.

Capex in Q4 was $35 million.

Compared to $37 million in the prior year quarter and $93 million for the full year compared to $85 million in the prior year. The increase was related to our previously announced transformation initiatives.

Looking ahead to 2022, we expect to see elevated capex in the range of $130 million to $135 million for the full year. This.

This increase is due to the continued investment in our it and finance infrastructure.

As well as the expansion of Emt facilities to address the strong demand in our ecommerce physicals.

Our financial transformation program remains on track and is expected to deliver annualized run rate savings of about $35 million to $40 million once fully implemented in 2023.

As of September 30, we had a cash balance of $499 million total debt of $3 3 billion and.

And net debt of $2 8 billion.

Since our IPO, we have actively managed our capital structure, reducing our weighted average cost of debt from 4% to three 2% and extending maturities with our nearest maturity date now in 2020.

As we look ahead to the rest of the year, our expectations for total revenue and adjusted EBITDA growth rates remain largely in line with our internal expectations at the time of the IPO, while there will be some variability in revenue mix driven in part by recovery in certain Covid impacted revenue streams, we continue to be very optimistic about our long term growth and have a high.

Degree of confidence in our margin targets. We are truly excited about the steady flow of freight new music, we havent store and look forward to an amazing rest of the year. Thank you for joining our call today and we will now open the call for questions.

Thank you to ask a question you will need to press star one of your telephone throw your question press the pedal Keith please standby, while we compile the Q&A rosner.

Our first question comes from Michael Morris with Guggenheim. Your line is open.

Thank you very much good morning, guys.

Two topics for me I think Scott first Steve can you talk a bit about the general trends that you're seeing in.

Anr costs, the deals seem to be getting more expensive and royalty advances I think are reflecting that can you just share with us what what you.

<unk> is driving that.

And then my second topic, I think I'll direct to Lou just because you spoke about this is really about the runway for these emerging platform digital partnerships.

Any forward as you start to lap some of the initial deals how should we think about the financial path there.

Did those initial deals have certain minimum guarantees there could be at risk as you renew or should we think about the growth opportunity more.

Driven by a combination of both usage and expansion of these these deals thanks guys.

Great. So Michael on the first one anr trends.

I think it's important to remember that.

We manage a portfolio.

And as artists as artist move from.

The initial stages of <unk>.

Their career to really an established artist to to either regional or global superstars.

The the cost does increase.

That cost is generally however, offset by reduced marketing and promotional expense as artists become better and better known.

I think that.

Given the <unk>.

Financial resources that are flowing into both the recorded music and the music publishing markets.

That.

The goal for Warner.

Is to not get.

Wrapped up in.

Silver it so the market for lack of a better term.

And maintain our financial discipline.

That's been in place since the acquisition of Warner.

<unk> access we are very thoughtful about how we allocate capital and what we put into any deal whether it be an artist or M&A.

We are very thoughtful about not buying market share at a loss and we are very thoughtful about structuring deals to ensure that we get what we believe to be appropriate returns on our investments.

You'll also see that.

Our anr budgets.

Marketing and promotional budgets have remained relatively speaking.

Same relationship with revenue over the last 456 years, and we expect that to continue that as stable relationship.

Our marketing and promotion.

To revenue.

For the foreseeable future Michael.

With regard to the ESP question, Michael as we mentioned the revenue for this stream is recognized on a step basis not linear.

Due to the timing of the renegotiations of the.

The deals are often structured buyouts versus consumption.

As a result, you see that revenue impact, we do believe that as the services scale and new services come online in the space that the economics will continue to improve and we're seeing revenue growth.

Sure.

Great. Thank you both appreciate it.

Okay.

Our next one comes from could been morale with RBC capital markets. Your line is open.

Good morning, Thanks for taking the questions and of course best wishes to Eric I Hope you get well soon.

I was hoping to get your perspective on Universal they're public listing has increased investor awareness and focus on the recorded music and music publishing side of the audio ecosystem and seems to be driving a better appreciation of the attractive dynamics of the industry overall, but I guess on your end has the USG spinout affected Warner.

Is it groups if at all.

And maybe second can you talk a bit about their margin profile compare to yours and maybe why their margins appear higher thank you.

So.

I'll take the first the first part of that is the new world.

Take the second part.

I think that Universal's IPO, which is good news.

Not only for the broad music sector, but specifically.

Because.

Awesome.

Excuse me to your point.

It has it has put content.

And our brighter spotlight.

And it's made the investor community more aware of the opportunities.

By way of investing on the content side of the music sector.

We've competed with them.

Successfully for decades and.

We wish them.

<unk>.

<unk> success possible with respect to dislodge <unk>.

<unk> will talk about.

Some of the differences when you look at when you look at margins.

What I will point out is and Luc will explain it to you our margins are essentially identical.

And we.

We do that.

With the essentially you have the operating leverage.

Yes, so as Steve mentioned, there is not a difference between our margin <unk> margin on an apples to apples basis. They are nearly identical.

IRS Universal is able to classify certain rent and lease costs as depreciation which was excluded from EBITDA. If you net out the impact of that rent expense differential as we noted our margins are nearly identical and as you pointed out <unk> greater scale.

Thank you.

Our next question comes from Andrew <unk> with Jefferies. Your line is open.

Hey, Thank you Okay can you hear me.

Two questions I'll ask them at the same time.

Steve.

You talked earlier about.

New opportunities, whether it's <unk> and whatnot.

Everyone else on the earnings call has been talking about this quarter.

You guys I believe you have invested pretty early in this space. So one could you kind of talk about the broad opportunity here on how audio plays a role of music and audio play a role.

And then secondly are there specific areas here.

More exciting than others. Thank you.

Okay.

Well, what we see Andrew are.

Yes.

Alright.

Are really new models emerging.

Every day.

And I.

I don't see any reason why these two models.

Whether it would be.

Social gaming.

Fitness other.

Other areas aren't going to continue to emerge.

Almost all of them.

Utilized music is one of the critical elements of building out their models and frankly underlying our success.

I personally.

Couldnt imagine a peloton without music.

Or a tick tock without views.

So when we looked at the ease of use.

New emerging opportunities, which are which.

Which are showing up all around the world.

They they present.

Tremendous possibilities for Warner.

They are very exciting.

Startups.

We love to invest in them, we'd love to work with them to to build these businesses to scale.

And I think our.

Our drive and our ability to diversify revenue will just continue with respect to.

Where do I think things are really going to get more interesting and more special.

Most of the models, we currently see.

Are they a traditional push pull.

Where we're.

We push to the models the models push to consumers and consumers pull through.

Music that we help differentiate.

Much of the white noise, it's uploaded.

These based on to the services.

Sync with the within these large scale.

Meta versus.

Fortnite roadblocks and others.

That we will begin to see an opportunity.

We're providing content.

And distribution.

Convergence answered.

And when you begin to look at.

The global reach.

The number of people that.

Spend meaningful amounts of time.

In these new World I think it provides a universe of opportunity for water.

Okay.

Got it. Thank you so my next one.

Our next question comes from Ben Swinburne with Morgan Stanley. Your line is open.

Sure.

Thank you good morning.

Sure.

Steve you made a comment in your prepared remarks that water strives or can it drive market share without buying it and I think there is the phrase you used.

Can you talk a little bit about how you guys do that.

Specifically as we think about a market where.

There's more and more capital chasing all.

This IP.

And then I'm wondering if you could talk a little bit about what you want to do with your free cash flow and leverage.

I think given the strong free cash flow this year and looking into fiscal 'twenty. Two you guys are gonna have a leverage level.

So on a net basis thats relatively low compared to how you sort of capitalize the company in the past. So as we think about the next couple of years and what might you guys do with your balance sheet or capital allocation that might optimize the balance sheet. Thank you.

Right. So so what are you what ive actually said about.

Market share Ben is we will require it at a loss.

The way we will.

<unk> maintain and grow our market share.

As through.

Our investment strategies, which which really we invest broadly speaking into four buckets, and then I'll swing back to <unk>.

All four of them actually influence market share.

First we invest in our core business and we do that both through an expansion of our Anr budget and in line with the growth of our revenue and through M&A and the publishing side, it's primarily through the acquisition of catalogs.

We are we are.

And have been making a concerted effort to invest in the diversification of revenue, which is bucket number two.

Bucket number three is innovation and technology.

Bucket for us and our people so all of those over time impact our ability to build and gain market share.

Specifically with money flowing into the sector.

Lots of money.

Flowing into this sector.

We are we are because of.

The fact that we live in this sector.

Often times have more insight.

A better view of what assets can and as importantly, what they can't do.

By way of.

Being turbocharge.

Our organization.

Our.

Experts at I think the best in the World at Turbocharging these sort of assets.

So when we look at them we.

We looked at them to see how we can create that turbocharging, what headroom do we believe we have it.

How through financial discipline, we are prepared to either price and or restructure companies to achieve those our ROI goals.

We are very selective.

We are certainly not going to be one of the lending going over a cliff by spending on wisely.

<unk>.

That without the organization and the expertise these assets are going to grow it through some Mr. Culbert magical formulation.

So that's on the first piece.

On the second piece.

We've been very clear about what we do with our free cash flow.

Our first priority is to invest in the business again with rigorous discipline to get the Rois that we believe our shareholders deserve.

The second is when we can't find those opportunities is to return capital to our shareholders.

The third is to pay down debt with respect to the third we haven't gotten to that intersection yet better and I don't see us getting there for the foreseeable future.

Alright.

Can I just ask one quick housekeeping.

On the streaming growth I think you said, 20% was there any currency impact or maybe if you have that number ex currency it would be interesting.

Yes, Ben it's not material, it's one or 2%.

Okay, that's what I think.

Thank you.

Okay.

Thank you. Our next question comes from Matthew Thornton with truly Securities. Your line is open.

Hey, good morning, guys.

Steve maybe maybe two for you I guess first I'm wondering if you can comment on kind of what's going on over in the UK with the CMA Theyre opening up a market study of the industry just kind of curious your thoughts as to the implications maybe just how that.

How that plays out and any implications for Warner.

And then just secondly, I know you guys don't provide formal guidance, but maybe just a little more high level color as to how you are thinking about physical fiscal 'twenty, two driver original or linearity or anything else that's kind of catches your attention for the upcoming year. Thanks guys.

Okay.

First of all on the UK study.

<unk>.

We believe what it's going to show.

Is that.

On the content side, and we should keep in mind that that study is going to look at the music sector not only content providers.

<unk> DSP.

But on the content side.

We have a fiercely fiercely competitive industry.

Artists and songwriters.

<unk> historically have today and will tomorrow.

The benefit of.

Here's competition.

Between the labels.

To land, both recording artists and songwriters and I think that.

The fact that there.

Yes.

We have we have such a competitive.

Environment.

It will show that.

Song writers and recording artists are the primary beneficiaries.

That compensation.

Sorry.

And our competitions are the benefits of that competition.

So so I'm confident.

Sure.

That.

That that.

That'll be a finding I think that.

The.

Excuse me I think that the.

The reviewer of the investigation will also show.

That artist and our roster.

And the and the way we we.

Select goes those hardest and songwriters to join US and then what we do by way of marketing and promotion promotion Matthew.

We'll show that streaming.

Has been in general very good to them.

It will also show.

That the availability of tools.

For DIY artist today.

By way of being able to.

To professionally.

Sound mix and distribute their music has never been greater.

So im confident.

That when somebody looks at.

The music Echo sphere.

From a purely factual objective point of view.

That.

People will finally realize and people will come to the conclusion.

The labels are actually the good guys not the bad guys.

On guidance as you noted we don't give guidance.

That being said.

Okay.

Our.

Our new <unk> in the market at the moment the.

The music Thats coming.

Some of our biggest service or.

Dropping music as we speak.

I'm confident that the momentum we've generated over the last 369 12 months will continue.

Okay.

Okay.

Thank you. Our next question comes from Jessica Reif Ehrlich with Bank of America Securities. Your line is open.

Alright, thank you.

Two topics the two questions.

First what do you think drove the Renaissance and physical.

And do you think that will continue and on that topic can you talk about the difference in margins, which we know are low, but what is the differential with physical purchases.

Digital and then second Steve you called out based revenue.

I guess as opposed to subscribe direct sale can you talk about the size of your base revenue now what the growth rate is an outlook for that part of your.

Revenues.

Oh sure Okay. So.

Let me just.

Quickly talk about the Renaissance of the physical and then I'll turn it over to Lou.

Both the.

The comparisons of margins and the.

The outlook for growth of AD based revenue.

There is there is.

A segment of people around the world that love vinyl.

It is it is.

The recordings ended up themselves are.

An art form.

The Alba March.

No.

Lyrics.

The way it's put together.

Represents a a work of art.

A work of art from.

These incredible.

Incredible musical genius.

So this segment.

Of the music loving population.

Loves final launch to collected.

And.

And we think that that.

We will continue to grow the constraint being the.

The ability to actually produce final.

<unk>.

Given the limited amount of capacity around the globe.

Incidentally final just.

Per se collecting it as is.

For many people something that's really cool and for what it's worth.

I think they are right.

And Luke will now walk you through the numbers.

Yes, so on the margin differential between physical and digital.

France is roughly 15% better margin on the treatment side.

And then.

The second question was with regard to AD revenue and how we see AD revenue, yes. So AD revenue continues to grow nicely obviously.

It did have an impact on digital advertising revenue that has since recovered.

That business for Us if you look at E&P.

Brock so I'll kick MGM central publisher of the combined revenue for that about 100 billion in the quarter.

And size.

Did that answer your question.

Our next question comes from Rich Greenfield with led Chip partners. Your line is open.

Rich your line is open please check your mute button.

Hi, sorry about that can you hear me now.

Yup.

Sorry about that Stephen so.

If I think about AD supported streaming for many years, there was sort of a.

I'd say the industry just didn't like AD supported streaming and really just saw it as either an on ramp to subscription streaming and many labels I won't speak specifically for you, but for many labels. They wanted to sort of shut it down or force everybody into pure.

Description streaming today it seems like the AD supported side of the business is exploding.

Never seen Spotify, Daniel So excited about AD supported side of their business as they have been over the last couple of quarters I'm curious sort of what are your thoughts on the growth of the AD supported side of their business and whether you're encouraging some of your other partners, who don't have an AD supported business to follow them.

Sure.

Well first of all.

We've always been of the view.

<unk>.

People can pay for music either with their time.

Or with currency.

I guess it is.

Supported business their time as the currency.

On the on the subscription side, our money has occurred.

So we've always been supportive of both.

We in our discussions with Dsp's always encourage them.

If you look at revenue generating possibilities to strengthen both their businesses.

And our business.

I think that.

Excuse me when you look at when you look at the way.

Digital.

AD revenue has bounced back.

The way a group during the pandemic.

We see others jumped the intuit rich.

But we like we like.

All forms of revenue that that.

<unk>.

Support the music sector, and ultimately flow to artists and for us So.

So whether it would be.

Going deeper into ads price increases.

New functionality.

For that always with respect to our partnerships with our DSP.

Thank you.

Our next question comes from Ian <unk> with Credit Suisse. Your line is open.

Hi, good morning, guys.

Steve you talked a lot about different growth areas, whether emerging markets new revenue streams acquisitions another.

All of these areas can you maybe rank order those for the drivers of future growth for the company.

Dan.

Maybe for Lew I am not sure. If this is for a little bit maybe.

Maybe discuss how you think about the return targets when you're allocating capital towards deals maybe that will help us to frame the impact from the acquisitions you've done recently.

Sure.

Well.

We.

I don't know.

I would rank them I think that.

That.

All of our areas of investment priority.

Have have tremendous value and will provide us with tremendous returns.

At least for the foreseeable future.

Our core business.

We will probably remain our largest business traditional streaming.

And.

We continue to.

To support that.

Growing our anr budgets through M&A and by increasing our geographic footprint.

No.

That will continue.

To support the core and when you think about.

Revenue diversification.

Yes.

We take product from our core business.

And.

Adapt that product.

Two use cases.

With respect to revenue diversification.

That continues.

As we.

Invest.

And these new and emerging economic models.

And Stephanie on the core business, we see as I think we you.

We've said repeatedly we see a lot of runway.

In the in the traditional streaming.

World.

And we see tremendous opportunity.

In both in both the.

What are called mature markets.

Think that runway is still quite long and in the emerging markets, where we think there will be a conversion.

Over time from free.

That free will in many parts of the world, where where there really are no way out markets will will will develop AD markets and will convert to.

Subscriptions if in fact, they choose to pay with currency as opposed to time.

So our priorities.

And investments are core.

Diversification.

Innovation and technology.

People and all of them are essential.

By way of investments to ensure that we thrive in the future.

Okay.

And then with regard to the IRR question.

My question, we've talked quite a bit about being financially disciplined which we are that will continue.

We will continue to look for accretive investments.

The IRR that we get on these yields it depends on the risk profile of that deal so a higher risk deals or a higher return.

So the blended rate is probably somewhere in the mid teens.

But again it depends on the risk profile of individual deal.

Okay, Thanks, and best wishes to Eric <unk> back with Us soon.

Okay. Thank you will pass on your kind wishes.

Thank you our last question comes from Ivan <unk> with Tigress financial your line is open.

Thank you for taking my questions congratulations on another great year.

I am please send my best wishes for a speedy recovery.

Yes.

Could you talk a little bit how soda tone has helped you.

Discover and find great artists and even in areas, where you may have to increase the investment that you've gotten a better return and since music is going to be a major part of the immersive experience of the Medicare Steve what when you start to hear people talking about this more what areas <unk> six makes you the most.

Okay, so with respect to soda tone.

Okay.

Yes, I'd say.

Yes.

For lack of a better term a super advanced search engine.

Which we utilized to identify.

Recording artists songwriters and their music.

As it is getting traction.

And emerging.

Literally in.

Every market around the world.

It is used by way as good as it is used by hundreds.

Our employees on a daily basis.

To evaluate.

Virtually all the new music.

And the artist associated with that new music.

Inside of their specific territories.

Or regionals, and while I, while I can't give specific numbers.

I will tell you that in the last.

Okay.

In the last several years.

The number of artists that.

That we've identified and assigned.

Through soda tone.

Has.

Sure.

Probably COVID-19 and tougher.

It is a it is a remarkable tool.

And our people.

They use it literally I've been with $24 seven.

So now the meta versus what excites me.

Dr.

If you looked at the trends.

You can see that.

More and more people and when I say more and more people on.

I'm talking hundreds of millions.

For tens of millions.

Our spending.

More and more time.

In these inter active environments.

So if you look at if you look at.

Many of the ways in which music is distributed.

It is not an interactive environment.

Okay.

It is literally a push pull environment.

In these meta versus.

It is it is the combination of social.

Gaming Entertainment.

Yeah.

And probably more things that that I'm, just not aware of that that I could add.

And in these environments.

It goes beyond push pull it is actually interconnectivity.

Between content between people.

<unk> people and content between communities interaction between adjacent communities.

It is it is it is bringing new sick.

Artists.

To those environments to build and enhance not only the interconnectivity of music to people, what our artists to people our artist to artist and.

Got it.

It just.

Create so many possibilities.

For the conversion.

Of content artists.

<unk>.

And distribution.

[laughter] fab.

I think that it will take.

Music.

And <unk> ability to really be the one true global language to an entirely different level alive.

Super Super exciting.

Yes.

Wishing you a happy holidays, and a great new year.

Thank you likewise.

Thank you. This concludes this may answer session I would now like to turn the call back over to Steve Cooper for closing remarks.

So again I'd like to thank everyone for joining.

Joining us today I hope everyone has a.

Wonderful safe holiday season, and we will talk to you in the.

The new calendar year stay safe everyone. Thank you.

This concludes today's conference call. Thank you for participating you may now disconnect.

[music].

Got it.

Yes.

Okay.

Thank you.

[music].

Yes.

[music].

Right.

Okay.

Yes.

Okay.

Yes.

Okay.

Sure.

Yes.

Okay.

Okay.

Yes.

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Sure.

[music].

[music].

Welcome to Warner Music Group quarterly earnings call for the period ended September 30th 2021 at the request of one of them is a great. Today's call is being recorded for replay purposes, and if you object you may disconnect at any time now.

Now I would like to turn today's call over to your host Kareem Chin head of Investor Relations you may begin.

Good morning, everyone.

Welcome to Warner Music group fiscal fourth quarter and full year earnings conference call. Please.

Please note that our earnings press release and earnings snapshot are available on our website and we plan to file our 10-K during the week of November 22nd.

On today's call our CEO, Steve Cooper, who will provide you with an update on the quarter and the full year.

Eric <unk>, our CFO is on medical leave and as a result, our acting CFO and corporate controller <unk> will take you through our financial results.

Lou and I will then answer your questions.

Before our prepared remarks I'd like to refer you to the second slide in the earnings snapshot to remind you that this communication includes forward looking statements that reflect the current views of Warner music group about future events and financial performance.

We plan to present certain non-GAAP results. During this conference call and in our earnings snapshot slides, we have provided schedules reconciling these results to our GAAP results in our earnings press release.

All of these materials are posted on our website.

Also please note that all revenue figures and comparisons discussed today will be presented in constant currency unless otherwise noted.

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 to 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 filings with the SEC.

And with that I'll turn it over to Steve.

Thanks, Karim good morning, everyone and thanks for joining us.

As we all know the world spend through a very dark time over the last 18 months.

All been challenged both personally and professionally and ways, we could not match.

But with vaccination rates continue rates continuing to rise.

In many territories beginning to return to some kind of normality.

Slight there is light at the end of the proverbial tunnel.

If there is anything that our company has learned during this pandemic.

For billions of people across the globe music.

Music is essential to our wealthy.

Permeates, our lives and gives us inspiration in Hollywood.

It gives voice to our anxiety or status and our joy and short music punches are like no other hardcore.

When concerts and life insurances, where nearly impossible to stage.

Our ability to super serve our artists and songwriters during this extraordinary time, we've made crystal clear.

Our global resources creative expertise and commercial commercial reach makes sense and absolutely indispensable component that is critical to the entire music value chain.

Six years ago.

Warner doubled down on stream.

We became the first music nature to make at our largest revenue source.

Today, our business is no longer driven by linear format shifts it's multifamily.

Multifaceted and expanding in all directions.

From social media gaming and home fitness to VR, we are at the heart of virtually every consumer experience.

The increasing complexity of our industry goes hand in hand, with the ever growing potential of our company.

We're not merely embracing our future.

We're creating.

With that let's get to an overview of our fourth quarter results.

Total revenue increased by 22%.

On an as reported basis and 21% on a constant currency basis.

Adjusted EBIT, we stopped by 34% with margin improvement driven by strong revenue growth.

In our recorded music revenue increased by more than 21%.

Digital grew 17% and streaming grew 20%.

Meanwhile, revenue sources that were severely impacted by Covid.

Most notably artist services, and physical recovered nicely growing 70% and 22% respectively.

In publishing we delivered revenue growth of over 19%.

<unk> mechanical and the same.

All had double digit growth and.

It was also very good news the performance revenue appears to have bottomed out and.

And has returned to modest growth as consumer venues across the board continue to recover.

As new capital into our sector, we're even more confident in our position.

We have the expertise and capabilities to increase market share not merely the financial resources to buy it.

We're highly selective and only pursue deals that through our active management of assets will be accretive to shareholder value.

Our track record of making financially disciplined investments as evidenced by the rate at which we converted adjusted OIBDA to free cash flow.

Now, let me drill down into the key tenants of our business.

With a few examples of the progress we're making.

While case trends and tactful change artists and songwriters will always be our driving force.

Pride ourselves on our ability to work with talent in all stages of their careers and across a wide diversity of genres generations and geographies.

We're developing and nurturing the next generation of recording artists such as the Uk's Pampers and Joel Corey.

Argentina's letter chiller.

And the U S as Don Oliver who solvent debuted at number one on the top outbound sales charges that belt.

We're also trusted by iconic recording artists and manage their life's work.

And just the last several months, we striked career spanning deals with Coldplay Macdonough, David Guetta NDA stage with David Paul.

On the publishing side Big signings include chairman wrapper in RMB, starting June AI crew.

Rock legend, William Patrick corrugated and Grammy Award winner Daniel saves are we.

We also welcome pop icon, Sam Smith, who rejoined publishing agreement with <unk> news.

Many artists also see the value in having Warner as their own for both recorded music can publish.

Like Chaplin Bruno Mars.

Data <unk> Thompson I Cardi b in lithium to name just a few.

While our artists and songwriters are at the center of all that we do.

<unk> really does need com.

More than ever talent needs help to cut through the noise. Our mission is to elevate great artists amplify their music and help their voices rule the world.

Music is the only true global language and I'm, a big believer to the principal.

That success can come from anywhere and translate everywhere.

Simultaneously, new cities, becoming hyper localized in Japan, Germany, and France, the three biggest non Anglo markets.

Domestic repertoires on average over 65% of the business.

We're now operating in over 70 countries and expanding our resources and reach in a number of key growth markets.

In the past year alone.

We've made a number of strategic moves to strengthen our anr presence across the globe.

We launched Atlantic Records in both Russia, and Benelux and Aea, our indie label services group expanded into Russia, as well as Italy.

We continued our expansion into Africa by acquiring leading independent label collapsed.

We further expanded our Asian, and Chinese footprint with our hip hop labels Asiatic juice and our dance label West.

And we forged an important new alliance with proton and user error.

<unk> of World, leading independent label.

We also established through local water company Houston.

Important distribution partnerships with <unk> in Malaysia.

Sky digital in India, and or a fine video box and worldwide Records in Mexico.

Barry May in Cambodia.

<unk> media in Vietnam, and same same records in Australia.

Here's a great example of our strategy in action.

We signed Nigerian artist CK to Warner Music, South Africa. After he was discovered through our partnership with Chocolate City.

And an unprecedented achievement CK made history by scoring the most watched video in the world on Youtube with your song.

<unk>.

The biggest solid to ever come out of Africa.

This is also one of the most popular tracks on Instagram Tictoc and also on Spotify.

Where it now has over 180 million streams.

Bloomberg recently noted this calling it a watershed moment for African path.

Let's now turn to our progress with innovation and revenue diversification.

Not so long ago people question, Dr Flynn for streaming growth.

Today, it's clear from our results that subscription streaming still has tremendous runway ahead of it bolster.

Bolstered by price increases in developed markets and increasing penetration in emerging markets.

Growth is being supplemented by emerging platforms that are incorporating music as a critical feature of their user experiences.

To that end.

We're positioning ourselves at the intersection of social gaming fitness VR in Houston.

We continue to lead the sector by being the first nature to partner with disruptive players in these dynamic and rapidly growing space.

And another pioneering move we are to date.

Only music nature to form a partnership with Twitch paving the way for even greater collaboration in the future.

We've also continued to grow our own unique network and consumer media brands, including <unk> <unk> song kick on hip hop Gx.

We've expanded our reach through the development of outlets such as the pit and in the mix tape and.

We continue to manage nearly five.

Unique artist Youtube channels.

As a result, our AD based revenue grew significantly in Q4.

Sustained gains across these owned and operated properties.

Our network of consumer media brands as a strategic focus for us and has significant growth potential.

Beyond the lookout for an exciting announcement later this week, which we'll tell you how we intend to further turbocharge this area.

None of this however, as possible with our great people in place to make it all happen.

We continue to strengthen our executive branch promoting from within as well as hiring great talent from the outside.

Over the past year.

We've installed our next generation of digital savvy leadership in many key territories.

These include Canada, China, Germany.

France, Latin America, South Africa, upholding the Philippines, Taiwan and Indonesia.

We also have a new leader of Aea worldwide, along with separate U S and international Eva Hesse, making us even more capable of serving <unk> artists and labels everywhere.

Without a doubt we have the best team in the business and one that positions us exceptionally well for this new Goldman Hmu's.

With our new head of ESG in place since August we plan to issue. Our first annual report in early 2022.

It will provide a detailed update on our progress in sustainability and <unk> among other topics.

This past June we published our first impact report from the Warner Music Group Lobotomy family Foundation, social adjustments pumps.

Established last year. The fund has focused its grant making on three key pillars.

<unk> vacation criminal Justice reform and Arts and culture.

It's already committed funds and resources to a number of amazing organizations with many more grants on the way.

Fiscal year 'twenty, two is already off to a strong start.

Hold placed new album was our ninth number one in the UK, while Ed Sheeran has the fastest selling album of 2021, so far.

So sonic for Bruno Mars, and Anderson <unk> duo dropped their new album and evening with Subsonic last Friday.

We also have an amazing slate of holiday releases from Kelly Clarkson Michael <unk>.

Rob Thomas Brett <unk> and others.

And today's detention economy.

Our business not only demands an ever increasing slowly great music.

But also ever growing levels of service to great artists and songwriters.

Warner achieved SaaS mix better than any other company in the world and we look forward to raising the bar, even further in the coming year and beyond.

Before I turn it over to you there is one final matter I'd like to mention.

While the major music companies, such as Warner Chappell negotiate direct licensees with streaming services.

In the United States. There is a portion of the revenue from traditional audio streaming services, specifically mechanical revenue.

Which is subject to a compulsory license at rates set by the copyright royalty board.

You may have read about phono records for <unk>.

Which is the name of the ongoing U S digital mechanical royalty rate proceedings before the CRB.

It will determine whether Houston publishers and song writers will be paid by these traditional services.

Between 2023 and 2027.

There's been a lot of controversy in your music press on this topic.

But there should be nothing controversial about music publishers and songwriters getting paid fair market rates to which they're entitled.

And we fight hard for the rights of our songwriters.

<unk> song writers are at the very beginning of the SaaS value chain.

And there would be no music business without.

We fully support the Mta's advocacy efforts and the current rate proceeding.

And we look forward to a positive outcome for Warner Chappell music and song writers.

And with that I'll turn it over to Lou.

Thank you, Steve and good morning, everyone.

'twenty, one was an incredibly challenging year to navigate and our results only continued to validate the strength and resilience of our business model.

In Q4 total revenue was up approximately 21% on a constant currency basis and up over 22% on an as reported basis. These results are underpinned by growth across almost all of our revenue lines.

For the full year, our total revenue increased by over 15% on a constant currency basis, and almost 19% on an as reported basis.

Our strong operating performance was evidenced by the healthy growth in adjusted OIBDA and adjusted EBITDA, We saw in both the fourth quarter and the full year.

In Q4, adjusted OIBDA increased by over 25% $218 million with margin improving from 15, 5% to 15, 8% adjusted EBITDA, which reflects the pro forma impact of future cost savings and transactions completed in the quarter.

<unk> increased by 34% to $237 million with margin improving from 15, 7% to 17, 2%.

I want to note that both metrics reflect adjustments for approximately $15 million of restructuring costs, primarily driven by severance costs associated with the leadership and related organizational changes as Steve referenced earlier.

For the full year, adjusted OIBDA, and adjusted EBITDA increased by approximately 29% and 30% respectively.

You can find the calculation and reconciliations related to adjusted OIBDA and adjusted EBITDA in our press release.

According to music revenue increased by over 21% in the fourth quarter digital revenue increased by 17% driven by continued strength in streaming revenue, which grew approximately 20% year over year.

All components of streaming revenue experienced robust year over year growth.

Courted music revenue from emerging streaming platforms remain at $235 million on an annualized basis, but grew meaningfully year over year. As we have said previously we expect the growth cadence for this revenue source to mirror, the timing of significant new deals and renewals with scaled platforms.

We also saw a meaningful recovery in several of our revenue streams that were impacted by Covid.

<unk> services and expanded rights revenue, which includes merchandising grew by 70%, reflecting an increase in merchandising and concert promotion revenue as Turing has resumed.

Physical revenue grew by 22%, primarily driven by the strong demand for vinyl or across the globe.

Licensing revenue declined 9%, mainly due to onetime licensing settlements in the prior year, partially offset by higher synchronization revenue as businesses continued to recover from Covid construction.

Adjusted OIBDA was $204 million or 27% increase over the prior year quarter with margin improving to 17, 4%. This growth was driven by higher overall revenue some of which came from recovering lower margin areas like artist services, resulting a more muted margin growth.

For the full year Accordingly, hip revenue increased by 16% driven by growth across almost all revenue streams.

Adjusted OIBDA increased by 29% with margin improving by one seven percentage points to 21, 5%.

Music publishing revenue increased by over 19% in Q4, reflecting growth across all of its components. This performance was led by digital revenue growth of around 19% driven by the continuing growth in streaming across traditional and emerging platforms.

Digital revenue growth in the quarter was impacted by a favorable onetime settlements in the prior year quarter. There was also a shift in the collection of greater share of U S. Digital performance income certain digital service providers, which will affect the next couple of quarters. The impact of this change is a reduction in our revenue offset by a reduction in our writers royalty expense.

Resulting in a modest benefit to our margin.

Yes.

Sync revenue increased due higher motion picture and commercial income and a onetime licensing settlement mechanical and performance revenue increased as business has continued to recover of COVID-19 disruption with mechanical which only covers physical sales benefited from an increase in net sales.

Music publishing adjusted OIBDA increased 14% to $49 million, while margin decreased one five percentage points and 23, 9%.

For the full year music publishing revenue increased by 13% and adjusted OIBDA increased by 12% with margin declining from 24, 4% to 23, 5%.

For both Q4 and the full year the decline in adjusted OIBDA margin was attributable to revenue, including the Covid impact the higher margin performance Triple.

Operating cash flow increased 30% to $228 million and 38% to $638 million for Q4 and full year, respectively. We have revised our free cash flow definition to be more aligned with how we evaluate the operating performance of the business and to better reflect cash flow available.

<unk> for acquisitions and vessels and return to shareholders going forward references to free cash flow will be calculated as operating cash flow minus capex.

On this basis, our free cash flow grew 39% to $193 million in Q4, and 44% to $545 million for the full year <unk>.

This translates to an impressive free cash flow conversion rate defined as the ratio of adjusted OIBDA to free cash flow of 89% and 54% for Q4 and full year respectively.

These metrics underscore the strong operating performance within our business as well as our financially disciplined ROI focused investment strategy.

Capex in Q4 was $35 million compared to $37 million in the prior year quarter and $93 million for the full year compared to $85 million in the prior year. The increase was related to our previously announced transformation initiatives.

Looking ahead to 2022, we expect to see elevated capex in the range of $130 million to $135 million for the full year.

This increase is due to the continued investment in our it and finance infrastructure as well as the expansion of Emt facilities to address the strong demand in our E Commerce business.

Our financial transformation program remains on track and is expected to deliver annualized run rate savings of about $35 million to $40 million once fully implemented in 2020 right.

As of September 30, we had a cash balance of $499 million total debt of $3 3 billion and.

And net debt of $2 $8 billion.

Since our IPO, we have actively managed our capital structure, reducing our weighted average cost of debt from 4% to three 2% and extending maturities with our nearest maturity date now in 2020.

As we look ahead to the rest of the year, our expectations for total revenue and adjusted EBITDA growth rates remain largely in line with our internal expectations at the time of the IPO, while there will be some variability in revenue mix driven in part by recovery in certain Covid impacted revenue streams, we continue to be very optimistic about our long term growth and have a high degree of.

And our margin targets.

Really excited about the steady flow of freight new music, we havent store and look forward to an amazing rest of the year. Thank you for joining our call today and we will now open the call for questions.

Thank you to ask a question you will need to press star one on your telephone to throw your question press the pedal Keith please standby, while we compile the Q&A rosner.

Our first question comes from Michael Morris with Guggenheim. Your line is open.

Jack.

Thank you very much good morning, guys.

Two topics for me I think.

First Steve can you talk a bit about the general trends that you're seeing in <unk>.

And our costs the deals seem to be getting more expensive.

Royalty advances I think are reflecting that can you just share with us what you think is driving that.

And then my second topic.

I'll direct to Lou just because you spoke about this it's really about the runway for these emerging platform digital partnerships going forward as you start to lap some of the initial deals how should we think about the financial path. There did those initial deals have certain minimum guarantees there could be at risk.

As you renew or should we think about the growth opportunity more.

Driven by a combination of both usage and expansion of these these deals thanks guys.

Great. So Michael on the first one anr trends.

I think it's important to remember that.

We manage a portfolio.

And as artists as artist move from.

<unk>.

The initial stages of.

Of their career to really an established artist to to either regional or global superstars.

The the cost does increase.

That cost is generally however, offset by reduced marketing and promotional expense as artists become better and better known.

I think that.

Given the.

Financial resources that are flowing into both the recorded music and the music publishing markets.

That.

The goal for Warner.

Is to not get.

Wrapped up in.

Silver into the market for lack of a better term.

And maintain our financial discipline.

That's been in place since the acquisition of Warner.

By access we are very thoughtful about how we allocate capital and what we put into any deal whether it be an artist or M&A.

We are very thoughtful about not buying market share at a loss and we are very thoughtful about structuring deals to ensure that we get what we believe to be appropriate returns on our investments.

You'll also see that.

Our anr budgets.

Marketing and promotional budgets have remained relatively speaking.

Same relationship with revenue over the last 456 years, and we expect that to continue that as stable relationship.

Our marketing and promotion.

To revenue.

For the foreseeable future Michael.

With regard to the ESP question, Michael and as we mentioned the revenue for the stream is recognized on a stat basis not linear.

That's due to the timing of the deal renegotiations.

The deals are often structured buyouts versus consumption.

As a result, you see that revenue impact, we do believe that Etsy services scale and new services.

In the space that the economics will continue to improve and we're seeing revenue growth.

Right.

Great. Thank you both appreciate it.

Okay.

Our next one comes from had been morale with RBC capital markets. Your line is open.

Good morning, Thanks for taking the questions and of course best wishes to Eric I Hope you get some soon.

I was hoping to get your perspectives on universal they're public listing has increased investor awareness and focus on the recorded music and music publishing side of the audio ecosystem and seems to be driving a better appreciation of the attractive dynamics and the industry overall, but I guess on your end has the USG spin out best connected Warner mute.

<unk> groups if at all.

And maybe second can you talk a bit about their margin profile compared to yours, and maybe why their margins appear higher thank you.

So.

I'll take the first the first part of that is the new world.

Take the second part.

I think that Universal's IPO, which is good news.

Not only for the broad music sector, but specifically.

Because.

Awesome.

Excuse me to your point.

Has it has put content.

And our brighter spotlight.

And it's made the investor community more aware of the opportunities.

By way of investing on the content side of the music sector.

We've competed with them.

Successfully for decades.

We wish them.

<unk>.

<unk> success possible with respect to dislodge <unk>.

<unk> talked about.

Some of the differences when you look at when you look at margins.

What I will point out is in Louisville explained it to you our margins are essentially identical.

And we.

We do that.

With essentially half the operating leverage.

Yes, so as Steve mentioned, there is not a difference between our margin <unk> margin on an apples to apples basis. They are nearly identical.

<unk> IRS universal is able to classify certain rent and lease costs as depreciation which was excluded from EBITDA. If you net out the impact of that rent expense differential as we noted our margins are nearly identical and as you pointed out <unk> greater scale.

Thank you.

Our next question comes from Andrew <unk> with Jefferies. Your line is open.

Hey, Thank you Okay can you hear me.

Two questions I'll ask them at the same time.

Steve.

You talked earlier about.

New opportunities, whether it's <unk> Ts and whatnot.

Everyone else on the earnings call has been talking about this quarter.

You guys I believe have invested pretty early in this space. So one could you kind of talk about being a broad opportunity to hear on how audio plays a role of music and audio play a role.

And then secondly are there specific areas here.

More exciting than others. Thank you.

Okay.

Well, what we see Andrew are.

Sure.

Okay.

Are really new models emerging.

Every day.

And.

I don't see any reason why these new models.

Whether it be.

Social gaming.

Fitness.

Other areas aren't going to continue to emerge.

Almost all of them.

Utilize music is one of the critical elements.

Of building out their models and frankly underlying our success.

I personally.

Couldnt imagine peloton without music.

Or a tick tock without views.

So when we looked at these.

New emerging opportunities which are.

Which are showing up all around the world.

They present tremendous possibilities for Warner.

They are very exciting these startups.

We'd love to invest in them, we love to work with them to to build these businesses to scale.

And I think our.

Our drive and our ability to diversify revenue will just continue with respect to.

Where do I think things are really going to get more interesting and more special.

Most of the models, we currently see.

Are there a traditional push pull.

Where we're.

We push through the models the models push to consumers and consumers pulled through.

The music that we help differentiate.

From much of the white noise that's uploaded.

These based on to the services.

Zinc with the.

<unk>.

Within these large scale.

Meta versus.

<unk> global.

<unk> and others.

That we will begin to see an opportunity.

We're providing content.

And distribution.

Convergence answer.

And when you begin to look at.

Our global reach.

The number of people that.

Spend meaningful amounts of time.

And these new World I think it provides a universe of opportunity for water.

Okay.

Got it. Thank you so our next quarter.

Our next question comes from Ben Swinburne with Morgan Stanley. Your line is open.

Sure.

Thank you good morning.

<unk>.

Steve you made a comment in your prepared remarks that water.

<unk> can drive market share without buying it and I think theres a phrase you used.

Can you talk a little bit about how you guys do that.

Specifically as we think about a market where.

There is more and more capital chasing.

This IP and then I'm wondering if you could talk a little bit about what you want to do with your free cash flow and leverage.

Because I think given the strong free cash flow this year and looking into fiscal 'twenty. Two you guys are going to have a leverage level at.

At least on a net basis thats relatively low compared to how you sort of capitalize the company in the past so as we think about the next couple of years.

You guys do with your balance sheet or capital allocation that might optimize the balance sheet. Thank you.

Right. So so what I, what I've actually said about.

Market share Ben is we wanted to acquire it at a loss.

The way we will.

Continuing to maintain and grow our market share.

As through.

Our investment strategies, which which really we invest broadly speaking into four buckets, and then I'll swing back to those all four of them actually influence market share.

First we invest in our core business and we do that voted through an expansion of our anr budget and in line with the growth of our revenue and through M&A and the publishing side, it's primarily through the acquisition of catalogs.

We are we are.

And have been making a concerted effort to invest in the diversification of revenue, which is bucket number two bucket.

Bucket number three is innovation and technology and bucket for us and our people. So all of those over time impact our ability.

To build and gain market share.

Specifically with money flowing into the sector.

Lots of money flowing into this sector.

We are we are because of.

Of the fact that we live in this sector often times have more insight.

And a better view.

What assets can and as importantly, what they can't June.

By way of.

Being turbocharge.

Our organization.

Our.

Experts at I think the best in the World at Turbocharging these sorts of assets.

So when we look at them we.

We looked at them to see how we can create that turbocharging, what headroom do we believe we have.

And how through financial discipline, we are prepared to either price and or restructure companies to achieve those ROI goals.

We are very selective.

We are certainly not going to be one of the lemmings going over a cliff by spending on wisely.

<unk>.

That without the organization and the expertise these assets are kind of growing through some Mr. Culbert magical formulation.

So that's on the first piece.

On the second piece.

We've been very clear about what we do with our free cash flow.

Our first priority is to invest in new business.

Then with rigorous discipline to get the Rois that we believe our shareholders deserve.

The second is when we can't find those opportunities.

As to return capital to our shareholders. The third is to pay down debt with respect to the third we haven't gotten to that intersection yet better and I don't see us getting there for the foreseeable future.

Great could I just ask one quick housekeeping.

On the streaming growth I think you said, 20% was there any currency impact or maybe if you have that number ex currency I'd be interested in.

Yes, Ben it's not material, it's one or 2%.

Okay, that's what I figured thank you.

Okay.

Okay.

Thank you. Our next question comes from Matthew Thornton with truly Securities. Your line is open.

Hey, good morning, guys.

Steve maybe maybe two for you I guess first I'm wondering if you can comment on kind of what's going on over in the UK with the CMA Theyre opening up a market study of the industry just kind of curious your thoughts as to the implications maybe just how that.

How that plays out and any implications for Warner.

And then just secondly, I know you guys don't provide formal guidance, but maybe just a little more high level color as to how you are thinking about physical fiscal 'twenty, two drivers or linearity or anything else that's kind of catches your attention for the upcoming year. Thanks guys.

Okay.

First of all on the UK study.

<unk>.

We believe what it's going to show.

Is that.

On the content side, and we should keep in mind that that study is going to look at the music sector not only content providers.

Dsp's, but on the content side.

We have a fiercely fiercely competitive industry.

Artists and songwriters have historically have today as well as tomorrow has the benefit of fierce competition.

Between the labels.

To land, both recording artists and songwriters and I think that.

The fact that.

We have we have such a competitive.

Environment.

It will show that.

The writers and recording artists are the primary beneficiaries.

That composition that sorry.

And our competitions are the benefits of that competition.

So so I'm confident.

Sure.

<unk>.

Staff.

That will be a finding I think that.

The.

Excuse me I think that the.

Positive review or the investigation will also show.

That artists and our roster.

And the and the way we.

Select goes those hardest and songwriters to join US and then what we do by way of marketing and promotion promotion App.

We'll show that streaming.

Has been in general very good to them.

I think it will also show.

That.

The availability of tools.

Or DIY artist today.

Sure.

By way of being able to.

To professionally.

Sound mix and distribute their music has never been greater.

So im confidence.

That when somebody looks at.

The music Echo sphere.

From a purely factual objective point of view.

That.

People will finally realize and people will come to the conclusion.

That the labels are actually the good guys not the bad guys.

On guidance as you noted we don't give guidance.

That being said.

Sure.

No.

Our.

Our music in the market at the moment.

Music that's coming.

Some of our biggest service or are dropping new sick as we speak.

I'm confident that the momentum we've generated over the last 369 12 months will continue.

Okay.

Yeah.

Thank you next question comes from Jessica Reif Ehrlich with Bank of America Securities. Your line is open.

Alright, thank you.

<unk> Capex of two questions first.

What do you think drove the Renaissance and physical.

And do you think that will continue on that topic can you talk about the difference in margins, which we know are low, but what is the differential with physical presence.

Digital.

Then second Steve you called out Euro based revenue revenue.

Yes as opposed to direct.

Direct sales can you talk about the size of your AD based revenue now what the growth rate is an outlook for that product.

Sure.

Revenues.

Sure Okay. So.

Let me just.

Quickly talk about the Renaissance of the physical and then I'll turn it over to Lou on both.

The comparisons of margins and the.

The outlook for growth of AD based revenue.

There is there is.

A segment of people around the world that lot of vinyl.

It is it is.

The recordings ended up themselves are.

An art form.

The Alba March.

No.

Lyrics.

The way it's put together.

Represents a a work of art.

And a work of art from.

These these incredible musical genius.

So this segment.

Of the music loving population.

Loves final launch to collected.

And.

We think that that.

We'll continue to grow due to constraints being the.

The ability to actually produce final.

<unk>.

Given the limited amount of capacity around the globe.

And should ethylene vinyl just.

Per se collecting it as is preventing people something is really cool and for what it's worth.

I think they are right.

And Luke will now walk you through the numbers.

Yes, so on the margin differential between physical and digital the differences roughly 15% better margin on the treatment side.

And then.

The second question is with regard to AD revenue and how we see AD revenue, yes. So AD revenue continues to grow nicely obviously.

It did have an impact on digital advertising revenue that has since recovered.

And that business for us if you look at E&P.

Rock solid kick MGM central publisher of the combined revenue that's about $100 billion in the quarter.

And size.

Did that answer your question.

Yes.

Our next question comes from Rich Greenfield with <unk> partners. Your line is open.

Rich your line is open please check your mute button.

Hi, sorry about that can you hear me now.

Yup.

Sorry about that Stephen so.

If I think about AD supported streaming for many years, there was sort of a.

I'd say the industry just didn't like AD supported streaming and really just saw it as either an on ramp to subscription streaming and many labels I won't speak specifically for you, but for many labels. They wanted to sort of shut it down or forced everybody into pure subscription streaming today. It seems like the AD supported side of the business is exploding.

I've never seen Spotify, Daniel So excited about AD supported side of their business as they have been over the last couple of quarters I'm curious sort of what are your thoughts on the growth of the AD supported side of their business and whether you're encouraging some of your other partners, who don't have an AD supported business to fall.

All of them.

Yes.

Well first of all we've.

We've always been of the view.

That's that people can pay for music either with their time.

Or with currency.

I guess.

In an AD supported business their time is the currency.

And.

On the on the subscription side with our money has occurred.

So we've always been supportive of both.

We in our discussions with the USPS always encourage them.

So look at revenue generating possibilities.

To strengthen both their businesses.

And our business.

I think that.

Excuse me when you look at when you look at the way.

Digital.

AD revenue has bounced back.

The way a grew during the pandemic.

We see others jumping into it rich.

But we like we like.

All forms of revenue that that.

Support the music sector, and ultimately flow to artists and for us So.

So whether it would be.

Going deeper into ads price increases.

New functionality.

Therefore that always with respect to our partnerships with our DSP.

Thank you.

Okay.

Our next question comes from Ian <unk> with Credit Suisse. Your line is open.

Hi, good morning, guys.

Steve you talked a lot about different growth areas, where there are emerging markets, new revenue streams acquisitions and other.

All of these areas can you maybe rank order those for the drivers of future growth for the company.

Then.

Maybe for Lew I am not sure. If this is for a little bit maybe.

Maybe discuss how you think about the return targets when you're allocating capital towards deals maybe that will help us to frame the impact from the acquisitions you've done recently.

Sure.

Well.

We.

I don't know.

I would rank them I think that.

Bass.

All of our areas of investment priority.

Have have tremendous value and will provide us with tremendous returns.

At least for the foreseeable future.

Our core business.

We will probably remain our largest business traditional scrutiny.

And.

We continue to chew.

To support that by growing our anr budgets through M&A and by increasing our geographic footprint. So that will continue.

To support the core and when you think about.

Revenue diversification.

Yes.

Sure.

We take product from our core business.

And.

Adapt that product too.

Two use cases.

With respect to revenue diversification.

That continues.

As we.

Invest.

And these new and emerging economic models and.

And Stephanie on the core business, we see as I think we were.

We've said repeatedly we see a lot of runway.

In the in the traditional streaming.

World.

And we see tremendous opportunity.

In both in both the.

What are called mature markets, we think that runway is still quite long and in the emerging markets, where we think there will be a conversion.

Over time from free.

That free will in many parts of the world, where where there really are no way AD markets will will will develop AD markets and will convert to.

Subscriptions if in fact, they choose to pay with currency as opposed to time.

So our priorities.

And investment our core <unk>.

Diversification.

Innovation and technology.

People and all of them are essential.

By way of investments to ensure that.

We thrive in the future.

Okay.

Okay.

And then with regard to the IRR question.

Hello, My question, we've talked quite a bit about being financially disciplined which we are that will continue.

We will continue to look for accretive investments.

The IRR that we get on the yields is dependent on the risk profile of that deal so a higher risk deals or a higher return.

So the blended rate is probably somewhere in the mid teens.

But again it depends on the risk profile individual deal.

Okay, Thanks, and best wishes to Eric <unk> back with Us soon.

Okay. Thank you will pass on your kind wishes.

Thank you our last question comes from Ivan <unk> with Tigress financial your line is open.

Thank you for taking my questions congratulations on another great year.

I am please send my best wishes for a speedy recovery.

Yes.

Can you talk a little bit how soda tone has helped too.

Discover and find great artists and even in areas, where you may have to increase the investment that you've gotten a better return and.

Since music is going to be a major part of the immersive experience of the Medicare Steve.

When you start to hear people talking about this more what areas <unk> six makes you the most.

Yes.

So with respect to soda tone.

I'd say.

Yes.

<unk>.

For lack of a better term a super advanced search engine.

Which we utilized to identify.

Recording artists songwriters and their music.

It is getting traction and.

And emerging.

Literally in.

Every market around the world.

It is used by the way it is used by hundreds.

Our employees on a daily basis.

To evaluate.

Virtually all the new music.

And the artist associated with that new music.

Inside of their specific territories.

Or regions and while I, while I can't give specific numbers.

I will tell you that in the last.

Great.

In the last several years.

The number of artists that.

That we've identified and assigned.

Through soda tone.

Has.

Sure.

Probably quintupled.

It is a it is a remarkable tool.

And our people.

They use it literally I've been with 24 seven.

So now the amount of versus what excites you.

Dr.

If you look at the trends.

You can see that.

More and more people and when I say more and more people on.

I'm talking hundreds of millions.

For tens of millions.

Our spending.

More and more time.

In these inter active environments.

So if you look at if you look at.

Many of the ways in which music is distributed.

It is not an interactive environment.

Okay.

It is literally a push pull environment.

In the smelter versus.

It is it is the combination of <unk>.

Social.

Gaming Entertainment.

And probably more things that that I'm, just aren't aware of that that I could add.

And in these environments.

It goes beyond push pull it is actually interconnectivity.

Between content between people.

<unk> people and content between communities interaction between adjacent communities.

And it is it is it is bringing music artists.

To those environments.

To build and enhance not only the interconnectivity of new sector people, but our artist to people our artist to artist and.

It just.

Create so many possibilities.

For the conversion.

Of content artists.

<unk>.

And distribution.

Okay.

Fab.

I think that it will take.

Music.

<unk> ability to really be the one true global language to an entirely different level alive.

Super Super exciting.

Yes.

And wishing you a happy holidays, and a great new year.

Thank you likewise.

Thank you. This concludes this may answer session I would now like to turn the call back over to Steve Cooper for closing remarks.

So again I'd like to thank everyone for <unk>.

Joining us today I hope everyone has a.

Wonderful safe holiday season, and we will talk to you in the new calendar year stay safe everyone. Thank you.

Yes.

This concludes today's conference call. Thank you for participating you may now disconnect.