Welcome to Warner Music Group's fiscal Q2 earnings call for the three-month period ended March 31st 2006. Operator instructions. Now, I would like to turn today's call over to your host, Jill Krutick, Senior Vice President of Investor Relations and Corporate Development. Thank you. You may begin.

Thank you very much. Good morning everyone. Welcome to Warner Music Group's fiscal Q2 2006 conference call. Hopefully you've seen the press release we issued this morning with our results. We also filed our form 10-Q today, which you can find on our website, at investors.wmg.com. Today our Chairman and CEO, Edgar Bronfman Jr., will share with you our strategic update and our EVP and CFO, Michael Fleisher, will discuss the fiscal Q2 results. Then we will take your questions. Before Edgar'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. Words such as 'estimates', 'expects', 'plans', 'intends', 'believes', 'should' and 'will' and variations of such words or similar expressions that predict or indicate future events or trends, or do not relate to historical matters, identify forward-looking statements. Such statements include but are not limited to estimates of our future performance such as the success of future album sales, projected digital sales increases, and gains in physical sales, expected expansion of the online marketplace and market share gains. 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. Reconciliation schedules are detailed in our press release posted on our website at www.wmg.com. With that, thank you and let me turn it over to Edgar. Edgar?

Thanks, Jill. Good morning everyone and thanks for joining us. First of all, to dispense with the (inaudible) in the room regarding the EMI proposal, we will have nothing further to say this morning other than to reiterate that the proposal was unanimously rejected by our board as not being in the best interests of our shareholders. We would appreciate your cooperation in focusing on our quarter, which continues to reflect how we have been able to transform the Warner Music Group and how highly the work of our artists and our employees is regarded by consumers around the world. Having seen our results, you'll understand how pleased we are about the company's performance, especially just one year after our initial public offering. In particular, I'd note that even in the face of a challenging industry environment we have several major accomplishments. First, we continued to out-perform the market and gain margin and market share. Excluding the effect of currency in the sale of our sheet music business last year, our revenue grew by 10%, or 4% on an as reported basis. Second, we sustained our leadership position in digital, growing digital revenue to 11% of our total revenue, up about 30% sequentially from Q1. On a worldwide basis, digital revenue gains exceeded gains in physical revenue on a constant dollar basis in recorded music. Third, we had a series of successful releases and A&R achievements, including stronger performance from a broader base of top sellers, consistent with our strategy for international and domestic growth, innovative efforts with established artists and initiatives to develop new artists, gaining share in the fastest-growing genres such as Urban, and strengthening our competitive position in the independent space. Most obviously through our agreement to acquire Ryko Corporation, a leading independent integrated music and entertainment company. Fourth, we continue to reap benefits from our focus on profitable growth as measured by our previously mentioned digital growth and OIBDA margin improvement. Our OIBDA margin rose 1.6 percentage points YoverY to 13.1% as we continued to manage the business efficiently, and operating income improvements, which Michael will address in his remarks. Now I'd like to give you some further color on our digital business and our A&R strategy. We continued to sustain our digital leadership position. For the March quarter, our digital album share in the US continued to outpace our physical album share. This ongoing performance is a testament to the continued success of our efforts to weave digital into the fabric of Warner Music and our mission to be a music-based content company. The momentum of digital sales activity remains very encouraging. The average pace of weekly US track sales for the March quarter was 11 million, up 33% sequentially and 89% above the same period last year. US digital albums continue to sustain an even steeper unit growth trajectory than digital tracks, rising about 145% over last year and accounting for a larger share of digital sales overall. Our digital success is evident both domestically and internationally. For example, this quarter, Warner Music act Gnarls Barkley made music history when their debut single 'Crazy' topped the UK singles chart from sales of downloads alone. As we described on our last call, we have been leading the industry in the evolution of premium priced digital album bundles with more than double the number of bundled offerings than our closest competitor. We find that if we include special features within albums, such as music videos, liner notes, digital booklets and preferred status for concert tickets, consumers are much more likely to buy the entire package instead of a track or two. These offerings have an average suggested retail price 20-30% above the traditional '9.99' level, with little or not additional cost to us. This approach has become the norm for us, representing the lion's share of our album offerings on iTunes. Another development that highlights our innovative approach in digital was the selection of Warner Music to be the launch partner for Cingular's video service, powered by Music Choice, which will include a diverse selection of our music videos, artist interviews and behind the scenes footage. Moving to our successful global releases and A&R initiatives, we continued to outperform the industry in this quarter. Industry-wide, total album units sold in the US, both in physical and digital form, fell by 3% this quarter. However, according to SoundScan our total album units rose 1%. As a result, we increased our total US album share by nearly one percentage point YoverY to 18.1% for the quarter and an even more impressive 2.7 percentage points over the past two years. At our labels, it's worth noting that we continue to see significant improvements at Atlantic, while Warner Bros, last year's top-ranked label of the year based on US sales, is performing well across all genres. We've been working to build and carefully manage a premier roster of artists, both developing and established. Following on the success of James Blunt, among our developing artists is Daniel Powter, a Canadian-born singer-songwriter whose Warner Bros debut album first broke overseas, selling more than 1 million copies outside the US. He is now gaining traction in the US, helped by the hit single 'Bad Day', which has been the number one digital track for the last six weeks. Strong performances from developing artists such as Death Cab for Cutie and Panic! at the Disco contributed to Atlantic's tremendous success and showcased the continued payoff from our ongoing A&R investments. Established artists also contributed to our success in the quarter with solid carry over sales from Green Day, James Blunt, Madonna, Sean Paul and Michael Bublé. Another significant part of our strategy is growing high potential genres of our recorded music business such as Urban. As further proof that our focused, consistent A&R investments are paying off, we have gained quarterly album share in the US YoverY in four out of the top five musical genres for three quarters running. For example, highlighting our commitment to increase our presence in the rap genre, our share this quarter rose to 22% an increase of 11 percentage points over the same period last year. Artists that have contributed to our recent rap success include T.I., Juvenile and E-40 and they are part of our roster of rap artists that include Mike Jones, Paul Wall, Deeforell(?) and Missy Elliot. In fact, T.I.'s album, King, debuted in the US at number one and sold over 500,000 albums in its first week, generating Atlantic's biggest ever first week sales for an artist since the introduction of SoundScan 15 years ago. The T.I. highlight caps an exciting three-year three-album career development story only enhanced by the dual revenue stream flowing from the ownership of both T.I.'s recording and music publishing rights. To best illustrate our development as a music-based content company, when we released the T.I. album, we released over 100 SKUs of T.I. product, including digital albums, digital singles, ring tones, ring back tones, video ringers and e-graphics. These accomplishments are in part attributable to the innovative A&R approach executed by our incubator labels, East West and Asylum, which seek to identify independent label entrepreneurs and high-potential artists and sign them at lower cost. In fact, we have reorganized our incubator labels together with our digital-only label, Cordless Recordings, under one umbrella, called the Independent Label Group. As I mentioned earlier, one important event that strengthened our competitive position in the independent space was our announcement on March 24th that we signed an agreement to acquire Ryko Corporations. Ryko will bolster our presence in the independent artist community, diversify our catalogue, bring a new label to our family and further our leadership position in the distribution of independent music. Before handing it over to Michael, let me give you a quick update on our music publishing. As we have said, getting this business back on track remains the top priority. Just to recap, the music publishing management team which has been in place for less than a year is continuing to take steps to reinvigorate the business. For example, this quarter music publishing extended and expanded agreements with George Michael, Nickelback and the estate of Irving Berlin. We also formed a publishing venture with T.I. which includes co-writers on his recently released album, King. In addition, we announced the music publishing industry's only incubator label initiative, with the creation of Perfect Game Recording Co., designed to promote and develop emerging artists. With Perfect Game, Warner Chapell can now organically develop its performing songwriters in a low-risk environment with an eye toward long-term career growth in either the independent or the major label community. You can see why we're very pleased with our results. We continue to focus on executing our strategy and building shareholder value every day. Now I'd like to turn the call over to Michael for a run-through of our financials. Michael?

Thank you, Edgar, and good morning everyone. Let me begin by covering some of our key financial highlights for the quarter. Looking at the income statement for the three months ended March 31st 2006, we reported revenue of $796 million, which rose 4% from the same period 2005. Excluding the $11 million contribution in the same quarter last year from our sheet music operations sold in May of 2005 and a $31 million negative impact from foreign exchange, revenue rose an even more impressive 10%. We generated a quarterly net loss of $7 million or $0.05 per diluted share, including $2 million of FAS123 expenses, versus a $0.28 loss per share last year. Despite a challenging industry backdrop, we outperformed the market and managed costs effectively, driving excellent overall results. As we have consistently said, evaluating our performance on a trailing 12-month basis is a much better indication of our progress. In the last 12 months we had a year over year revenue advance of 4% to $3.5 billion and all our measures of profitability were up as well on a currency adjusted basis. The US was a major source of our strength, with revenue for the quarter up 18% YoverY, excluding the results of our sheet music business. Recorded music was the primary business that fueled our growth, while music publishing was relatively flat. Driven by our strong domestic recorded music results, we achieved worldwide revenue gains in both our physical and digital recorded music business on a constant dollar basis. We also exhibited revenue growth overseas, up 2% currency adjusted. In fact, Europe has picked up momentum for us in the recorded music business, with mid-single-digit revenue gains on a constant currency basis, while we had strong double digit revenue gains in Asia-Pacific and flat Latin American performance. The UK and Italy were two bright spots, led by Madonna, James Blunt and Enya. Our quarterly digital revenue nearly tripled to $90 million or 11% of total revenue from $35 million last year, and rose 30% sequentially. To spotlight a particularly exciting number, in our recorded music business digital now represents 13% of revenue. For the six months, digital revenue was 8.6% of total revenue and 9.4% of recorded music revenue. Similar to the last quarter, approximately 70% of our digital revenue is generated in the US, and 30% outside the US. Our worldwide digital revenue continues to be split about 50/50 between online and mobile, while today, online is larger than mobile in the US and the reverse is true overseas. Over time we expect this distinction to blur as we strike deals with mobile operators that include dual content delivery and over the air downloads become more prominent. As we've discussed in the past, we're seeing an emerging seasonal pattern to the digital business, with stronger YoverY sales growth in the first half of our fiscal year and a more flattish second half performance. This sales pattern is partially a result of the timing of the music device sales. Moreover as digital revenue grows results will also more closely mirror the timing of our album releases, which may cause quarterly fluctuations in our percentage of revenue coming from digital sales. As a result of managing our costs and investment balance wisely, our total operating income before depreciation and amortization, or OIBDA, amounted to $104 million for the quarter, up 18% YoverY, driving a 1.6 percentage point improvement in OIBDA margin to 13.1%. OIBDA included the $8.1 million severance charge for a previously announced executive departure and $2 million in FAS123 charges. Prior year OIBDA included $7 million in FAS123 charges. Now let's take a look at our different business segments. Recorded music's quarterly worldwide revenue rose by 9% to $676 million and was up 13% on a constant currency basis over the same period of last year. Contributing to this growth were new releases in the quarter from T.I. and Juvenile and significant carry over sales from James Blunt, Madonna and Sean Paul. Recorded music quarterly OIBDA increased 13% to $81 million, reflecting the benefit of a shift to higher margin digital revenue and higher margin top sellers. The success of our recorded music business translated into a 12% recorded music OIBDA margin, a 0.4 percentage point improvement over the prior year and a 1.6 percentage point improvement excluding the executive severance I mentioned earlier. Let's move on to our music publishing business. In comparison to the same quarterly period in 2005, excluding the sheet music business in last year's comparable quarter, music publishing revenue fell 10% to $129 million or 3% on a constant currency basis. Declines in mechanical and synchronization revenue were partially offset by gains in performance revenue. The decline in mechanical revenue in part reflects prior year industry declines in physical record sales. This revenue is recognized on a cash basis and is typically received on at least a one-year lag. Music publishing OIBDA was flat at $47 million compared to last year's comparable quarter. As for our cash management in our balance sheet, we ended the quarter with a cash balance of $359 million, short term investments of $61 million, total net debt of approximately $1.8 billion and a $250 million dollar undrawn revolver. Net debt reflects total debt less both cash and short-term investments. As previously disclosed, we declared our third quarterly dividend of $0.13 per share on March 14th, giving us a yield of 128% based on yesterday's close. The dividend was paid on May 3rd. We maintain our intention to pay up to an $80 million annual dividend to shareholders on a quarterly basis. For the quarter, we generated free cash flow of $162 million, calculated by taking cash from operations of $176 million less capital expenditures of $7 million and cash paid for investments of $7 million. Our unlevered after tax cash flow which we believe provides the most accurate reflection of the ongoing cash generation capability of our business, was $186 million, resulting in an OIBDA conversion rate of 179%, due in part to the collection of cash related to holiday sales during this quarter. Unlevered after tax cash flow is calculated by adding that $24 million in cash interest to free cash flow. OIBDA conversion is calculated by dividing unlevered after tax cash flow by OIBDA. For the six-month period ended March 31st, our conversion rate amounts to 80%, a rate that is more representative of our typical annual performance. On the tax front, our cash taxes were $12 million for the quarter. Substantially, all of our income taxes are being paid outside the US because our US taxable income is being offset by our interest expense deduction and the annual recurring non-cash amortization deduction. As we've previously mentioned, we're entitled to this deduction because we can amortize and deduct for US tax purposes ratably over a 15-year period a substantial portion of the purchase price we paid to Time Warner. We have a substantial tax carry over amount in the US resulting from net operating losses and foreign tax credit carry overs. We expect our effective tax rate to rise during the year. Before we wrap up, I would like to mention one item regarding our corporate governance. We are delighted that Michele Hooper has jointed our Board of Directors. Michele will serve as an independent director and will sit on the audit committee. She currently serves on the Board of Directors and chairs the audit committee for PPG Industries and previously served as a director and audit chair on the board of Target Corporation. Michele was the President and Chief Executive Officer of Voyager Expanded Learning and today is the co-founder and managing partner of the Directors' Council. We will be adding another independent director as soon as possible, to bring our total to three, giving us an entirely independent audit committee as required by the New York stock exchange rules. As you know, as a matter of policy we have chosen not to provide financial guidance to the investment community. We believe that, especially given the rhythm of the music release schedule and associated marketing and promotion expenses, quarterly variations of results are normal. We are very pleased with our financial growth, digital leadership and cost management efforts and remain very optimistic about our ability to capitalize on opportunities in the rapidly changing music industry. Thank you, and now we'll open up the call for Q&A. Operator?

Operator instructions. Our first question is going to come from Doug Mitchelson, and please state your company name. Doug Mitchelson, Deutsche Bank: Thank you very much. That's terrific results, guys. Edgar, I'm sorry but I can't help but ask. You and EMI are a similar size. Given the fantastic execution we've seen from you in the past four quarters and your experience putting Universal and Polygram together, wouldn’t it make more sense for Warner to be acquiring in any deal with EMI, rather than the other way around?

Doug, we're just not going to comment on the EMI proposal or any speculation around the combination of the companies. I appreciate the kind comments you made about our results and that's where we'd like to focus the call. Doug Mitchelson, Deutsche Bank: All right, well then maybe just one quick follow-up question. Is your new release digital market share also higher than your physical market share? The implication of course is that your strong library could be driving your digital sales and once consumers have rebuilt their library in digital your share would slip. Are you seeing the same results on the new release side?

We are. Our strength is across the board. We do have strength in catalog, but very much our growth is a factor due to new releases as well. Doug Mitchelson, Deutsche Bank: All right, interesting. Thank you very much.

Thanks, Doug.

Our next question comes from Michael Savner, please state your company name. Michael Savner, Banc of America Securities: Good morning, Banc of America Securities. Two questions. First, if you could maybe, Michael, give us a little bit more color for what was going on in domestic recorded music? Because when we strip out the growth in digital it still looks like growth was significantly higher than I think most people would have expected, so maybe a little bit more color on what was going on in physical? I think you said 1% growth, but that was probably a worldwide number, so that would be helpful. Secondly for Edgar, on the Apple announcement from last week that the labels had agreed to extend the deal at $0.99, presuming that's probably a one to two year deal? Can you give us your thoughts on your desire and you think the need to get the tiered pricing and if this new deal precludes you from going back to them prior to the expiration of the deal? Thanks very much.

I'll start, Michael. On the physical side, I think if you just look at the SoundScan numbers, the most readily available public numbers, you can see that for Q1 we outperformed the industry quite well. We did that in both physical and digital. We had strong new releases and continued strong performance across our carry over records as well as our catalog. We saw good performance in both the physical and digital markets. Michael Savner, Banc of America Securities: You don't want to quantify the physical gains, specifically?

I don't think we've broken that out.

This is Michael on Apple. A couple of things, the first thing I would say is that the agreement with Apple is confidential and so we can't really comment on the specifics of the agreement or the terms. I think the second thing I would say is that we don't set retail pricing, so Apple's pricing is Apple's pricing. The $0.99 announcement that Apple made is a reference to their retail price, not to our wholesale agreement. But nevertheless, that remains confidential. I think, though, our focus has very much been and will continue to expand in the whole range of digital bundled products. We, together with Apple, as such as large retailer, are constantly redefining what the consumer's experience with digital music is, and how that will transform over time. I think digitally bundled albums are really just the beginning of that. Of course, we do always price those at a premium to the unbundled product. I think you're just going to see our efforts in that area continue to expand across singles, albums and all other kinds of products, giving us - at least from our perspective - the opportunity to differentiate our content. Michael Savner, Banc of America Securities: OK, thanks, and congratulations.

Thanks, Michael.

Our next question comes from Anthony Noto, and please state your company name? Anthony Noto, Goldman Sachs: Thank you very much, it's Goldman Sachs. A couple of questions. Michael, when you think about the fact that digital music accounts for 11% of revenue, could you give us some perspective for that it may account for as a percent of EBITDA, and do you think that its relationship and margins will stay constant? Because I know the margin of the digital music play is greater than physical, but will the digital music margins come down over time as royalties change? Then, Edgar, second question, could you comment a little bit on what drove the significant step up in the digital music business? Do you think it was the benefit of new distribution channels, i.e. if you think about every point of distribution on a comparable versus new store opening basis, was it that, or was it just some comparable sales growth? Thank you.

Thanks, Anthony. On the digital business, and looking at it as a percent of revenue, obviously we don't break it out as a percent of our EBITDA or OIBDA, but what I can say as we've said before, it’s more profitable business. We continue to see that as it grows as 8% of our total revenue. We are flowing through that incremental profitability to our OIBDA margin rate and you can see that in our continued pickup in OIBDA margin rate YoverY. I don't think - the one thing you mentioned was as royalties increase - we don't see a reason that royalties are going to increase as the percentage of the digital business increases. There's a fairly constant relationship, but we're planning now on digital from a royalty rate perspective we should continue to pay. Obviously, digital will grow and continue to grow as a percentage of our total business.

In terms of the step up in digital in the quarter, I think it was less from new channel development than it was just from comparable growth. I think part of that is due to our release schedule and the strength of our release schedule, and particularly in digital, the strength of some of our releases and their relationship to digital such as Daniel Powter and others. But I would also say that there is this timing that Michael referred to, where we're seeing a slightly different pattern than we do in the physical world, where we're seeing significant growth in the December and March quarters and somewhat less growth in the June and September quarters, as gift cards and new devices enter the market around Q4, then play out into the first few months of the next year. I don't know whether that pattern is going to continue, whether it will remain, whether it will change, but for 2005-2006 it seems to be a pattern that at least has developed for those couple of years. Anthony Noto, Goldman Sachs: I had one follow up, if I could as well, on that topic. A year ago when we initiated coverage we had done a study that showed that when consumers start buying digital products, their physical purchases do not decline, i.e. their total purchases remain relatively constant. We just redid the study and I was looking at the results on the plane last night. It looks like that same cohort of shoppers who have been buying digital for a year are actually increasing their total music purchases. Do you have any sense of whether that's what you're seeing in the business as well?

We continue to do consumer work as well, but I guess that I'd just point you to our results and just say yes, we're seeing strength in the recorded music business as a result of more people buying more music. Then on top of that, frankly, more people are buying more of our music, because we've had specific A&R success. We're certainly seeing support for your research results in our financial results. Anthony Noto, Goldman Sachs: Thank you.

Our next question comes from Eric Handler, and please state your company name. Eric Handler, Lehman Brothers: Thank you, Lehman Brothers. Can you give a little perspective on the publishing business specifically with the growth in digital, when that begins to offset some of the declines that you're seeing in synchronizations from the other areas within publishing?

Well as you know, the publishing business, even in digital, lags by about 12 months in the recorded music and reflects so that our 2006 income in publishing would reflect essentially our 2005 market results and so on. Also, publishing is accounted for on a cash basis. We don't account for publishing or any other kind of revenue unless it's actually received. There remains a fair amount of royalties that the publishers - not just Warner Chapell, but the publishing industry, which have been accrued by the recorded music industries but not yet paid to the publishing industries, which we expect will increase our overall percentage of digital revenue in publishing once those cash flows start to flow through our income statement. On top of that, what we've said is that given the fact that the new management came in a little less than a year ago and has been working hard to turn the business around, but that results are delayed for a year. You're going to start seeing both digital growth and other growth coming from publishing, but more likely in our 2007 results than our 2006 results. Eric Handler, Lehman Brothers: Thank you.

Our next question comes from Richard Greenfield, please state your company name. Richard Greenfield, Pali Research: Good morning, Rich Greenfield, Pali Research. Two questions. One, first in terms of the free cash flow, given the strength of your revenues and EBITDA in the quarter, could you just walk us through what was the pressure on free cash flow? Was this just a timing issue related to working capital, or is there something else going on within that number? How should we think about it going forward if there was a timing issue? Then two, you made a change in your disclosure related to the breakout of international and domestic revenue, something you'd done at the end of the year but not on a quarterly basis. It obviously is very helpful in comparing your results to other companies in the sector, but just wondering why we decided to make the change now? Thanks.

On the working capital, Rich, it really is just a working capital timing issue and in particular, it's somewhat tied to our release schedule. This quarter we had four of our releases and a lot more of our revenue come from releases in the March month. Therefore, later in the quarter, and therefore we didn't have collections on those releases. You can see that in the receivables balance. So the big driver in terms of the change in our cash flow and cash conversion is really just a working capital movement that should work itself out over the next quarter or two. Richard Greenfield, Pali Research: And what was the negative working capital?

I don't have the number right in front of me, but I can get back to you on it. In terms of the disclosure, I don' t think there was anything special to the timing. We continue to try and add more disclosure and make our results more transparent for folks. Richard Greenfield, Pali Research: Thanks.

And our next question comes from Bishop Cheen, and please state your company name? Bishop Cheen, Wachovia Securities: Wachovia Securities - thanks for taking the call. Hi Edgar, Michael, Jill. Two questions, I guess related more to the digital. One, Edgar, are you seeing any improvement or change in the way the international digital accounting is developing? And two, can you give us a breakdown of what you're seeing and any change in, let's say, downloading tracks online versus ring tones and ring backs?

Bishop, let me answer those in order. Our international growth in digital I think is outpacing our domestic growth, because that market's beginning to develop and we are getting much more aggressive about our initiatives at international rates. As an example, as I mentioned when I was speaking earlier, we had quite a landmark I think for the industry, which was to become the number one single in the UK from downloads only. The first time that's ever happened. So the digital marketplace is beginning to gain traction internationally, just at the same time as our A&R traction is really taking hold. We think that augurs well for continued international growth. Bishop Cheen, Wachovia Securities: What about the accounting standards settlement and that kind of thing, is that still on a par with US settlement stockroom accounting?

Bishop, I'm not sure I understand the question? Bishop Cheen, Wachovia Securities: International, I thought that the actual recognition of digital revenues and what I call the settlement stockroom wasn't quite as developed as what you were seeing in the US.

I guess what I would say is it's equally undeveloped everywhere. I think one of the challenges that we're all seeing across the recorded music and publishing business is that the digital business has a large volume of transactions at very small rates and every company and the publishing agencies, everyone, are struggling to understand how we're going to communicate that amongst ourselves and make sure that we can report appropriately. Bishop Cheen, Wachovia Securities: OK. And the second is sort of the break out between ring tones, ring backs and more traditional downloading tracks online?

As I said before, our mobile and download business splits about 50/50. It varies a little bit geographically, so US has been heavier downloads, overseas has been heavier on mobile and ring tones. But that distinction is blurring as the mobile carriers start to carry over the air downloads. I'm not exactly sure how you make a distinction between that and a download to a computer directly. More to follow on how we'll report that, but nothing unusual this quarter in our digital performance in one category or the other. We had strong performance across the mobile market, the ring tone and ring back market as well as the download market. Bishop Cheen, Wachovia Securities: Very good. Thanks for the color.

Our next question comes from Marc Sugarman, and please state your company name. Marc Sugarman, Citigroup: Thank you, good morning. Citigroup. Three questions. The first is just on the US market. If you etched out your growth and your market share, I guess the rest of the market was flat. Are you very optimistic still about the health of the overall market, not just your market share which is clearly doing very well as you look to the rest of 2006. Secondly, you talked about your growth in Europe, you talked about a couple of blind spots in the UK. Could you give us a sense of what the overall market growth is for some of the major markets like Japan and the UK? Then the final question is just on the various arbitrations which are coming up. Is there any more clarity on the timing of particularly satellite radio and are you any more positive or negative as a result of conversations you've had with the different industries over the last six months or so? Thanks.

Marc, it's Edgar. Let me maybe go to the last question first. I don't think that we have an update for you on any kind of arbitration with satellite radio or any other industries. I don't think there's any new news there to add one way or the other. I think in terms of the overall market here in the US, the market is, I would say, OK. It's not robust and it's not showing significant weakness. I think the SoundScan results are modest declines for the physical business. I think it's hard to project and we don't like to predict, but that's what we're seeing now. I think the only thing I would add is the UK market looks like it's doing reasonably well and we don’t see any significant changes in terms of the international area. There is a mix of strong and weak markets, the UK's been doing well, France has had some weakness as an overall music market. The Japan music market is a little bit better and is showing some signs of strength. I think it's a mix of markets and I think our Q2 results are reflective of that mix. Marc Sugarman, Citigroup: Thank you very much.

Your next question comes from Steve Lidberg, and please state your company name. Steve Lidberg, Pacific Crest Securities: Good morning, Pacific Crest Securities. First of all, with regards to the digital business, as you look at the online component, are you seeing any shift with regards to single downloads versus full albums? Maybe a contribution of each would be helpful. Secondly, with regards to the A&R activity and specifically to some of the new labels, Asylum and East West, why the structural change that you made during the quarter? Lastly, if you look at the success of those initiatives, what are you seeing in terms of the impact on the model?

Let me start with the question on downloads, single tracks versus albums. I think what we continue to see is when we offer the consumer a unique digital product like the digital album bundles. There is no question as we look at our results that we are driving people from purchasing single tracks one or a few at a time to those bundles. We've definitely seen a pick up in bundled album purchases versus track purchases on those. Shall we say, a little hard to do an apples to apples comparison because it's hard to set a control. But that's really been the primary focus of our creative energies, getting those digital album bundles up and running at higher price points and higher margin points as well.

I think on the independent label group, we've seen really significant success for our incubator initiative, at East West and particularly at Asylum. We've begun this new initiative at Cordless, which is the digital-only label, and we see significant relationships amongst all of those businesses. We want to make sure that there's enough information flow or communication as between all of those businesses, which is why we took the president of Asylum, Todd Moscowitz, and made him actually head of an integrated independent label group. I think that whole model has had an impact on our earnings. If you look at the percentage of our revenue from the independent sector, both through ADA and the growth of the incubators themselves, and the artists that have been upstreamed to our major labels, across the board it has resulted in increased market share and increased profitability, because of course we're signing labels and artists earlier in their careers, therefore at lower cost. That's a very positive development for the company. Steve Lidberg, Pacific Crest Securities: Thank you.

Our next question comes from PJ McNealy, please state your company name. PJ McNealy, American Technology Research: Good morning, American Technology Research. Two questions this morning. The first thing is you talked about 100 SKUs for one artist. Is this going to be the typical approach for the entire catalog moving forward? Just to put that SKU count in perspective, how many SKUs are we talking about for artists say for example three years ago?

To answer your second question first, we're pretty much talking about three. An album, a single and a music video. I think being unfortunately now sort of an old pro at the consumer products business, one of the things that you generally don't like to see is this kind of SKU proliferation, but the great thing for our business is that these are digital SKUs. We have really no increased cost of inventory as a result of having so many SKUs. We have no real increase in cost of developing the SKUs, since almost all of the SKUs are simply slicing and dicing the original three SKUs that we've been promoting and developing for 20-odd years. With lower incremental costs to either inventory or the development of the SKUs, it gives us the opportunity to market to so many different consumers, so many different kinds of product and therefore increase both our revenue and our margin as a result. I think you will definitely see us continue to do that, both significantly increase our SKU development for new releases, but also look for opportunities to do the same in catalog. This is what we've been talking about in terms of become a music-based content company rather than a songs and records company, which is what we in the industry have been for so long. A digital opportunity for us allows us not only to grow our revenues through increased distribution but through an increased product portfolio well beyond our horizons that existed three or five years ago. PJ McNealy, American Technology Research: Then just one follow up about digital. What are your expectations, or what kind of color can you give us around your expectations for the launch of the music services from MTV and Amazon? How should we think about those types of launches in relation to what they can do to your digital revenues?

I don't think we should project. First of all, we can't predict the success of either MTV or Amazon, though we wish every new service launch well and we are working with all of them to try and make sure that they can serve their consumers in the best way possible. I think until new services gain traction, I don't think we should really think about adding to or subtracting from our digital growth. PJ McNealy, American Technology Research: Thank you.

Our next question comes from Tuna Amobi and please state your company name. Tuna Amobi, Standard & Poor’s Equity Group: Hi, it's Standard and Poor's Equity Group. Most of my questions have been asked, but I just wanted to focus on the Ryko acquisition, which I realize is a very small deal. I wanted to get a sense of how that deal would fit into your current label structure and if you can also provide any incremental revenue and EBITDA that you expect from that transaction, that would be very helpful.

Thanks, Tuna. In terms of how it's going to fit, Ryko is primarily a distribution business that distributes a large number of independent labels and is really a complement to our WEA business, which is our US distributor, our ADA business which is our independent label group and our Rhino business which does compilations primarily and markets special packages. Ryko has pieces in all of those businesses. Different pieces will be put into the different pieces of our business and integrated in. The one thing it's important to notice is that we do think that the Ryko distribution business for its set of independent labels is a great asset to itself, so it will continue as a distribution business, separate from but part of WEA and ADA and we'll work closely to leverage all of the service infrastructure and assets we have in place throughout the US. Tuna Amobi, Standard & Poor’s Equity Group: Any incremental numbers that you could provide in terms of impact?

We haven't, other than saying it won't have a substantial impact to our results for the balance of this year. Tuna Amobi, Standard & Poor’s Equity Group: Was that an all-cash deal, or was there any cash and stock transactions?

No, it was an all cash deal. Tuna Amobi, Standard & Poor’s Equity Group: Thank you very much.

Our last question comes from Jason Bazinet, and please state your company name. Jason Bazinet, Citigroup: It's Citigroup, and my questions have been answered, thank you.

All right. Well I just want to thank everyone for your time and attention to the call. Again we are very proud of our results and very pleased to be able to share them with you and we look forward to being back with you on the call again in three months with Q3 results. Thanks very much.

And that does conclude today's conference. You may disconnect at this time.