Universal Music Group N.V. ($UMG)

Okay. Good morning. My name is Daniel Kerven. I'm part of JPMorgan's European media research team. We're very pleased to have Universal Music with us in Boston today for the first time and to welcome Matt Ellis, CFO.

Thank you. Great to be here.

We've got a lot to get through, so we're going to get straight into it. Matt, Q1 streaming growth was only 8% despite the initial benefits of streaming 2.0 due to a 2% headwind from lower stream share. What gives you the confidence that your share should stabilize across the rest of this year?

Yes. So good to be here with everyone today. So as you think about the subscription revenue growth, I think it's worth putting in context over the last couple of years. we've averaged almost 9% growth. So we continue to see very strong there -- as you said in the first quarter, we saw about a 2-point headwind from market share. Just to put that in context, over the last 3 years, we've had 9 out of the top 10 artists every year over a 3-year period. And so 1 of the things I culminated in is our our total market share last year was the highest it's been in over a decade. So we come in the year from a very high point there. We had a lower release schedule than in some quarters during the first quarter, and that drove the 2-point reduction but it's reiterate, obviously, that catalog makes up the majority of our revenue, which is why even with a low slate that we still saw a market-leading market share in the quarter. And we're really encouraged by the release slate from our artists that we've seen already in the second quarter here including last week when we had 3 new albums from Dry come all at once, and we've got more new releases coming in. Obviously, we'll get a partial quarter impact of those in -- so as you think about the trajectory from Q1 to Q2, we'll see those start to phase in and start to get the benefit, and then we'll see that momentum build through the rest of the year. So continue to be very excited about where we're positioned in the industry and the great work that the artists and songwriters that we partner with continue to do.

You've spoken to a 3% contribution to growth from pricing in Q1 as the first DSPs migrated to streaming 2.0 deals, how would you expect that pricing contribution to develop in Q2 and into the second half?

Yes. Yes. It's really fun being in 2026 now and talking about the actual price increases coming through. We spent a lot of time last year talking about we designed these deals and the pricing will kick in ahead of us. So we're now at that point where we're seeing that happen. So we've had 3 deals that we signed over the course of the last year and a bit. And 1 of those kicked in at the beginning of the quarter, the other 2 kicked in as the quarter went on. So glad to see that impact in 1Q and knowing that we've got the full effect of each of those now starting to show up in the remainder of the year. So excited to see that. And we expect to continue to sign streaming 2.0 deals with various DSPs around the world.

Well, it's hard to be specific on the exact timing of the streaming 2.0 step-ups in the per subscriber minimums should we expect them to underpin the high single-digit price rises over 2 years, that was implied by your Capital Markets Day.

Yes. So it's worth just specifying when we gave the Capital Markets Day guidance, the 8% to 10% the breakout that we gave at the time. So we said roughly half, 4% to 5% related to continued growth in subscribers and the other half, 4% to 5% from pricing actions. So the subscriber piece of 4% to 5% was the net impact of continued high single-digit growth in the number of subscribers, but more of that growth coming from low ARPU markets. And then on the pricing side, that 4% to 5%, we said it would be a combination of 2 things. One would be an increase in the minimum per subscriber numbers or what's often called wholesale rates. And then also the impact of more tiering being introduced into subscription revenue products. So that's how you get to the 4.5% on each side. And it's really good to see how things have been playing out since we said that at Capital Markets Day, clear line of sight against each of those vectors that get you to the 8% to 10%.

Moving to ad-funded streaming Warner saw 11% ag growth in Q1 versus your 1%. Could you talk about the challenges to your near-term ad-funded growth? And in the medium term, would you -- should we expect ad-funded royalties to grow more in line with the digital economy?

Yes. We certainly are very optimistic about the opportunities in the ad funding side. In fact, we were the first company to kind of monetize that when we did our first deal with Meta back in 2017, 2018 time period. So it's a space that we have been involved in for close to a decade now is how music gets monetized in that space. Obviously, it's an area that continues to evolve to move towards short form and so on and the monetization models have to adjust there as well, but we continue to believe it will be an important part of our revenue stream going forward.

Merchandising has been a drag on margins over the past year. Could you explain the challenges that you faced in that space and how you're fixing them? And also remind us of the wider benefits but merchandising brings to your offer.

Yes. Yes, maybe I'll start with the second part of that question because I think it's -- why are we in the space? And what you really have is a situation where artists continue want to have methods to deepen their relationship with fans and fans want to continue to show their engagement with the artists, their Phantom, et cetera. So there's demand here from both sides and we feel that playing in the merchandise space is an important part of how the industry continues to develop and a role that we play as an artist continues to develop their brand. So there's a lot going on in that space. We're very happy with seeing where some of the top line growth is pointing and the opportunity is there. Now what we're looking at is, okay, on the margin side, obviously, it's not where we would like it to be today. There's some operational areas that we are looking at that will address the margin in there. But it's a lot easier to think about improving the margin. When you see a segment that's got the type of top line potential that we've talked about, and we're seeing show up in the numbers. So we'll get to the operational side, and we'll like the margin in that business as well as the revenue growth over time.

Downtown is a lower-margin business, and we'll have a dilutive mix effect on the group margin into Q1 of next year. Could you discuss the benefits that Downtown brings to UMG? And what synergies you'd expect from bringing Downtown's distribution in-house? And what ROIC are you targeting in the medium term?

Yes. So as you look at Downtown, and I think it's worthwhile just building on some of the comments that Luciad made on our last earnings call that a few years back, the company saw that there was very much growing space of the market that we didn't have the representation in that you would expect Universal Music to have. And so we took some pieces where we are playing in that space, but across different parts of the business, pull them together and formed what we call Virgin Music Group. And so bringing Downtown in puts us in a position where we now have the scale to be a very clear #2 in that space and really have a set of products in the area supporting independent labels and artists a full portfolio of products to really serve that community, which is a fast-growing part of the overall industry. So just like we talked about with merchandise, we look across the industry, we say, where are things growing do we have the assets to play there? Let's make sure that we are participating in those growth areas and Downtown was a way for us to really accelerate our growth in that space. So we now feel like we go to market with a complete suite of offerings for that community. In terms of the return, certainly, we're driving EUR 15 million to EUR 20 million of synergies over the next couple of years. The team has already got good line of sight to delivering those. I'm excited to see how the integration is going so far. And we continue to see mid-teens type of IRR for that investment as we deliver those integration benefits over time.

Now margins have increased from 14% in 2014 to 22%, but were flat last year despite cost savings. Could you explain what factors weighed on the margin in 2025?

Yes. Yes. We spend a lot of time on this question. Overall margin was flat last year, but when you break out the individual pieces, you see the benefit of operating leverage and that then gets offset by the different growth rates of different businesses. So first of all, recorded music, our largest segment in totality, had flat margin last year. But on our last earnings call, we broke that out between the virgin component, which is growing faster than the total. And when you look at the rest of recorded music, it grew 20 basis points last year. And within that 20 basis points growth last year, we had physical grow at a faster rate, and that's a lower margin business. So you can clearly see the operating leverage in there being offset by mix effect towards physical and towards the Virgin business, giving you that overall flat number, but operating leverage in there. And then publishing grew 20 basis points last year as well. So as we continue to grow our core businesses, we see the margins expand on a line of business by line of business standpoint. Then when you add it up, you get that mix effect as well. But overall, growing EBITDA, and we'll continue to do so.

Investors are concerned about the gross margin erosion that you've seen in recent years. How would you split that erosion between business mix, higher royalties to artists and increased investment in advances to new artists and into emerging markets, which would help drive future growth.

Yes. Look, great question. As you think about the gross margin, again, there's a mix effect in there. In addition to the pieces that I mentioned, 1 other piece as our publishing segment has grown a little faster than the Recorded Music segment. As you think about the gross margin construct within the publishing business, although at the EBITDA margin line, you end up with something that doesn't look too dissimilar from recorded music it has a lot less of the expenses between the gross margin and EBITDA. So it starts with a lower gross margin as it grows in the mix as it has over the last couple of years, it has an effect there. So again, continue to see operating leverage in there, but there's a mix effect on the gross margin line. You mentioned advances, and we've had a lot of questions about that, that's why we broke out at year-end, an analysis which showed that advances have grown advances have grown by 8% over the past 6 years, but total revenues growing at 10% and EBITDA has grown at 14%. So advances are -- we see them as a working capital investment. And they are exactly what they say. They're in advance to the artist on their future earnings. And so as the total music industry has grown, it's not surprising that advances have grown as well. And in terms of how we look at them, not only do we get to recover them against the future work that the artist produces -- we also get to cover them against the catalog we have of prior work from that artists, too. So it's a -- it's no surprise when they're growing. The fact that they're growing is a reflection of the health of the music business and we continue to look to deepen the relationship with our artists and the success that they've delivered.

Now your Capital Markets Day guidance was for 7% plus organic growth and for 10%-plus EBITDA growth. We suggested margin expansion that made provision for lower margins if you were successful in driving faster growth from your lower-margin activities. Does be modest change in overall business mix post Downtown change that base algorithm, potentially with faster revenue and EBITDA growth, but with less scope for margin expansion.

Yes. Look, I think what you see us do is be very focused on delivering growth that drives long-term value. And we will continue to focus on delivering long-term value so as I think about the near term, certainly, there's a mix effect. At the time we did Capital Markets Day. We -- Virgin has certainly growing faster, especially with the addition of Downtown that's in there. So we will be very -- continue to focus on driving revenue and EBITDA more so than just worried about the short-term margin impact. Over time, as we continue to grow each of those businesses and viewing it from a return on investment standpoint and the IRR they create, we think that drives the maximum long-term value for all our shareholders.

Now Warner's margin is going up, in part because it's lost lower-margin activities, while your margin has been constrained by your success in winning some of our lower-margin business. One resetting is targeting a high 20s margin in the medium term. Is that also a realistic target for UMG?

Yes. So I'm not going to comment on any other company. We're focused on what we're doing at Universal Music. And as I kind of hinted at in my last answer, I'll focus in on how do we continue to drive the best performance in the industry, the leading revenue, the leading EBITDA numbers. And if that means that we happen to be in a wider area of businesses, including merchandise, including the artist and label services business, including expanding in a lot of high potential markets that others may be having lowering their presence in, then we're absolutely going to do that if it drives long-term value. So that is ultimately always our focus is driving that long-term value generation as opposed to a short-term margin target.

Moving to Concord. You currently do most of the digital and physical distribution of Concord. And I would guess it's 1 of your most important external relationships. BMG is acquiring Concord. What would be the impact of BMG taking, at least for digital distribution in-house?

Yes. Look, we've had relationships with both Concord and BMG for many, many years very constructive relationships with both of them. I'm not going to speculate on exactly how those things will play out after that transaction closes. But I would imagine we will continue to have solid relationships with both of them as we go forward, but too soon to speculate on the specifics of what that might be.

Okay. So let's move to catalog investment -- could you talk about your approach to catalog investment, explain why it's attractive, where you are the best buyer? And what is the returns profile?

Yes. Yes. So we view catalog as another form of M&A in terms of why it's attractive to us. I think it's a core of what we do, right? It's not some new adjacency we're trying to expand into. It is acquiring music rights and creating the most value for them. That's at the very heart of what we do and what we've done for such a long time now. So it's very consistent with our overall business. Are we an attractive buyer. There's really, I'd say 2 reasons. One, with the market knowledge today to the analytics we have, we understand the value of any piece of catalog better than anyone else. And secondly, when an artist is choosing to sell -- the vast majority of them care about how that catalog is going to be treated over time. And that's 1 of the things with our relationship with artists over the years. They know that UMG is somebody they can trust their catalog with. So it's something we look at from a return standpoint. There's catalog deals that make sense for us to do, and we're very happy to do them. But we're also disciplined in how we think about investment in catalog just like we are about any other investment area.

Now why are some analysts wrong to characterize catlog investment as some sort of maintenance CapEx that you have to do to maintain your organic growth?

Yes. Look, it's purely discretionary whether we go ahead and invest in catalog. We are always happy for the opportunity to deepen the relationship with a lot of artists by engaging in catalog purchases. But it absolutely is a growth investment. We view it as M&A. In fact, some of the things to get classified as M&A, an acquisition of the equity interest in the company is essentially a catalog purchase. That's the vast majority of the assets in some of the high-potential markets we've invested in. It's being structured as an M&A deal, but the vast majority of what we're buying is actually catalog. So we look at catalog as an investment that continues to grow the business. And I think investors should think of it that way as well.

Now with the support of shareholders, Sony and Besman, have been a lot more active in cathlog acquisitions, does the perhaps lack of investor understanding and in some areas of support the catalog acquisitions put you at a competitive disadvantage?

Absolutely not. I think we have very strong support from investors in the investments that we make. We continue to be very disciplined in how we look at the investments we make, but also think about catalog as part of the portfolio of our investments. We're investing in catalog. We're investing in artist and label services as we've seen with Downtown. We're invested in high potential markets as we continue to see the growth globally of music generation. And so our catalog spending is part of that overall investment spend, and we look at it on that portfolio basis. And every item that we invest in is done with a degree with a strong degree of financial discipline and looking at where we think we'll generate returns.

And if you could just touch briefly on your relationship with Cord and the benefits that brings to your cash log acquisitions.

Yes. Court is a great vehicle for us to invest in a lot of the catalog transactions that are out there. The pace, obviously, of investment in the catalog space over the past 5, 10 years has grown rapidly and it gives us a very capital-efficient way to participate in that while allowing us space to continue to invest in the other areas I mentioned. So we get the opportunity to partner with Cord. We preserve some of our capital for other activities, but we also get to administer and distribute that catalog that comes in through the court vehicle.

Now moving to cash conversion. There has been concern about the cash conversion being weak in '25 and '26 as a result of investment in advances and CapEx and buildings. Is the market wrong to extrapolate from what we would see as an elevated cash gap? And could you remind us as to why advances are, in fact, a very good thing.

Yes. So obviously, the advantage, as I mentioned earlier, we see them as working capital. But they don't necessarily move as much of a straight line as revenue line. There's some more variability in the timing of advances depending on when we structured new deals with, especially some of the larger artists that we have very strong and long relationships with -- so we're glad that we are able to continue our relationship with those artists as they continue to put great work out there. We saw an uptick last year. There might be something similar this year. We'll see exactly the timing of those deals get done. But as I mentioned earlier, advances of working capital and the gross advances have actually been growing at a slightly lower rate than our revenues have. So we'll continue to expect that continue. And we also mentioned that the cash flow this year, we've got a couple of real estate projects that create some additional lumpiness as we go through. But the important thing is the business continues to be a very strong generator of cash and allows us to invest in advances to maintain relationships with our key artists and bring new artists into the fold. It allows us to invest in our expansion areas such as the high potential markets, continuing to grow our artist and label services to grow our superfan initiatives, including merchandise, et cetera, and position ourselves to not just run the existing business but create long-term value over time and continue to be the leading company in the music space.

With regard to the issue of disclosure, why not give organic growth, which would address concerns that your growth is dependent on M&A and Casto acquisitions?

Yes. Yes. hopefully, with some of the comments you made at year-end, we mentioned that of our growth last year, about 1 point of it came from M&A last year. So that starts to give a little more insight into the fact that the vast majority of the growth was definitely organic and continues to be so. In terms of overall disclosure, what you've seen over the past couple of earnings releases now, we've continued to add to the disclosures. We continue to listen to investors in the areas where they'd like to see additional items and where we think it makes sense to improve the understanding of the business and do it in a way that doesn't create competitive issues as well that we continue to listen to that feedback and you should expect us to continue to look at making sure that we're being as responsive as we can be.

And as part of that improving disclosure, you've broken out Virgin's contribution but Virgin really only tells investors a small part of the admin and distribution story and its impact on growth and margins. Why not break out the overall distribution for recorded and admin for publishing?

Yes. So as we do that, certainly heard that question a few times. Part of the answer is as you dig into it and you look further into it, it's not necessarily always clear black and white between what's a distribution deal, what's not a distribution deal. And so we've attempted by breaking the Virgin piece out to give people insight into that. We'll continue to find the right ways to put data out there that helps people understand the business in more detail. But only if we think it does so it doesn't create actually more confusion in itself. So we'll continue to look at the right way there. But our deals there's a wide range of them and being very specific about what's a certain type deal versus another. There's a lot of gray in that, that we have a vast array of different deals but all of them allow us to continue to generate value across the industry.

What are your latest views on a U.S. listing?

Yes. Look, certainly, at this point in time, earlier this year, the Board looked at it felt like there was too much dislocation and the valuation in the marketplace to make sense. The Board is going to continue to look at the right time to do a U.S. listing and when there's something to update, we'll look forward to doing so.

And then with regard to your balance sheet and use of cash, could it make sense to have a target leverage or a target leverage range to give you some flexibility?

Yes. Look, I think we've been clear that we think a strong balance sheet is important for us in our industry. We specified that our current credit rating is important to us. And so that gives some ballpark in terms of where we think we could be. But I don't think it's necessarily appropriate at this point in time to give a specific leverage target. We'll continue to return cash to shareholders when it makes sense. We announced our first buyback a couple of months ago. And then obviously, on our last earnings call, we added an extension to that as well. So excited about how we're thinking about managing the balance sheet, but continue to believe that having the flexibility to take advantage of opportunities when they come along is also important to us.

Right. Well, finally, I want to finish on what we see as a transformational positive for music and for which is AI. And you may have seen that we now have such conviction in the story that we're adding an AI premium to our valuation of UMG. So could you perhaps talk about the partly, you could touch on why AI isn't a threat. But could you focus on the opportunity for new and existing DSPs to license content for AI derivatives, which would transform the user experience drive volumes, pricing, ARPU and UMG's market share and explain how you're leveraging your content to ensure that the emerging business models can only ever be incremental for UMG and your artists and songwriters.

Yes. Yes. It's interesting how the narrative has moved over the last few months on this. And I think when there's a number of proof points that show that AI that isn't based off of something created by an artist is not what a consumer is looking for. And a number of proof points around this. We had some of the DSPs. I think Deezer has been a leader in it. But they're seeing the same data as every other DSP that the actual listenership of pure AI-generated music is less than 1% and some part of that is actually fraudulent. So real list to ship is like an even smaller percentage of that. In addition to that, we showed the top 10 AI-generated songs last year. The #1 didn't even crack the top 7,000 songs last year, and the #10 could have cracked the top 92,000 songs. So nobody is listening to this. And just another proof point, if all of this AI music was creating listenership, our market share last year, as I said earlier, was the highest it's been in over a decade -- which would be difficult to do if listenership was being diverted. So you've got all those proof points out there now. And in all the various surveys, I say the same things. artists what -- sorry, consumers want to listen to music created by human artists. They want to interact with it. Now do they want to interact with it? Do they want to speed up, slow it down. If you look at the music that's on a number of social media post it's already getting sped up, slow down other things. The tools around that are increasing rapidly and it's going to give DSPs, whether it's existing DSPs or new DSPs, the opportunity to put new tools in the hands of consumers who are showing a desire to play around with the music, but to play around with the music that was created by their favorite artists, not something that was created by a machine. And so that puts us in a position where our artists should get to participate in this. And that's part of our artist-centric principles that we've spoken about throughout streaming 2.0 as we move into the AI age that's part of it. But you can see tools that are going to get built to allow a consumer to speed up, slow down, match different things together, but have that in a contained way. And then those tools will be available. I spoke earlier about how our revenue increase was partly from the wholesale price increase, but partly through tiering, while so a big piece of that tiering looking forward is probably access to these AI tools that will allow consumers to do that and continue to deepen the interaction with their favorite pieces of music. So we're incredibly excited about the positives of AI coming into the music space. And the empirical evidence is out there now that just computer-generated music isn't what consumer is looking for. They want to interact with the music from their favorite artists the tools are coming out there. And then we'll see the monetization, which would be another key part of the continued growth in the industry.

Fantastic. I think we have come to come to end of my questions. I think we are pretty much at the end of the schedule. So I don't know if you have any closing remarks and...

No. Look, we are very excited where we are. We've had continued growth in the industry now for well over a decade. And when we look forward to where the industry is and where we are as a company, the portfolio of businesses that we have, how they're growing and the -- we talked about the different growth vectors and our participation in each of those having the discipline to invest in those in a way that generates a return. We're excited about the future as we look ahead here.

Fantastic. Thank you very much for being with us today, and thank you for joining us.

Thank you.