Welcome to Warner Music Group's Fourth Quarter 2015 Earnings Call for the period ended September 30, 2015. 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. [Operator Instructions] Now I would like to turn the call -- today's call over to your host, Mr. James Steven, Executive Vice President, Communications and Marketing. You may begin.

Good morning, everyone. Welcome to Warner Music Group's fiscal fourth quarter and year ended September 30, 2015, conference call. Both our earnings press release and the Form 10-K, we filed this morning, are available on our website. Today, our CEO, Steve Cooper, will update you on our business performance and strategy. Our Executive Vice President and CFO, Eric Levin, 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 to differ materially. With that, let me turn the call over to Steve.

Good morning, everyone. Happy holidays, and thanks for joining us today. I'm pleased to report another very good quarter, topping off a great year for the Warner Music Group. For the year, we grew total revenue by 6%, with the U.S. up 3% and international up 9%. We grew digital revenue by 10%. We grew OIBDA by 28%, with margin expansion of 3.5 percentage points to 14.7%, and we generated cash from operations of $222 million, up from $130 million in the prior year. Our fourth quarter was also very strong. We grew total revenue by 7%, digital revenue by 20%, OIBDA by 6% and OIBDA margin by 1.2 percentage points to 15.1%. It's worth highlighting that this marked the fourth consecutive year that we grew combined digital and physical revenue in our Recorded Music business, and this year, both segments grew. It is all the more impressive that our sustained growth story is taking place against a backdrop of a music industry that is still going through an uneven digital transformation. For example, we had a 2% increase this year in physical revenue, a segment that has been in steady decline for 15 years. While we're optimistic about the long-term health of the music industry, we're also focused on creating our own opportunities and charting our own course. As we shared last quarter, our strategic priorities include producing a steady and balanced stream of great music, strengthening our reach around the world and pioneering new commercial possibilities. I'd like to provide you with an update on each of these priorities and explain how they are driving our results. First, we remain focused on delivering a consistent flow of great releases. We're achieving this goal by drawing on the collective strength of our entire global organization, with hits coming from…

Thank you, Steve, and good morning, everyone. Let me first note, we're presenting certain non-GAAP results during this conference call. Please note that all revenue figures and comparisons discussed today are presented in constant currency, unless otherwise noted. We have provided schedules reconciling these results to our GAAP results in our earnings press release posted on our website. Our fourth quarter and full year results are impressive, owing to outstanding music, strong growth and streaming revenue and excellent execution globally. We grew on the top and bottom line, all the while leaving flexibility to reinvest in the business. We stay focused on cost and cash management throughout the year and saw significant improvement in key financial metrics. As I reflect on my first full year at Warner Music, I'm pleased by our progress and excited by our potential. Turning to our results. In the quarter, total revenue was up 7%, and for the year, it grew 6%. Currency continued to impact as-reported results, with a 10 percentage point drag on revenue growth for the quarter and an 8 percentage point drag for the year. So that on an as-reported basis, our revenue declined 3% for the quarter and 2% for the year. From an OIBDA perspective, certain adjustments are necessary to make the year-over-year comparisons more meaningful. We have highlighted these in our press release, but let me walk you through them. In the quarter, we had $1 million in PLG-related expenses, which is down significantly from $16 million in the prior year quarter and $7 million in expenses related to other cost savings initiatives versus none in the prior year quarter. For the quarter, adjusted OIBDA, which excludes these items, declined 2% to $121 million or was up modestly if also excluding a one-time Music Publishing-related benefit in the…

[Operator Instructions] Our first question comes from the line of Aaron Watts with Deutsche Bank.

Appreciate all the details, as always. One clarifier for me. I think you said streaming growth in the quarter, at least on the recorded side, was 47%. What was the download decline in the quarter?

Download decline remains stable with the past, if anything, slightly better. It was below 10% and on a constant currency basis, rose significantly below 10%.

Got it. Okay. And then, as we think about the cost base that you're now operating at, I know you talked about the headquarter costs coming down in fiscal '16, any other kind of big moving levers on the cost side that we should think about additive or kind of taking away from that over the next 12 months that we should factor in?

So you're asking cost in both directions. So additive, I don't see anything coming at this point that would be additive. On the additional cost savings, which is, I guess, you'd look at, we did have a cost savings program in '15, which was quite effective. We're looking at a series of initiatives going forward, some of which would rely on incremental technology to find efficiencies. And otherwise, we're not announcing anything today, but we're developing a series of programs. When we have something that's ready to launch, we'll make sure that we share that, but it is part of our culture and it is something that we're working aggressively towards.

All right. And I know we've talked about this on past calls. As we think about kind of revenue translation down to EBITDA, as streaming becomes a bigger component of your revenue pie, is there any reason why we shouldn't see the flow-through continue from revenue to EBITDA or see a change, I guess I should say, from the experience of the past?

I would say 2 things. I think that digital revenues have -- tend to have and have a higher margin than physical revenues because you don't have the physical production and physical supply chain. However, within digital revenues, streaming versus download, in general, you'll have comparable margins differing depending on artist agreements, et cetera. But as streaming grows, if it's eating into physical, we would expect to see margin accretion. If it's coming from downloads, then you'd see less of that.

Okay. And last question from me. There's been some reports over the past week of Spotify, on a case-by-case basis, perhaps allowing artists to put their music on the platform, even if it's not available to all their subscribers, just the paying ones. How do you think about that from your seat? Is it good that they may make that change? Or is that not necessarily as positive a change or not a material change?

We haven't been able to verify that position, Aaron. So just speaking hypothetically, we believe that being able to differentiate between a free and a premium service makes sense. That being said, we'll have to wait and see if the Spotify position is verified by Spotify per se, which to date, we haven't been able to do.

Your next question comes from the line of David Farber with Crédit Suisse.

Some of my questions have been asked, but I did want to talk a bit about -- I think on December -- mid-December '14, we might hear more on the streaming and royalties for '16 and '17. So maybe you could update us on your thoughts and what you're hearing and how do you think that could impact your business either positively or negative? And then I have a couple of follow-ups.

Well, we could -- we continue to feel good about the SoundExchange case. We thought that the content providers had very, very good arguments. We'll know in the next few days as to how this situation turns out. I think that the decision has to be rendered no later than the 15th, David, but our expectations are positive.

Okay. That's helpful. On cash flows, I just had 2 questions. You touched on it a little bit in the beginning, but just on the currency side, anything you guys are considering to alleviate some of the currency concerns just inherent in the business? And then second, there's obviously some seasonality in the working capital as you talked about, at least historically, in the cash flows. I'd be curious to hear what you think the cadence is of the cash flows in '16, anything we should think about there? And then that's it for me.

Appreciate it, David, thank you. Let me tackle both of those. So on currency, clearly, the dollar has been strengthening and that has an impact on revenue. We should note 2 things: one is that our cost of our international affiliates are largely local, so there's a natural hedge with operating costs and the impact on OIBDA is more moderate than on revenue. Two is we have commenced a hedging program. And although we hedge cash flows and OIBDA, it is a reasonable approximate of that and will be helpful. We do want to continue to urge a little bit of caution there. I always say that we're not in a manufacturing business that's highly predictable month in and month out, we're in the music business, where individual performance of releases is variable and timing of releases can move. So we have to be somewhat conservative in our hedge ratios, but we have begun that program, and we expect it to be effective -- or we've done it, and that what we think is an effective way to be helpful going forward. On working capital, our forecasts indicate most likely that some of the key things that indicate trends of the past will repeat in the future. So the first fiscal quarter of every year is a heavy working capital quarter related to a series of things, in part because of the holiday season and physical manufacturing that comes in that quarter when collections come in later, in part due to royalty and interest and in our payments that begin to fall in that quarter. So we start slow and then build throughout the year. So the first quarter we expect to be one with working capital needs, and then obviously, we expect to build and improve throughout the year.

That's helpful. And then just very high level, if you could just talk a little bit more about the release schedule in '16, anything you're particularly excited by, either front half or back half-related? And then that's it for me in total.

Well, we're excited about all of our releases, but what we try to do I think is, as we've mentioned a couple of times, is to have balanced releases throughout the year and have a constant flow of music that moves both globally and locally. We should have a number of our very prominent artists hopefully dropping music during this fiscal year, and at the same time, at the local level, both our local and regional artists, and as we've seen over this last year, they can go globally at any time, David, continue to be very productive. So I'm hopeful that will continue throughout '16.

Our next question comes from the line of Davis Hebert with Wells Fargo.

I wanted to ask you a question on the publishing side of the business. I think there's been some speculation in the press that one of the largest publishing catalogs could be looking at strategic alternatives. And I know you can't really comment on that specifically, but I just wanted to know your interest in owning more publishing assets given the changing landscape on the streaming side versus looking at Recorded Music opportunities. And then secondly on publishing, just kind of curious if you see more opportunities like the deal we saw with Pandora and Sony recently. Do you feel like there's going to be more of these sort of privately negotiated deals away from the CRB?

Well, on the first, we are constantly both on the Music Publishing side as well as the Recorded Music side looking at opportunities to acquire additional assets. That's just a normal ongoing aspect of our business, David (sic) [Davis]. We don't, however, acquire assets if, in fact, we don't believe that we can acquire them from a reasonable, rational, financial perspective. And we do not look to acquire market share for the sake of acquiring market share if we don't believe that it can be profitable and profitably managed. Every year, we probably look at 1, 2, 3, 4, 5 dozen opportunities to acquire more catalogs on the Music Publishing side. And I think as we continue to report, we -- I think the number's probably less, but we continue to look at opportunities on Recorded Music. And when they make financial and operational sense for us, we spring on them.

Okay. That's helpful. Maybe if I can ask one on the streaming side. Again, you said the growth was 47%. I just want to understand how much of a skew in streaming is there toward the U.S. versus international? I know international can be a pretty broad-based bucket, but I wanted to get a sense for how sustainable perhaps that streaming growth [indiscernible].

Well, when you -- I'll give you kind of a top-down view, and then Eric can comment on some more specifics. But when you look at streaming today, it's my understanding that globally, there is somewhere between 40 million and 50 million paying subscriptions. And when you look at that as a percentage of the global population of 7.5 billion people, plus or minus, it looks to me as if we have barely scratched the surface by way of the upside potential for both premium and free models on a global basis. And so I'm hopeful that because of that, we will continue to see, relatively speaking, very, very, very robust growth. When you look in United States, I think that there is, from the numbers we get, something in the area of 10 million, plus or minus, paying subscribers. And when you think about that, that's 3% of the U.S. population. When you look at those countries, the Nordics, Benelux, where streaming has had more opportunity to take root and grow, music delivered vis-à-vis streaming is a very, very high percentage. In some of the Nordics, it's 70% or 80%. So I think that also speaks to the potential opportunities with respect to our domestic market in addition to the comments on international. Eric, do you want to add anything to that?

Yes. Thanks, Steve. I'll just add one quick point. David (sic) [Davis], to get to kind of part of what I think you're interested in, it's very balanced, both in terms of the base streaming revenue and the growth of streaming revenue, it's very balanced between U.S. and international. And we would also say that international isn't dominated by a market, it's across many markets globally. So it's really an extraordinary global balance in terms of the base and growth and where it comes from.

Anything more, David (sic) [Davis]? Hello? David (sic) [Davis]? Hello? All right. Well, I guess that's it. So before we go, one, I'd like to apologize one more time for the technical breakdown today in the conference call. We'll take whatever steps we have to take to hopefully ensure that it's not a repeat performance, so to speak. And I want to wish everybody a very, very happy, safe, warm, comfortable, relaxing and enjoyable holiday season. And we look forward to chatting with you in 2016. Thanks, everybody. Bye-bye.

This concludes today's conference call. You may now disconnect.