Warner Music Group Corp. (WMG) Q3 2013 Earnings Report, Transcript and Summary

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. (Operator Instructions) 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 in 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 through 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’d 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 officially welcome Parlophone’s extraordinary artists, its legendary catalog and talented management team to the Warner Music family. For the past several months, we’ve been working very closely with Parlophone’s leadership towards the swift and efficient combination of the two companies. This preparation insures 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 labels 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 artist 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 artist, will continue to lead Parlophone’s 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 Tina Turner, Philip (inaudible) among…

Thank you, Steve and good morning everyone. As Steve mentioned, we are pleased that the Parlophone acquisition has closed and we are moving forward with the integration. We also feel good about that we’re able to deliver a quarter with growth in our top line digital Recorded Music and audio results. Starting with a few comments on Parlophone let me remind you that the last quarter, we entered into an amended term loan agreement in connection with the acquisition. This provided for an $820 million senior secured term loan facility, priced at LIBOR plus 2.75% with the 1% floor. The facility was draw down on July 1 upon the closing of the acquisition. We also simultaneously re-priced our existing term loan at the same rates. Additionally on May 9, we prepaid a $102.5 million outstanding on our 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 a $198 million based on existing rates on $2.88 billion of outstanding debt, lower than a $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 the 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 offsetting a 6% decline in…

Thank you. (Operator Instructions) Thank you. Our first question comes from Aaron Watts of Deutsche Bank. Your line is open.

Good morning guys.

Good morning.

Brian just a quick question on sort of thinking about 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 material at all, it’s very close to what we have been talking about.

Okay perfect and then I said I had a couple of 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’s a pretty nice improvement from what I think we’ve been hearing the last several quarters, is that just the timing issue or have we seen maybe a move towards stabilization there?

No 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 repayment 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.

Okay. All right and on the synchronization revenues, I know you said you have that one-time settlement, 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 have 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, 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.

Okay, perfect. And then 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 you maybe just talk more about that shift that you’re making and what you’ve had gotten out of them, 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 with Warner Brothers Studio deal, the Mi-Jack deal, and if itself that went to Sony, and then the focus that Chairman has had in executing against with his publishing team is in these higher margin, the film catalog that – Paul we picked up Miramax and he picked up Blind’s Date and also improving margins around writers that are now being signed to Warner/Chappell.

Okay, perfect. And last one for me, this is you think about some of the opportunities obviously you just closed Parlophone, you mentioned Gala and Lionsgate, how do you, if 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 kind of six months to a year?

We’re actively in the market, looking at deals that are available. We’re not going to change our strategy round trying and invest against what we believe with the growth assets for our business simply because we 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.

Okay. Perfect. Thank you for taking the questions.

Thank you. And at this time, I am showing no further questions.

Thanks everyone. I hope you have a wonderful end of summer time 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.