Warner Music Group Corp. (WMG) Q2 2013 Earnings Report, Transcript and Summary

Welcome to the Warner Music Group’s Second Quarter 2013 Earnings Call for the period ended March 31, 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 any time. As a reminder, there will be a question-and-answer session following today’s presentation. (Operator Instructions) Now, I would 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 second quarter 2013 conference call. Both our earnings press release and the Form 10-Q we filed this morning are available on our website. Today, our CEO, Steve Cooper, will update you on our business performance and strategy; and our Executive Vice President and CFO, Brian Roberts, will discuss our financial condition and results, and then both of them will take your questions. Before Steve’s comments, let me remind you that this communication includes forward-looking statements that reflect the current views of Warner Music Group about the future events and financial performance. All forward-looking statements are made as of today and we disclaim any duty to update such statements. Our expectations, beliefs, and projections are expressed in good faith and we believe there is a reasonable basis for them. However, there can be no assurance that management’s expectations, beliefs, and projections will result or be achieved. Investors should not rely on forward-looking statements because they are subject to a variety of risks, uncertainties, and other factors that can cause actual results that differ materially from our expectations. Information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in our earnings press release and Form 10-Q and other SEC filings. We plan to present certain non-GAAP results during this conference call. We have provided schedules reconciling these results to our GAAP results in our earnings press release posted on our website. With that, let me turn the call over to Steve Cooper.

Thanks, James. Good morning, everyone. And welcome to our second quarter earnings conference call. Before we get to our quarterly results, I’ll provide some updates on our acquisition of the Parlophone Label Group. We’ve achieved the number of significant pre-closing milestones since the deal was signed on February 6th. First, we completed the next step related to the acquisitions financing last week. Working with our five lead banks, their commitment was successfully syndicated. Brian will give you the details in his part of the presentations. Second, we’ve already receive regulatory approval for the transaction in the U.S., Brazil and Austria, and the only remaining merger review process in EU is proceeding on schedule. Third, we are actively planning for the combination of our existing business with Parlophone. The implementation of which will follow the closing of the transaction. In connection with the syndication process, we disclosed that this combination is expected to result in annual cost savings of around $70 million. We continue to refine our integration plans, so that we remain in the best possible position to merge the two businesses as quickly and efficiently as possible following the closing. Obviously, the social and legal processes in each individual European territory will determine how quickly we can execute our plans and realize the synergies. We remain on track to close the Parlophone transaction by the middle of this calendar year. Now turning to our results for the quarter. This was a great quarter for us and we achieved the number of very positive metrics. We grew constant currency revenue by 10%, we increased OIBDA by 37% and improved OIBDA margin by nearly 4 percentage points, and we grew our free cash flow to $121 million, reflecting our continued focus on cash generation. In addition, in the U.S. according to…

Thanks, Steve and good morning, everyone. As Steve mentioned, we are excited about the Parlophone transaction and pleased with our results this quarter. I would like to make a few additional points regarding our recent financing activities and changes related to our capital structure. Last week, as Steve mentioned, we entered into an amendment to our term loan in connection with Parlophone transaction. This provided for an $820 million senior secured incremental term loan facility priced at LIBOR plus 2.75% with the 1% floor. The facility won’t be drawn down until the closing of the transaction. As part of the financing process, I’m happy to say we also reduced the pricing for our existing term loan and our revolving credit facility to correspond with the lower pricing of the new incremental term loan. As part of the term loan amendment, the existing term loan facility was repriced to LIBOR plus 2.75% with the 1% floor from the original terms of LIBOR plus 4% with the 1.25% floor. Our revolver was repriced at LIBOR, which was less priced, excuse me at LIBOR plus 3.5% is now at LIBOR plus 2%. Additionally, on May 9th, we used $102.5 million of cash available to pay down a portion of our existing term loan. The remaining principal amount of the existing term loan is now $490 million. Taking a step back to look at our capital structure over the last couple of years, we have significantly reduced our interest payments and cost of capital, as we work to maximize our operating flexibility. Currently, pro forma for the drawdown of the $820 million incremental term loan, the repricing and pay down of our existing term loan, we expect to have annualized cash interest expense of approximately $202 million on $2.95 billion of outstanding debt. This…

(Operator Instructions) The first question is from Andrew Finkelstein from Barclays.

Hey guys, good morning.

Good morning, Andrew.

A few questions from me, one just a couple of big picture items, I was wondering if you could give comments on, I guess, there was an article in Billboard today on Universal maybe striking a deal with Apple iRadio. I was just wondering if you could comment on where you think that product is and what your involvement might be. And also you can give us an update on the performance royalty and radio to be -- there’s been some more noise at Washington on that?

Well, Andrew on the first, we’ve seen same articles about Universal. I think the -- we, I think, as well as the rest of the industry would welcome Apple’s entering into the digital radio business. I think we have a view that it would lead to charge for other entrants and would accelerate also the growth of simulcast and digital radio from terrestrial participants. So hopefully, Universal, Sony, we and others in the industry will come to terms with Apple in the near future. With respect to Washington, I’ll turn it over to Brian.

I think our view there, Andrew, is that we actually are supportive clearly of a performance right in terrestrial radio for the Recorded Music industry. There’s been a lot of talk about it. There’s a lot of talk around overall rates in general both on the digital front and the terrestrial front. We’ll just continue to monitor what’s going on down there and see with Apple’s. But from an industry perspective, we’re very supportive of getting that right.

Okay. And then the Recorded Music obviously had a great quarter here, well exceeding the industry in the U.S. at least as you guys mentioned. One, could you talk about what you think the prospect for outperforming for the rest of the year would be or is it just a sort of clustering of your releases so far. And then also, could you give us a breakdown on the recorded digital side of downloads versus some of the other big buckets in the digital?

Andrew, I’ll take the second part and I’ll let Steve give the first part. If you look at the Q now, we give you a breakdown of the elements of our growth from a digital perspective. We’ve actually broken out some of the other [items] to around some of the licensing stuff. So if you take a look there, you’ll see that. With the respect to the balance to the year end, we typically don’t provide guidance given the nature of our release schedule in a way it can move. That being said, we had early in the third fiscal quarter, Michael Bublé’s release and it’s doing very well worldwide. We had a release of the Paramore album and it’s doing very well. And obviously, we had started some meaningful carryover from releases that came out in either of the first or second quarter. So I don’t want to give you any forecast for the balance of the year. I do believe that with our current and planned releases in the future that we’ll be able to keep the momentum that we’ve generated in the first six months going.

Okay. That’s great. And then just one more from me, I think in the public filings on the Parlophone deals, much of you can talk to it but the synergy number that was printed there. I think it was $70 million against roughly $100 million of EBITDA. So it does appear to be a pretty large number. Although I was thinking some of those synergies might come out of the Warner side as well. I was wondering maybe you could talk about the expected synergy number. And maybe how long it will take to achieve?

Well, given that and I’m sure you can appreciate this, given that we haven’t got EU clearance shut and the deal hasn’t closed. And obviously we have to work our way through the various legal and social processes in Europe that at this point I would be uncomfortable in saying anything specific other than the number that you mentioned. We’re relatively confident that that’s a very reasonable target. And we hope to achieve it as quickly as permitted under the legal and social guidelines as dictated by the countries we’ll be operating in.

Okay. Thanks a lot.

(Operator Instructions) The next question is from Aaron Watts from Deutsche Bank.

Hey guys. Speaking about some of the geographic areas that were stronger for you and contrasting unto those that were weaker, I guess you called out parts of Asia and Europe, Japan, Italy. What’s going on in the weaker geographic locales that -- is it more to do with just macroeconomic issues there or can you call out any other kind of particular things going on that’s pressing down sales?

Well, I think that particularly in Japan most of our business this year, Aaron, has been tracking pretty well in all parts of the world. Japan, we didn’t get the carryover from a number of our very, very prominent Japanese artists that we expected after their releases in the fourth quarter of fiscal ‘12. So that’s been somewhat disappointing and we also historically did not have the broad and deep Japanese catalogue of some of our competitors. We’re looking at obviously ways in which we can improve that business. And hopefully, we’ll have a better handle on it over the coming quarters. But I don’t think it’s really any macro trends. The macro trends are actually knock on wood pointing in the right directions both on a domestic and a global basis. I think we’ve just had an unfortunate number of circumstances, which has depressed over the last six months, our Japanese business.

Okay. Got it. And then, just one more for me and maybe it’s a little bit of a follow-up. But assuming, Apple does introduce a digital radio streaming service, as you think about it as a content provider and Apple also being kind of the dominant download store, how do you -- is it a threat to Warner Music, as people use Apple streaming radio service versus downloading songs? And maybe you can just talk a little bit about that, whether it’s an opportunity or if it is in fact somewhat of a threat that people aren’t going to download music for stream and listen to the radio often?

Well, I guess two things. One, I try and never assume particularly about our counter parties business, but even with other digital radio services that it become very, very prominent. Pandora, I guess is one of the lead examples. We haven’t seen any meaningful shift in consumer behavior away from collecting music. And again, I wouldn’t want to assume what Apple’s long-term plans are, but it does seem to me that what Apple does is continue to build and complement all of the facets of its ecosphere. And it seems to me that they believe and probably having more information about consumer behavior and preferences than anybody on the planet that they also noticed that radio hasn’t eroded the consumer’s preference to collect music and want to control and collect that in their own way. So, I suspect that they suspect this will be complementary, Aaron, as opposed to creating erosion in the overall demand for either downloads or the collecting of music in other forms.

Okay. Now, that’s helpful. I appreciate you taking the questions.

Thank you. I’d now like to turn the call back over to the speakers for the closing comment.

Well, thanks everybody for joining us today. I appreciate you taking the time. Have a wonderful Memorial Day and a great summer, and we’ll talk to you in a few months. Bye-bye.

That concludes today’s conference. Please disconnect at this time.