Welcome to Warner Music Group's First Quarter Earnings Call for the period ended December 31, 2017. As a 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 today's call over to your host, Mr. James Steven, Executive Vice President, Communications and Marketing. You may begin, sir.

Good morning, everyone. Welcome to Warner Music Group's Fiscal First Quarter ended December 31, 2017, Conference Call. We filed our earnings press release and the Form 10-Q with the SEC this morning. 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, we 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, our Form 10-Q and Form 10-K 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. Also, please note that all revenue figures and comparisons discussed today will be presented in constant currency, unless otherwise noted. With that, I'll turn it over to Steve Cooper.

Good morning, everyone. Thanks for joining us. We're still celebrating our spectacular showing at the Grammys. Atlantic, Billboard's label of the year, won more awards than any other record company. The icing on the cake was Bruno Mars winning all 7 that he was nominated for, including a sweep at the top categories, Album of the Year, Record of the Year and Song of the Year. We also had many other well-deserved wins across diverse genres for our recording artists including: Ed Sheeran, who took home 2 in Pop, including Best Pop Vocal Album; The War on Drugs’ for Best Rock Album; Dear Evan Hansen for Best Musical Theater Album; Kraftwerk for Best Dance/Electronic Album, Portugal; The Man for Best Pop Duo/Group Performance; Mastodon for Best Metal Performance; and Randy Newman for Best Instrumental Arrangement. Warner/Chappell songwriters also won in nearly all of the big publishing-related categories, including Song of the Year, R&B Song, Rap Song and Country Song. Kendrick Lamar swept the rap field, including rap/sung performance for his collaboration with fellow Warner/Chappell writer Rihanna. Our songwriters won in every country category with Chris Stapleton collecting 3, including Best Country Album. Just to get it said, this wasn't from our point of view, luck. When you pair the world's best operators with the world's greatest artists and songwriters, these are the results. 2018 is obviously off to a great start. Specifically, in the first quarter, we grew total revenue by 10% and digital revenue by 17%, with streaming up 27% and downloads down 17%. OIBDA was about flat, though this was largely due to onetime items, which Eric will discuss. For 3 years running, we've grown first quarter revenue by double digits. Our performance fueled a healthy jump in our cash balance, hitting a record $776 million at the…

Thank you, Steve, and good morning, everyone. We're pleased to share our first quarter performance as it is further evidence of our ability to sustain strong results. In fact, this marks the first time in over 10 years that we had quarterly revenue in excess of $1 billion. Revenue, again, rose double digits, up 10% in constant currency and 14% on an as reported basis. Furthermore, there are 2 factors which affected the numbers, such that our underlying momentum is even stronger than it appears. First, in last year's Q1, we booked $18 million of revenue related to the Pandora pre-'72 settlement, which impacted growth by 2%. Second, you'll recall that late last year, we completed the PLG-related asset sales, which, along with some noncore concert promotion assets, had about a 2% impact on our revenue growth for the quarter. The effects will be felt for the balance of the year. From an OIBDA perspective, certain adjustments are necessary to make the year-over-year comparisons more meaningful. The details are in our press release, but in the quarter, we had $13 million of onetime expenses, up from $4 million in the prior-year quarter. These expenses relate to costs from our corporate headquarters moving L.A., relocation of our shared service center to Nashville, costs associated with management changes and restructuring costs as we optimize the business. Q1 adjusted OIBDA rose 4.3% to $168 million. The improvement was driven by revenue growth. Adjusted OIBDA margin declined 1.5 percentage points to 16.1%, due primarily to higher variable compensation expense, investment in A&R and the impact of the pre--- of the Pandora pre-'72 settlement in the prior-year quarter. Variable compensation expense was $23 million, up from $10 million in the prior-year quarter. As a reminder, this is largely a deferred cash expense attributable to our…

[Operator Instructions] Your first question comes from the line of David Farber with Crédit Suisse.

Congrats on crossing the billion-dollar mark. That's a good number to have. I have couple questions. I guess, I wanted to quickly touch on the CRB, because we're getting a number of questions on it. And I guess, I want to understand, there seems to be, I guess, a meaningful increase in streaming royalties. So given the Publishing business and the Recorded business and the mix there, can you maybe just talk a little bit about how that will impact Warner? How we're supposed to think about that in terms of P&L? And then I had a couple follow ups.

Thanks, David. So the CRB does have an increase, you are correct. It phases in over 5 years. So the impact in the short term, we expect to be modest. It's come out relatively recently just in the past few days. We're still analyzing the specific impact. But I would expect it to phase in over time and initially be modest.

Is the expectation that -- I guess, I'm trying to understand from the -- like I assume maybe there's some upside from the Publishing side weighed against the Recorded Music. Do you think net-net...

No.

Is this incremental expense? Is it potentially incremental benefit?

It's certainly incremental to the Publishing side, that's what the ruling dictates. How it plays out overall in negotiations, we'll play out over time, and I wouldn't want to speculate specifically.

Okay. So I guess, the takeaway is that you expect this to be relatively small in totality for the time being?

In the short term, yes.

Okay. You talked about this -- your global footprint and mentioned, I think, perhaps the Middle East and markets in Africa. I guess, I'm just trying to get a better sense for if you could touch upon how you're doing that? Are these outright acquisitions? Are they JVs? I'd just like to get a better sense of how you're structuring these deals or how you're thinking about them and the economics involved, that'd be helpful? And then I just had one follow up.

Well, it's a -- it's anywhere from our own stand-alone investments, David. So by way of example, Warner Music Middle East is one of our own internal operations. It's similar to our other -- it will be similar to our other Warner Music operations in other parts of the world. The streaming services, those are just counterparty deals that we've initiated for the Middle East and North Africa and the balance of the African continent. So I should note, we have a wholly owned operation also, Warner Music South Africa. So based upon the nature of the markets and where we want to plant our flag, so to speak, we go anywhere from a direct investment and building the market with our investment organic, so to speak, and organic with streamers in those areas.

So they're more -- so there's no necessarily more acquisitions you're making. You're just sort of trying to plant your flag in other areas where perhaps streaming is less of an option today with the hopes it'll become more viable down the road, is that the right way to think about it?

Well, we expect it to be viable as we step onto the road. But we are also still in the acquisition business. We look at acquiring businesses that we think fit nicely with the Warner Music Group as long as we can do it on a sound-economic basis. I think we've indicated before that we don't find acquiring market share at a loss to be a good long-term strategy.

Okay. And Eric, you mentioned some of the cash flow pieces. I just want to make sure I had it right. So there were -- subsequent to the quarter, there was $125 million dividend plus cash bonuses to the employees, is that right? I just want to make sure I have that correct.

That is correct.

And your next question comes from the line of Aaron Watts with Deutsche Bank.

Couple questions for me. I wanted to start with a question on EBITDA margins. And Eric, understanding there's some noise these past couple quarters from the Pandora payment and some of the asset sales you mentioned. But as we think about the different buckets within both Recorded and Publishing, digital, physical, artist services, licensing, for instance. How should we think about the margins of each of those buckets? And I know from quarter-to-quarter, you talk about mix. What -- which are those kind of tends to bring in higher margins and which tend to be a little bit lower margin?,

So on Recorded Music, and generally speaking, digital will have somewhat of a higher margin than physical related to really not having the manufacturing, production, distribution requirements that allow that to perform at a higher margin. So as digital continues to grow and physical continues to decline, you'd expect moderate margin accretion over time. What you're seeing against that when we report in this quarter somewhat lower margins are onetime events like Pandora, which was in the prior-year quarter creating a significant benefit, and you're also seeing some of our spend against restructuring and continued improvement of our business, which again, is generally onetime in nature, whether it's the move to Nashville or consolidating our L.A. offices. And once you clear out those adjustments, our margins are actually quite healthy and continue to grow. On the Publishing side, we generally expect margins to be somewhat to be stable. We are continuing to invest in growth and sometimes on the incremental deal on growth, the incremental deal may have a lower margin. And so you may see, as part of the growth trajectory, incremental margin decretion, but the underlying business remains quite stable.

Okay. That's helpful. And then just kind of secondly, as you think about the cash balance even after paying the dividend and your cash bonuses and priorities for that cash, understanding you have, maybe, a potential to optimize your capital structure again in the near term with your unsecured notes, any thought to using some of that cash to pay down debt, mixed in with kind of refinancing with additional debt or how are you thinking about the priorities there now?

So -- thanks, Aaron. So with cash, we generally think about our priorities kind of are waterfall in kind of this way. So first is about investing in our business, continuing our momentum and growth, whether it's organic investment or an M&A investment. As Steve was talking about before, we see a terrific growing market, and we continue to reinvest in driving the future of the business. So long as it meets the return on investment profile, and we're very financially disciplined in our investment, but that's priority 1. Priority 2, as you talked about, Aaron, is continuing to optimize our capital structure. We've made a series of steps updating our term loan and revolver, and we'll continue to look for ways to optimize our capital structure, reducing our net cost of interest and making sure that's sufficient as it can be. Third, and from cash available, we'll continue to evaluate dividends after meeting the first 2 goals and from cash available. So that's kind of our set of priorities, Aaron.

Okay. And Last one for me, maybe back to Stephen. As you think about your flow of new music, any particular releases we can look forward to in calendar 2018 that you want to highlight today?

Well, I think you can look forward to a steady flow of great releases. But as always, Aaron, we don't get into specifics, primarily because while we're very confident of what they will be and when they come, there is always the probability that they can shift. So while not talking to that, we will continue to have a steady stream of great stuff for the remainder of our fiscal year, I mean, really great stuff.

And we have no further questions in the queue at this time. I'll turn the call over to Steve Cooper for closing remarks.

Well, thanks so much, everyone, for joining us, again, and enjoy this bright sunny groundhog day. Talk to you soon

And this concludes today's conference call. You may now disconnect.