Welcome to Warner Music Group's Second Quarter Earnings Call for the period ended March 31, 2025. 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, and welcome to Warner Music Group's Fiscal Second Quarter Earnings Conference Call. Please note that our earnings press release, earnings snapshot and Form 10-Q are available on our website. On today's call, we have our CEO, Robert Kyncl; and our departing CFO, Bryan Castellani, 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 and 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 Robert.

Thanks, Kareem, and hello, everyone. While you were waiting, you just heard new tracks from Rose and Don Toliver, both featured in the hotly anticipated F1 movie. The blockbuster Apple film, starring Brad Pitt will be released in June. It's sound track will add to our run-off hit albums for movies such as Barbie and The Greatest Showman. As many of you know, Bryan Castellani will be leaving us, and I'd like to thank him for his [counsel], partnership and contributions to our company. I know everyone joins me in wishing him the best in his next endeavor. Armin Zerza joined us as CFO this week, and he brings a strong track record of operational excellence, commercial innovation and financial discipline. He was previously CFO at gaming giant, Activision Blizzard, where he played pivotal roles in the company's growth for almost a decade. I look forward to working with Armin as we enter the next exciting era for music. I'll get into our broader strategy shortly, but first, let's talk about the quarter. Our results in Q2 reflect a lighter release schedule, market share pressure in China and a tough year-over-year comparison in subscription streaming, where we saw strong double-digit growth in the prior year quarter. As a result, the company's revenue increased 1% as Recorded Music revenue grew 1% and Music Publishing revenue grew 3%. Within Recorded Music, subscription streaming grew 3%. Total company adjusted OIBDA decreased 1% and adjusted OIBDA margin decreased 50 basis points. We recognize this is a moment of transition in the industry and for our company. Even so, we are very optimistic for many reasons, but 3 in particular. One, against the backdrop of global uncertainty, music is the most resilient art form and currently the least expensive. Two, the industry across music companies…

Thank you, Robert, and good morning, everyone. Before I get into our results, I want to remind everyone that growth rate comparisons will be in constant currency. In Q2, Total revenue increased 1% and adjusted OIBDA declined 1% with a margin of 20.4% and a decrease of 50 basis points over the prior year quarter, primarily due to revenue mix. Recorded Music revenue increased 1%, subscription streaming grew 3%, reflecting the challenging comparison to robust growth in the prior year quarter, compounded by a lighter release slate and market share loss in China. Ad-supported streaming declined by 3%, driven by a soft overall ad environment. Physical revenue increased 2% due to strong releases in the U.S. and Japan which was partially offset by the BMG roll-off. Artist services and expanded rights revenue decreased 6% due to lower concert promotion revenue, primarily in France as well as ongoing weakness in our e-commerce business, EMP. Licensing revenue increased 3%, driven primarily by activity in Japan and the U.S. partially offset by timing of legal settlements. Recorded Music adjusted OIBDA increased 1% with a margin of 23%, an increase of 10 basis points. Music Publishing total revenue increased 3%, while streaming revenue increased 2% due to the impact of digital deal renewals, primarily in the U.S. We have a tough comparison against the prior year quarter, which saw robust streaming revenue growth of 29%. Performance revenue grew 6% driven by an increase in concerts, radio and live events, primarily outside the U.S. Sync revenue increased 2% due to higher TV and commercial licensing activity and Mechanical revenue increased 14% due to higher physical sales. Music Publishing adjusted OIBDA increased 5% with a margin of 27.4%, an uptick of 50 basis points. Q2 operating cash flow increased to $69 million from a use of $31 million in the prior year quarter. The increase was primarily due to timing of working capital items. Operating cash flow conversion was 23% of adjusted OIBDA. Free cash flow increased to $33 million from a use of $57 million in the prior year quarter. As of March 31, we had a cash balance of $637 million, total debt of $4.3 billion and net debt of $3.7 billion. Total debt includes approximately $300 million related to our acquisition of Tempo. Our weighted average cost of debt was 4.1% and our nearest maturity date remains 2028. As I wrap up, I'd like to welcome Armin and thank Robert, our Board and everyone at Warner Music Group, especially our global finance team. I'm also grateful to everyone in the investment community who supports and follows Warner Music Group so thoughtfully. It's been a pleasure working with you. With that, we will take your questions.

[Operator Instructions] Your first question comes from Michael Morris of Guggenheim Securities.

I want to ask a big picture question to start, Robert, given the challenging quarter that we had and the little visibility, what confidence can you give investors to reinforce why do you think Warner Music remains attractively positioned with an opportunity to return on a path to the growth goals that you have put out. And maybe if I could ask just one follow-up as well. Can you give us an update of how you're thinking about subscription streaming growth for the year at this point relative to the high single digits? And how much intra-quarter volatility should investors be considering given your release slate timing?

Thank you, Michael. So the reason we're excited, and we believe all investors should be excited is our strategy is -- I spoke about our strategy on the last earnings call, which has 3 pillars, to grow market share, grow the value of music with our DSPs and grow efficiency so that we can free up more capital to reinvest into music and tech so that we can spend the flywheel for long-term profitable growth. That's exactly what we've been doing. We have increased our A&R spend last year from the proceeds that we freed up and we've done exactly the same in this fiscal year. And our investments in that area are starting to show early signs of success. I'll give you a couple of examples. One, during my remarks, I mentioned our charts success, which is the biggest in a very, very long time. On Spotify Global 200 in the last 2 years, we're up 50% in our chart share, which is incredible. In Spotify Global Daily today, yesterday, we have 5 of the top 10, same on the Billboard chart. And then on Spotify U.S. Daily, we have 6 of top 10. So clearly, our investments into A&R, into artists and artist songwriter development as well as into our superstars is yielding hits. And I'm really excited that the creative engine of the company is humming. It's also starting to translate into new release market share in the U.S., for example. Obviously, the biggest market, it's the home of our largest divisions, Warner Records and Atlantic and seeing the early signs of success in growing market share of new releases is very, very encouraging. And we have to make sure that we sharpen our executional focus to make sure we do the same thing across the entire business. The second early sign is also on technology. Yesterday, we rolled out an app called WMG Pulse, which is the copilot for artists' careers, which is giving them lots of transactional data about their albums, streams, audiences and money. And it's a result of a lot of infrastructure work that we've done in terms of investing into our digital supply chain, financial transformation and data infrastructure to collect tremendous amount of data and process it in a simple and easy-to-use way. And what we will do is we'll continue to roll out to more and more artists and songwriters, and we will continue to add a lot of features to this. So this is just the beginning of where this will go. So it's a new surface for us to interact with artists. So all of that together is -- that's our strategy. We're executing against it. We have to sharpen our focus on execution even more. And to your second question, as it relates to this year, we expect similar trends as in Q2 for the balance of the year.

The next question comes from Benjamin Black with Deutsche Bank.

Robert, so from the outside looking in, it would appear that at least some of the heavy lift has been completed as it pertains to your deals with some of your larger distribution partners, at least here in the near term. And if I'm wrong here, certainly, please correct me, but I'd be interested if you could dig a little bit more into sort of your strategy to grow global market share. How do you think about scaling your presence in some of the faster-growing emerging markets? And how do you bring some of the success you're clearly seeing here in the U.S. across your sort of global footprint? And then secondly, just on subscription streaming, just a quick clarification question. Curious to hear what exactly happened in China? Was it just release slate driven? And can you maybe expand upon exactly what happened there and how big the impact was? And will that persist for the balance of the year as well?

Sure. Thank you. So yes, indeed, it's a heavy lift, as you said, and it's a stated strategy to increase the value of music through greater certainty around rates and alignment with our biggest partners. As I said last time, we've been making great progress on it. Our job isn't done yet. We continue to work through it. And also as we achieve it, it takes time for it to percolate through the agreements and go into effect. But it is a core pillar of our strategy, and we're executing against it. And we're very encouraged by the collaborative nature with our largest partners. As it relates to developing markets, we have some great success, great leadership in places like Mexico and Brazil, 2 of the top global markets and also high-growth markets. So we've been doing a great job driving growth over there. And we have some more opportunities in other parts of the world. You're asking specifically about China. That is a big opportunity, obviously. We have a new Head of Asia starting in 2 months, who will play a pivotal role in helping us drive growth around the largest markets in Asia. And in terms of the current impact from China, we expect the same trend to continue for the balance of the year.

The next question comes from Kutgun Maral with Evercore ISI.

And sorry for all the focus on subscription streaming, but maybe if we kind of take a step back away from this year, I think there's a lot of excitement around the DSP renewals and how they would flow through. And now maybe it seems like more of a calendar '26 benefit, maybe I'm wrong on that. But can you flesh out how to think about the timing of the flow-through of those renewals and how they -- when we could start to see them benefit the subscription streamline for you? And yes, maybe I'll just leave it at that because that's the main question we're getting.

Yes, sure. Obviously, I cannot go into the details of the agreement, but I would say through your questions, you can nail the answer. Most clear way to say it. And there's obviously still more work to do.

The next question comes from Batya Levi with UBS.

Can you provide a little bit more color on what changed versus your original expectation for high single-digit subscription growth? Is it mostly impact from China had you assumed that you would -- we would have some price increases? And I know that you don't disclose core growth, but tough comps is a major driver of that. If you didn't have that situation, what would be the run rate growth that we would see in subscription? And maybe just one more on the lighter release slate. Is that lighter than you had originally expected? Because I thought you were originally thinking that it would be a more linear release schedule going forward and not fluctuate as much as in the past.

Sure. Thank you. So there's -- our results are basically compounded through 4 different things. One, which is the tough comps that you mentioned from last year, and I'll let Bryan chime on that later to answer your question. Two, pressure in the ad market; three, the lighter release schedule that you mentioned and weakness in China. Those 4 compounded to the results that we're currently seeing. As it relates to the slate, obviously, we always plan for growth. And sometimes you have shifts for different creative reasons with different artists, different life situations, et cetera, that may impact the volume that's coming out, albums may get shifted out of quarter, et cetera. So it's a bit of an ebb and flow that simply happens. And so it is something that we're used to, and it is harder to predict, but it is part of our life.

Yes. And Batya, thanks. Just on the tough comp, it was 13.5% in the prior year quarter. So we did expect some decel. And we've also stopped talking about [ BNP ] normalizing, but that would have been a point here in this quarter as well.

The next question comes from David Karnovsky with JPMorgan.

This is Kiscada Hastings on for David Karnovsky. I just wanted to ask a little bit about management at some of the labels. So it seems like you have some 2 different philosophies at your flagship labels now with Aaron Bay-Schuck at Warner, who seems to have more of a long-form and deliberate approach to artist management and Elliot Grainge in Atlantic now, who seems to be pretty good at quickly identifying and blowing up artists. Is this the right way to understand it? And how do you think the structure will help drive market share growth going forward for WMG as a whole?

Yes. So I would say, one, as a company, we have to walk and chew gum at the same time. And it is -- there are different ways to succeed in the market. And I am actually very pleased that we don't have just a singular approach to our business, that we have talent that has different strengths. You've highlighted some of those, but it doesn't mean, for instance, in case of Elliot that is all inclusively focused on quick hit. Elliot is also very much focused on artist development. And we are working much, much closer together as a leadership team across all the operators so that people also are sharing insights, not just competing with each other, but actually sharing insights together so that as a whole, as a company, we do better. So I think this is exactly the kind of mix of executives we need.

The next question comes from Stephen Laszczyk with Goldman Sachs.

Robert, could you perhaps talk a little bit more about the investments you're making in A&R. I'm curious what genres or markets you see the most opportunity in. Maybe how should we think about any near-term, long-term goals you have on market share for Warner? And then to what extent could we expect A&R expense to increase, I think you mentioned up more than double digits last year. Any context there would be helpful. And then maybe related to that for Bryan, I'd be curious just to get your latest thoughts on puts and takes on the outlook for margins this year. You have cost efficiencies, the A&R investment and then FX, which I know has been moving a bit in both directions, would just be curious of any thoughts you have on that front.

Sounds good. Thanks, Stephen. So let me take the first one on the investment focus. What -- we've been spending a lot of time on capital allocation. And by the way, also with Armin starting, we'll also continue to do that over the next quarter and make sure we really sharpen our focus on that. And the best way to think about it is that we evaluate the world based on global value of local repertoire and think about where we get the most bang for the buck in the near and the long term. And so there's 2 different ways to look at the world, country lens or to repertoire lens, and we're starting to shift way more towards the repertoire lens. So that really drives how we think about the world, how we think about resourcing and how we think about a more sharpened capital allocation.

And Stephen, it's Bryan. On margins, in the quarter, what we pointed to was the revenue mix, the lower streaming growth, of course, translated to lower margin for us. And just to point out, if you exclude BMG, our physical was up 15%, which was a bright spot. But again, that comes at a lower margin. And then on the cost side, there were a couple of things that create some quarter-to-quarter variability. We mentioned the continued reinvestment in tech, including the launch of the app and as well, we continue to point to investing into A&R. Even though you will see overall that was down slightly within it, our unproven A&R was up modestly in dollar terms, more than double digits on percentage terms, and that unproven gets expensed to the P&L. So those created some margin headwinds. FX, as you know, was a significant headwind in Q1. Some of that did come back in Q2. But at this time, it's too early to update on any guidance. And as we said, Armin started this week, and we will come back to you on the next call with an update.

This concludes the question-and-answer session. I'll turn the call to Robert Kyncl for closing remarks.

All right. So thank you all for dialing in, paying attention to our company. I want to reiterate that our strategy, we firmly believe in the strategy that we set ourselves on growing market share, growing the value of music and growing efficiency to reinvest in music and technology and drive long-term profitable growth and the early signs of success through our chart share success on a global level as well as U.S. level and many markets around the world are very, very encouraging and as well as our growing market share in the United States and new releases. And I'm very pleased that we're starting to ship technology products into the hands of artists and songwriters to start paying back on some of our investments in technology and to transform the company. So thank you so much, and we'll talk to you next quarter.

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