Welcome to Warner Music Group’s Quarterly Earnings Call for the period ended June 30, 2022. 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 I would like to turn today’s call over to your host, Mr. Kareem Chin, Head of Investor Relations. You may begin.

Good morning, everyone. Welcome to Warner Music Group’s fiscal third quarter earnings conference call. Please note that our earnings press release, earnings snapshot and the Form 10-Q we filed this morning will be available on our website. On today’s call, we have our CEO, Steve Cooper; and our CFO, Eric Levin, who will take you through our results, and then we will 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 in our earnings snapshot slides and 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, Kareem. Good morning, everyone, and thanks for joining us today. Given these turbulent times, I’d like to start by reaffirming why we’re so positive about WMG’s future. As the pandemic proved, music is an essential need for humanity. This need has and will continue to make the music sector more resilient than many other industries. Streaming, our largest revenue source has a long runway, and there’s substantial headroom for both subscriber growth and subscription fee increases. We continue to see an explosion of new opportunities in sync, social media, gaming and NFTs, as well as the resurgence of vinyl sales and the bounce back in touring related revenue. Over the long term, we’re no longer reliant on any single format. Today, music propels and monetizes across every form of entertainment. In the digital age, artists have more ways than ever to engage and excite fans, which magnifies the importance and value of music companies such as ours. Against this backdrop, we’re uniquely positioned for long term success. We have the scale, skill set and agility to best capitalize on trends and artists development and drive the globalization and diversification of our business. It’s from this position of strength that we want to be clear about some challenges that we encountered in Q3. We’ve had to deal with very, very significant FX headwinds, as we report in Dollars, not Euros or Yen. The slippage of a number of key album releases into Q4 macro advertising trends resulting in a slowdown in ad supported revenue, and the ongoing suspension of our Russian operations. In addition, our reported results were impacted by several previously disclosed onetime items that affect year-over-year comparisons. These include the deal renewal with one of our digital partners, which affect all four quarters of this fiscal year, but…

Thanks. Thank you, Steven. Good morning, everyone. Our Q3 results reflect the inherent resilience of our business that comes from our diverse portfolio of revenue streams. Even in a quarter where ad supported streaming revenue came under pressure due to macro trends, we still grew most of our revenue lines and saw significant growth in operating and free cash flow. Total revenue increased by over 12% on a constant currency basis reflecting growth in both recorded music and music publishing. Total company streaming revenue increased 6.5% driven by growth across both segments. Adjusted for the onetime items that I will describe in a moment, total revenue and streaming growth were 14.9% and 10.3% respectively. Companywide streaming revenue from emerging platforms was sequentially flat at $345 million on an annualized basis. As Steve mentioned, this revenue will increase in Q4 driven by new deals with platforms including our recently signed deals with Meta. Adjusted OIBDA declined 3% with margins of 17.8% compared to 19.6% in the prior year quarter. On a constant currency basis adjusted OIBDA increased 2.4%. That decline in margin was primarily due to revenue mix, driven by the growth and lower margin artist’s services revenue, and the impact of exchange rates. The impact to adjusted OIBDA growth and margins was magnified by the reduction in streaming revenue, which was primarily driven by onetime items. Normalizing for these items consolidated adjusted over OIBDA on a constant currency basis grew 13% and margins would have declined by only 40 basis points. Adjusted EBITDA decreased 6.7% with margins declining from 21% to 18.4% due to the same factors that impacted adjusted OIBDA. Recorded music revenue grew 8.5%, driven by growth across all revenue lines. Streaming revenue increased by 3%, compared to a very strong prior year quarter that saw impressive growth…

[Operator Instructions] First question comes from [Indiscernible] with JPMorgan. Your line is open.

Hi, thanks for taking the question. It’s good to hear the confidence and the underlying growth in scope for 4Q based on the deal, other ESP deals and just the new release schedule. Can you perhaps update us on your outlook for or expectations for 2023 given concern about slowing growth industry wide ad supported slowdown that you kind of call that the macro? Perhaps any one time item that will affect comparability as we kind of go into next quarter and into 2023. Thank you.

Yes. Sebastiana thank you so much. So we don’t have, we disclosed the one time. Sebastiana thank you so much. So we don’t have we, we disclosed the onetime items, we don’t have anything next quarter that we are, that we see that is meaningful, that will affect the comparison. We do look forward to 2023 when we will last the anniversary of the DSP renewal that has been creating challenging comparisons for the four quarters of fiscal ‘22. But fundamentally, even though there’s a challenging macro environment, we are very confident in the resilience of music and the effectiveness of Warner Music strategy. We have a strong release schedule for Q4 and are looking forward to further strong releases throughout fiscal ‘23. We see subscription streaming growth continuing to grow double digits, despite what’s happening in the macro environment. Sync continues to grow. Artists services and recorded music is now back to where it was pre-COVID, which obviously is low margin revenue, but delivers revenue and OIBDA and provides a value added services for artists that we always look forward to providing them as part of our relationship. Warner Chappell has been going full guns. Their growth every quarter this year has been 20 plus percent. The recovery of performance has allowed their stellar growth in areas like streaming and sync to shine through. So we feel really good about our underlying business model, we feel really good about the resilience of music and our positioning for continued growth. I don’t want to short sell that it’s a challenging environment, we’ve seen this quarter the impact on ad supported. We continue to make sure we do everything we can to support each line of revenue growth. But FX and ad supported revenue both had challenges this quarter. And we’ll continue to manage them as best as we can. Fortunately, ad supported is a minority of our streaming revenue, and therefore is a contained portion of our revenue. And the larger portion of our revenue is continuing in strong growth mode. So hopefully that gives you a summary. And thank you for your questions Sebastiana.

And one quick follow up there. With artist service recovering obviously, you’ve outlined low margin, but still contributes to the OIBDA growth. Any perhaps update on or how should we should be thinking about margins into fiscal 2023 particularly as maybe the financial transformation program kind of gets implemented?

Thank you for that. So one of the things we’ve been saying, quite frankly, for the past couple of years, is when artists service recovered because it was so, it was basically put on hiatus for the first two years of COVID that when it started to recover, and it would have an effect on margins downward. But we didn’t know exactly how much because we didn’t know if artist services recover over two years or recover fully in one year. Artist services is now back to the revenue levels that it was pre-COVID. So it’s really fully recovered in a very, very short period of time. What this does is put margin, downward margin pressure in 2022 but will then create comparisons for 2023, where we’ve got artist services fully baked in ‘22 compared to ‘23. So we expect to get back on our margin growth trajectory, as we have comparisons that are going to be more favorable with the fully recovered artist services in both the numerator and denominator. So we feel very good about the fundamental margin growth program that we have in place growing our high margin digital revenue streams, managing costs, including our financial transformation, other technology initiatives that are in place to drive efficiency. So we feel very good about our margin growth trajectory. Our financial transformation program remains on track to launch in fiscal ‘23. We expect the benefits to start to roll in ‘23 and ‘24 until it’s fully rolled out and complete. I will say that the rollout of the financial transformation is always tied to meeting very specific and detailed standards that allow us to complete our statutory management reporting, essentially perfectly. We are very close to that point. But there is work to do till we crossed dot every I and cross every T. And we’re working diligently to get there. And we fully expect to launch the program at ‘23.

One moment for our next question. Benjamin Black with Deutsche Bank. Your line is open. Benjamin Black with Deutsche Bank your line is open.

Hey, guys, thank you. Thanks for taking my question. After two follow-ups really so after adjusting for the new deals and the catch-up payments, we’ve seen a few quarters of decelerating on the line recorded music streaming growth. So the question here is really how should we be thinking about a good underlying growth rate going forward? You’ve seen slowing subscriber growth, or we’re just simply lapping difficult comps. And on the advertising side and Spotify mentioned seeing modest softening last two weeks and into the third quarter. Now you’re mentioning as well. Can you elaborate on the softness that you’re seeing? Is it platform specific? Is it region specific, for example? And how are you thinking about some of the tenure of advertising growth for the balance of the year in 2023? Thank you.

So sure. Let me jump in on that. So thanks for the question. So first thing I’d say is that subscription streaming growth still remains quite strong remains in the double digits. In the short term, we see that as being very strong sign despite a macro environment. Long term, we think subscription streaming growth has tremendous upside potential in front of it. Developed markets are roughly 30% penetrated in aggregate. We’ve seen both research studies, but also market forecasts that showed that growing into the 50s or even 60s percent over time. Emerging markets are still penetrated in the mid single digits and are starting to show real improved growth. And we see enormous opportunity for emerging markets coming online with subscription streaming. The price per subscriber is still very low. We see real ARPU opportunity and Spotify and Amazon that have done forms of price increases, I think, have proven to the market that it doesn’t have an impact on churn and that price increases are really available for distributors who are very excited about subscriber growth opportunities. We did see an ad supported slowdown. You’ve seen that in some of the companies that are distributors that reported lower ad supported growth. Clearly it was a difficult comp versus a year ago. A year ago, we had 27% streaming growth and ad supported growth was even faster than our average total streaming growth because of the recovery from COVID. But we do think the macro environment has had an impact on ad supported businesses and we’ll continue to monitor to that. Again ad supported streaming is in the mid to high teens overall streaming so it’s part of our business and the much larger part of our business continues streaming business continues to grow double digits. But that is something that we’ll continue to monitor. Again, we have great confidence in the long term potential up streaming, we think it’s just getting started, we think the emerging streaming side continues to increase in the number of licenses. We’ve just concluded our new Meta deal the opportunities of web-3, NFTs communities, we think is just at the very, very early experimentation phase and has significant potential, that we’re focused on developing the business models to be able to monetize. So we’re excited as we look forward about the growth in streaming. In the short term we’re navigating tough macros, but still think the resilience of music and streaming gives us real opportunities to continue the growth vectors.

Fantastic. Thank you for the color.

[Operator Instructions] Our next question comes from Matthew Thornton with Truist. Your line is open.

Hey, good morning, Steve and Eric. Maybe one question and two housekeeping items if I could. First, Eric, you talked a little bit about the margin progression as you see it over the next couple of years. How do you think about the conversion have adjusted to free cash flow the next couple years? It was 50% in this quarter is kind of bounced around a bit, but I guess higher level, how do you think about that progressing over the next couple of years? And then just secondly, that the housekeeping items, I think there was an adjustment to an earn out liability that benefited the recorded music margin the quarter if you can quantify that. And in the streaming portion, I think there was some language around timing of new deals. Again, anything worth quantifying there as well? Thanks, guys.

Those three questions and reading notes really fast. Okay. So three things. So adjusted OIBDA free cash flow. So one thing I would encourage there generally our free cash flow to adjusted OIBDA conversion has been 50%, 60%. We think that’s a reasonable range to operate and every quarter will be different. The timing of spend on A&R is going to vary based on deal activity and really challenging to look at quarter-to-quarter. A larger period of time, year-to-year, for example, is a better period, the 50% to 60% has been a place we’ve been comfortable operating in. We think that’s a fair place to look. I will make the comment though, that we look at our waterfall of how to deploy excess cash. And the first stop at our waterfall is redeploying it into the business to drive future growth. We have grown our market share. If you look at over the past several years, call it a five year period. And one of the ways we do that is by redeploying our operating cash flow back in the business with accretive deals to drive growth. But fundamentally we are driving to drive our operating and free cash flow in line with OIBDA with call it a 50%,, 60% conversion rate. But we then use our waterfall beyond that. Second question. So we had made an investment in the business and had accrued about 10 million towards an earn out that was part of the acquisition if certain metrics were achieved. Given the slowdown in the ad supported market, we no longer forecast that earn out will be achieved and reversed a $10 million accrual on the timing of deals. The one deal we called out here is the Meta deal, which we closed in Q4 and that will be reflected in our Q4 results. We do expect our emerging streaming revenue in our streaming revenue because of that, because of the timing of new emerging streaming deals to have a positive bump in Q4. We were still in the process of driving Q4 and we don’t quantify individual deals. So I can’t give you a number but we do expect that to have positive impact. Thank you, Matthew.

[Operator Instructions] Our next question comes from Michael Morris with Guggenheim. Your line is open.

Thank you guys. Good morning. Maybe one for Eric. Just following up on digging in a bit to the recorded music streaming trend. You talked a bit about the advertising portion and the size there which was helpful. Can you talk a bit about the release schedule that album release slippage and the impact as we looked at kind of export growth rate going from 15% or mid teens in the second quarter, fiscal second quarter to the 9%, sort of quarter rate in the third quarter. How much of that sequential sort of slowdown was driven by that release late timing? And how much of that kind of do you expect will come back in the fiscal fourth quarter? And then maybe a bigger picture question for Steve, just on the CEO transition, which was announced late in the quarter and a little bit long dated with respect to the timing. Can you just give us your thoughts on that transition? Why the timing? What you guys are looking for? Would appreciate the color there.

So I’ll start so and thank you, Michael, for the questions. So there was a few substantive releases that have slipped from Q3 to Q4. I will focus a little bit on Q4. We feeling very good about Q4 overall, for the reasons we talked about on the release schedule. Lizzo, who already has a number one hit the album coming out and in Q4 special Cardi B has an album coming out Panic at the Disco, Paulo Londra and several other significant international artists are Q4 release schedule, we think is really set up nicely. And certainly we do see that as being an accelerator versus Q3. In addition to a strong release schedule, the close of several emerging streaming deals, including Meta will be a positive. And we also mentioned that there were several legal settlements in Q4 that will bring approximately 25 million of OBIDA into Q4. So there’s a series of positive news in Q4 that we have already delivered. And that will be impacting the results throughout the remainder of the quarter. On ad supported part of the slowdown was the market. You could look at the results of some of our largest distributors, and see the rate of which they’re slowed down that affects our business. But again, our job is to maximize the performance of that area with releases and great marketing campaigns. And we’re thrilled that the largest part the lion’s share of our subscription revenue of our streaming revenue, which is subscriptions, continues to grow solidly in the double digits.

On the CEO transition. I mean, it’s really very straightforward. We decided to announce a change with a long lead time, which would allow us to have a very thorough, thoughtful, broad search a diverse group of candidates. I’m actively in the loop on that process. And I think that I expect that there will be an overlap with respect to the transition. We just want to make sure that it’s well thought out that it’s orderly, and that we continue focusing on business without missing a beat.

Thank you. One moment for our next question. Our next question comes from Kutgun Maral with RBC. Your line is open.

Good morning, and thanks for taking the questions. First, given the divergent trends across subscription, ad supported and emerging platforms, can you just update us on the mix of the three buckets across either recorded music, or your overall digital revenue? Eric, I think you said earlier that advertising is about mid to high teens. But I wanted to confirm and maybe get a little bit more color on emerging platforms as well. And I apologize if I missed it, but how much was emerging platform revenue in the quarter? And just lastly, you were asked earlier about the timing of emerging platform renewals. Emerging platform revenue and growth had decelerated over the last year because you’re kind of in a lull of activity with the Meta deal as we move forward into fiscal 23. Are you entering a new cycle of renewals that could help accelerate the streaming revenue growth line? Thanks.

Thanks Kutgun. So on streaming, rough ballpark, the mix of the components subscriber ad support and emerging is roughly 70, 20, 10 in the high teens 10. So think of subscriber as the 70% ad supported is the high, very high teens and emerging being the rest call it roughly 10. There are some cats and dogs in there like digital radio and things like that. But those are relatively small compared to the bigger pie. Your other question on emerging streaming and the growth components and the trending going forward. There’s a few components to that. Obviously, as you stated Kutgun the renewals are a meaningful part of that, when you have a few deals that have become relatively scaled in there, it becomes meaningful when those are renewed. We don’t talk specifically to the renewal timing of individual deals, obviously, Meta is a meaningful one. We usually do two to three year deals. We had a slew of renewals roughly a year ago, that were actually reflected in our Q3, ‘21 results. So there will be some deals that come up in ‘23. And we will see that in next year’s results. What I will also say is it’s not just about renewals, it’s also about new vectors of growth. We look at areas like Web-3 with NFTs and the ability to build interactive communities as having huge potential. But the platforms and products that develop sustainable business models that really excite fans, and monetize and connect fans and artists in ways that are the deep, rich, and exciting dynamic communities is something that is being experimented with develop. We’re working very closely with a series of partners when we’ve talked about the different deals that we’ve done over the past year or so with best in class partners in NFTs and building out nods with roadblocks and others that is all with an eye towards developing a model for music in this new world that can monetize and we see that as an area of growth that will show up over the next several years. So I would stay tuned and we look forward to having exciting news as our experiments get to the marketplace and yield results.

One moment before our next question. Our next question comes from Matthew Thornton with Truist. Your line is open.

Must be a busy morning. I didn’t think I get a second question in here. Eric. The right way to think about streaming growth just to put a fine point on this. You guys reported 9.2% constant currency extra to DSP items. You have some Russia headwind. You had some slight slippage that you talked about and then probably most pronounced you have the ad supported pressure. Is it those three items that kind of bridge you up into that healthy double digit growth? I want to make sure I’m understanding that the bridge commentary correctly and then maybe one for Steve. Steve in this tougher macro higher interest rates how do you think about deal activity whether it’s small.

So again with our discipline remaining as a focal point I would expect our activity to continue to be quite active.

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

Hello this is Ben. Can you hear me?

We can hear you Ben.

Hey, guys. I didn’t hear the last like eight minutes. So this could be repetitive. I apologize. I was hearing nothing. But anyway, Eric a couple things. One, anyway to help us think about currency in the fourth quarter as relates to revenue, but also margin. I think there’s a similar mismatch on OpEx and revenue on the currency front we should be thinking about. You mentioned 50% to 60%, cash flow conversion. I don’t think you’re going to be there this year, just based on the nine months. I know you said strong Q4, but do you think ‘23 you could be back in that in that zone. And then I know we talked about it a lot already on the emerging streaming. But I think part of the attraction to your business and your stock is the idea that over time, there’s more consumption of music, which drives more revenue for your company. Is that. do you have any, what’s your visibility in this emerging streaming bucket overall? I don’t a lot of different deals. But as you look out over the next year or two, does that start to play out more obviously, to all of us that we’re seeing consumption growth? And then revenue growth? Or is it still too early to really make that call? Thank you.

Thanks, Ben. So on currency, a few things. So looking Q4 which I think is your question. I think nothing indicates that there’s going to be much difference from Q4 and Q3 it’s still going to have a similar headwind in Q4. As we convert to a strengthening dollar. The margin impact continues to flow through pretty organically. A fair amount of our costs are in local dollars, but some of our repertoires, international repertoire that’s sent around the world. So there is an impact on margin as well. I will say that we do hedge against the U.S. dollar against the nine most major currencies that we work against, that doesn’t necessarily flow through OIBDA but when there’s a negative currency impact affecting our business on a cash basis, we have hedged operating cash flows and do get a benefit there. So we’ll continue to manage to hedge currency impact. And obviously, when there’s a negative currency impact on our operations, we also have roughly a billion dollars worth of Euro notes that there’s a favorable impact is that becomes less expensive. That’s one. Two is on the 50% to 60% conversion the first half of ‘22, we spent a significant amount on A&R, we see the flow of the second half of the year being more moderate in investments and more favorable and working capital and a significant improvement in the second half of the year. We are now in deep into evaluating fiscal ‘23. And we do evaluate and look at our cash generation and cash conversion as part of the modeling and we look at how we can achieve our goals in there, but also look at the growth opportunities investments. So we’re looking at that right now. In fiscal ‘22, when we talk about cash…

And I’m not showing any further questions at this time. I’ll turn the call over to Steve Cooper for any closing remarks.

Again, thanks, everyone for joining us. We appreciate your ongoing interest in support of Warner Music. I hope everybody has a wonderful wrap up to this summer and a very safe Labor Day. Stay well everyone. We’ll talk to you soon. Bye, bye.

Ladies and gentlemen, this concludes today’s presentation. You may now disconnect and have a wonderful day.