Welcome to Warner Music Group's second quarter earnings call for the period ended March 31, 2016. 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 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 Second Quarter Conference Call. Both our earnings press release and the Form 10-Q we filed this morning are available on our website. Today, our CEO, Steve Cooper, will update you on our business performance and strategy. 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, let me turn it over to Steve Cooper.

Good morning, everyone, or good evening, depending on where you are in the world. I'm currently in Beijing, where it's 8:30 at night. I'm traveling with Stu Bergen, our CEO of International and Global Commercial Services; and Simon Robson, our President of Warner Music Asia. We're visiting cities across the region, and it's incredibly exciting to see how our business is thriving here. As I am out of the office, I will keep my remarks relatively brief. And Eric will handle Q&A. I'm very happy to report another excellent set of quarterly results. We grew our total revenue by 13%, digital revenue by 25% and OIBDA by 5%. Given the effect that currency has had on our numbers over the last several quarters, I'm pleased to say that, this quarter, we grew our revenue by a very healthy 10% on an as-reported basis. In addition, industry publication Music & Copyright recently posted its calculation of 2015 market share data. We have the largest recorded music share gain of the 3 majors, rising to 17.1%, up from 16.7% in '14 and 15.8% in '13. This success is driven by our focus on 3 strategic priorities, and I'd like to update you on each of these now. First, we remain committed to generating a strong and consistent flow of new music. I'm pleased to say that on IFPI's global music charts for 2015, our artists scored 5 of the top 10 singles, more than any other company; as well as 2 of the top 10 albums. Great music is our lifeblood, and breaking new artists is paramount to our success. The latest example of our artist development strategy at work is the Danish band Lukas Graham. Signed to Warner Bros. Records and Warner/Chappell publishing, the band notched 5 straight weeks on top of the U.K. official singles chart with their smart smash hit 7 Years. This hit has also gone global, reaching #1 or #2 in over a dozen markets, including the U.S. This quarter, we also developed 2 A&R partnerships that are already translating into commercial successes. We extended our investment in Mike Caren's Artist Partners Group, whose records are released through Atlantic. 2 APG artists, Kevin Gates and Charlie Puth, both recently hit the top 10 on the Billboard 200 album chart. And I should also highlight that Puth's collaboration with Wiz Khalifa, See You Again, was named the #1 global single of 2015 by IFPI. We also launched a new label with Crush Music, the artist management company held by Jonathan Daniel and Bob McLynn. Weezer's 10th studio album, the White Album, was the first title released as part of this deal. And in early April, it debuted in the top 5 in the U.S. and also went straight to #1 in Japan. Our second strategic priority is international expansion. This quarter, we saw strong growth in both the emerging and developed markets. Revenue rose in every major region, with Asia up 17%. Latin America also was up 17%, and Europe was up 12%. We continue to believe these regions have huge potential, and we are exploring other growth opportunities. Our third strategic priority is commercial innovation, where we are positively leading the industry's transition to streaming. Our Recorded Music streaming revenue continues to grow at an impressive rate, rising 59% this quarter. Just 5 quarters ago, streaming was the third largest revenue source in our Recorded Music business, behind both downloads and physical. Today, we are the first major music company to report that streaming is the largest source of revenue in our Recorded Music business. This record transformation is evidence of our ability to sign, develop and market artists that thrive in the streaming world. Reaching these achievements is made possible by healthy macro trends in the recorded music industry as well as tireless execution by our global operators. IFPI data for calendar '15 shows that global recorded music business rose 3%, the first meaningful increase in nearly 2 decades. Streaming paved the way, growing 45%, driven by paying subscribers rocketing to 68 million, up 66% over the prior year and more than 3x the number only 3 years ago. As you may have read, there are significant efforts being made by the entire music community to narrow the so-called value gap. We fully support this unified movement to clarify copyright legislation around so-called safe harbors in order to create the conditions necessary for the improved monetization of music. It is imperative that we ensure a fairer correlation between the massive consumption of music via services built around user uploaded content; and the value generated for artists, songwriters and rights holders. We have made our views known through our submissions to the European Commission and the U.S. Copyright Office. I'd now like to turn to our results for the quarter. I'll start with Recorded Music, where our performance was excellent. Specifically, we grew total revenue by 13%, digital revenue by 23% and OIBDA by 2%. A wide range of artists contributed to these results. 2 of our global top 10 sellers were X, signed to Fueled By Ramen, the edgy Atlantic Records imprint. twenty one pilots is exploding around the world with their latest single Ride, going to the top of the U.S. alternative songs chart. Their current album Blurryface, which debuted #1 on the Billboard 200 last June, spent nearly the entire quarter in the top 10. In addition, Panic! at the Disco just scored their first #1 album since the band's formation more than a decade ago. Other global top sellers illustrate the diversity of our roster, including album releases from U.S. newcomer Charlie Puth and Japanese band Jezkiwa [ph]; as well as strong carryover sales from U.K. superstars Coldplay and Ed Sheeran. It's worth noting that in the U.K. we became the only major label to see year-on-year increases in our share of singles and albums during the first calendar quarter, and we now rate second in artist albums. Just as important, our third quarter releases are off to an extremely strong start. Lukas Graham's Blue Album went top 5 in Denmark, Sweden, the U.S., U.K., Australia and Canada. Another Warner Bro. artist, Deftones, had their eighth studio album Gore go top 5 across Anglo-American markets. And Warner Music Nashville's Blake Shelton, saw his latest single Came Here To Forget debut at #1 on the country digital sales chart in advance of his upcoming studio album If I'm Honest. Before turning to publishing, I want to let you know that our independent artists and labels services division ADA recently signed a major distribution deal with BMG, one of the world's most prominent music companies. We will be the exclusive global distributor of BMG's recorded music catalog as well as a global partner for BMG on frontline releases. We're also pleased that ADA recently won distributor of the year at the U.K's Music Week Awards. Let's now turn to our second quarter results in publishing, where I'm pleased to say that total revenue increased 13%, digital revenue grew 44% and OIBDA grew 6%. Strong performance in the U.S. was the primary factor. Jon Platt has run Warner/Chappell in the U.S. since 2014, and given his recent promotion to Global CEO, we are looking forward to his taking our publishing operations around the world to new heights. Jon and his team are off to great start. Most notably, Warner/Chappell was recently named ASCAP Pop Publisher of the Year. Songwriters all around the world are contributing to our success. These range from Kendrick Lamar and Bruno Mars to Sweden's Ali Payami, Australia's band Stroid [ph] and Canada's Belly. Our global organization is building up great momentum in fiscal '16. We are attracting groundbreaking talent; delivering a stream of hit records; and growing revenue, profit and cash flow. We remain keenly focused on finding new and innovative commercial opportunities. And our outstanding artists and songwriters, supported 24/7 by our global team, are achieving landmark creative successes. Before Eric discusses the numbers, I want to express our sadness at the passing of Prince, one of the most talented artists of our time. Our deepest condolences go to his family, friends and millions of fans around the world. We are honored to have had him as a member of our family during 2 eras of this dazzling career. His art will live on bringing his genius to each new generation of music lovers. With that, I'd like to turn the call over to Eric.

Thank you, Steve. And good morning, everyone. Our robust results were fueled by a strong flow of new music and outstanding global execution. Our financial improvement is allowing for deleveraging. And I'm pleased that, during the quarter, we paid down an additional $25 million in debt beyond the $50 million in holdco notes that we spoke about in February. More on that shortly. Let's start with details on our second quarter performance. Total revenue growth of 13% was impressive, coming on top of 13% growth in the prior year quarter. Although currency was a factor, it was more modest than in recent quarters, impacting top line growth by only 3 percentage points. I am pleased the revenue grew 10% on an as-reported basis. 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 this quarter, we had $2 million in nonrecurring expenses versus $4 million in the prior year quarter. Adjusted OIBDA, which excludes nonrecurring expenses, rose 3% to $129 million. Adjusted OIBDA margin declined 1.2 percentage points to 17.3%. The decline was due to revenue mix. In the prior year quarter, our margin benefited significantly from the impact of a large initial PLG neighboring rights distribution. In addition, in this quarter, we had higher revenue from constant promotion, which tends to be low margin. Recorded Music was up a meaningful 13%. Digital revenue increased 23%, driven by growth in streaming. Physical revenue was flat, reflecting a downward industry trend that was offset by our strong new releases and catalog sales. Licensing revenue declined 18%. As anticipated, we had a challenging comparison with the prior year quarter, where we benefited significantly from the neighboring rights distribution that I just mentioned. Artist rights -- artist services and expanded rights revenue rose 44%, driven by the timing of concert promotion activity, including a Johnny Hallyday tour. Recorded Music adjusted OIBDA was up 1% to $95 million. And Recorded Music adjusted OIBDA margin declined 1.4 percentage points to 15.3%, which was related to revenue mix. Music Publishing revenue also rose 13%. While mechanical revenue declined 11%, reflecting industry trends, digital revenue was a standout increasing 44%. Also strong were sync, up 11%; and performance, up 7%, driven by the U.S. Music Publishing OIBDA rose 6%. OIBDA margin declined 1.1 percentage points to 42.5%, driven primarily by revenue mix. Cash flow also continues to improve. We generated operating cash flow of $111 million, up from $107 million in the prior year quarter. This was driven by OIBDA improvement and thoughtful working capital management. CapEx came in at $13 million, which represents a fair run rate for the balance of the year. During the quarter, we received $42 million from real estate sales, including the sale-leaseback from our Sydney office and an office in the U.K. As a result of strong free cash flow during the quarter, we paid down $75 million of debt. This included the previously announced redemption of $50 million of our 13.75% notes as well as a subsequent repurchase of $25 million of our 6.75% notes in the open market. We will be opportunistic with respect to ongoing debt repayment. Our cash balance was $316 million as of March, with no drawn balance on the revolver during the quarter. This cash level compares favorably with the balance of $278 million at the end of December and $218 million at the end of the prior year quarter. I am very pleased with our year-to-date performance and look forward to ongoing strength in results. As a reminder, I will be handling today's Q&A. With that, operator, please open the line for questions.

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

I have a couple. I wanted to start on the publishing side of the house, certainly saw a nice uptick from the trends over the last few quarters. Can you maybe you talk a little more what was driving that? Is it the flow-through of better blocking and tackling with the management changes? Or what else might have been underlying the nice increase?

Sure, happy to. And thank you, Aaron. I think I would point to 2 things, Aaron. I'd -- you actually hit it nicely already. So one obviously is we do have a new CEO and a new CFO. Jon Platt, our new CEO, is -- an extraordinary executive with a great history in A&R. His ability to recruit talent. His ability to work with talent and help put them into the right products and build the right A&R team around him globally is clearly something we're excited about. As you also see in these results, our digital revenue grew 44% in publishing. And often, what you see in publishing is that the revenue trends happen with a bit of a lag, often because money flows through societies around the world. So obviously, as a quarter, we were seeing significantly increased gains or rate of growth in digital. We'll keep a close eye on that to see if it continues at this level, but it's not a surprise to us that digital is starting to show an increased rate of growth in publishing.

Okay, got it. And I apologize if I missed this but just wanted to make sure I had the number right. On the neighboring rights income you had in the prior year quarter, how much was that exactly?

It was in the range of -- the revenue was somewhere in the low tens, with a very high margin. And so when you pull that -- low tens meaning starting with a 1, so in the teens, if you will, at a very high margin. So if you pull that out -- and you should also note that in artist services in this quarter, versus a year ago, we had higher revenue from French touring activity, and that is lower revenue. So those 2 adjustments, if you make those adjustments, our actual margins remained quite stable and our OIBDA increase was quite healthy on the core underlying business.

Got it, okay. And yes, on the capital structure, you bought back some bonds in the open market. What was your thinking there in terms of the timing? Do you think there might be opportunities for further kind of open-market purchases? Curious, your thought process around that.

Well, the 6.75% notes that we bought back aren't callable yet at this point. We had -- it's an opportunistic purchase. It was favorable pricing. We continue to be opportunistic. Obviously, our focus is fairly steady. We focus first on driving revenue and OIBDA growth, working hard to convert that into free cash flow. And we continue to look at whether we invest in growth in the business and explore opportunities there or pay down debt. I think what we've shown this quarter is our seriousness of purpose with which we are evaluating paying down debt. The 6.75% note purchase was really based on an opportunistic purchase at a favorable price.

Okay. And I think I've been reading about a little bit of movement at long last on you divesting some of your assets to independent labels. Any update you have yet on in terms of when proceeds might start coming in for that and whether it would kind of be lump-sum type payments or they're going to be spread out over time?

So it's still in active negotiations, so we really can't comment too much on it. What we can say is that we're making steady progress. And then when there's something that we can -- once this is a completed transaction, we'll make sure we communicate quickly and clearly what the impact is.

Okay. All right, last two from me, a little bit bigger picture. I guess, first, when I think about -- when we read about how some of the contracts come up from time to time with various streaming outlets, a large video site comes to mind. Can you just comment how long the contracts typically are when you strike them for streaming? And is it your expectation that -- when these contracts come up for renewal, that there is material price increases to be had by you given the growing popularity?

Well, I would say the contracts with streaming services differ. They range generally in a range from 1 to 3 years. We're in active negotiations, obviously, with some, so we don't comment on active negotiations. We work very hard to make sure we monetize each platform as effective as we can both for ourselves and our artists.

Okay. And last one, and again, appreciate the time. Maybe given where Stephen is right now, and I think you mentioned your optimism of being able to grow in some of these international markets, can you just make some broad-stroke comments about where streaming growth is at maybe in Asia, in Europe relative to the U.S.? And how is that impacting piracy to the extent piracy was a big issue in some of those markets in past days?

All right. I get 3 part of the question, okay. So it's streaming is at really different phases almost country by country even within regions. And you can look at a market like Japan, which is still 75% physical and until last year really didn't have any material streaming. And the market was in decline, in large part because of those dynamics. Streaming hasn't launched in Japan. Last year, it was a market that was quite stable actually and technically in '15 had some growth about 2% or 3%. So streaming in a lot of these markets that have been traditionally physical. And you can look at a Germany, a France. I mean this is throughout many big markets in the world. Streaming is growing at great rates and allowing these markets to regain a healthy platform. IFPI for 2015 recently released their results showing a 3% growth of the global music market overall, and that's been an extraordinary support for this. So every market is different, but streaming is growing globally, both helping emerging markets regain a footing but also some of these markets that are historically physical, as I mentioned before, grow too. With respect to piracy, look, there's multiple ways to talk to you about it. Obviously, we and our trade associations are pretty diligent and -- at looking at where there are significant pirates and making sure that we are addressing that and trying to make sure that they're not able to function freely. But streaming services, both because they have a great kind of product offering and value offering to consumer, we do think over time will continue to have a positive impact on combating piracy.

And your next question comes from the line of David Farber of Crédit Suisse.

My questions have been asked and answered. Thanks.

And thank you. It's nice [indiscernible].

[Operator Instructions] Your next question comes from the line of Davis Hebert of Wells Fargo Securities.

This is Eric for Davis. You mentioned in your comments that margins were pressured during the quarter due to revenue mix. I'm wondering if you can just give a little more clarity there, especially given the success of streaming revenue during the quarter, which as I understand this is typically higher margin.

Sure, and a pleasure. And thank you for the question. We -- last year, in the second quarter, so 2015 second quarter, was the first time when the -- from our PLG acquisition were the European broadcast teams holding these neighboring rights were distributed and therefore recognized. So we had not just the ordinary-course broadcast fees recognized but actually a catch-up, so the comp versus last year was quite challenging. When you normalize for that, our margin growth year-over-year would have been -- or our OIBDA growth and margin growth would have been traditional healthy, showing that margin growth and OIBDA percentage growth that we would have expected. So it's really due to a challenging comp.

[Operator Instructions] Your next question comes from the line of Michael McCaffery of Shenkman Capital.

I don't know if you mentioned this in your prepared remarks. I came on the call a few minutes late, but did -- could you just comment for fiscal 3Q and 4Q how the release schedule that you have planned right now compares to the year ago period just generically?

Well, we think we have solid releases coming up. So Blake Shelton just released a single. He'll have an album coming up. Obviously, across the globe, we're going to have a series of strong albums: Lukas Graham's Blue Album; Deftones'; Sturgill Simpson's. So we believe our album lineup and our music lineup coming out, both albums and singles, by the way, Q3 and Q4 will be quite strong and quite solid. And again, our goal year-on-year is to continue to drive stronger and stronger music, and we think a lot of the data continues to support that. So Music & Copyright, which recently published market share data for 2015, we were at 17.1% global market share versus 16.7% in '14 and 15.8% in '13. So our continued strategy for an increased, continuous flow of music, we believe, is paying dividends and we believe will continue to do so going forward.

And can I just ask a follow-up from a question Aaron asked about your decision to go after the -- use some of your capital to go after the 6.75% opco bonds? Why -- obviously, they were turning at a pretty nice discount earlier in the quarter, but I guess, at this point in time, as you look at your options, that bond versus just calling the remainder of the holdco notes, how are you thinking about that at this point, with use of excess free cash flow?

Well, so we kind of -- we're opportunistic. We were able to purchase these back at a favorable price. And it was really based on the price availability.

And I guess, just to extend on that: With the step-down on those holdco notes in October, are you -- is it fair to say you're probably more inclined to wait for that step-down before you take another action there?

Well, we're -- we continue to look at our options to reduce debt across our capital structure. We don't really give guidance on timing of actions going forward, but we're aware of all the dynamics related to costs and certainly are taking them into serious consideration.

And your next question comes from the line of Karl Hermann of Babson Capital.

Just going back to Eric's question on the lower margin in the quarter and you guys talking about the PLG impact. Is there -- can you quantify that PLG catch-up that occurred in the second quarter of the prior year?

Yes. Well, the revenue from the PLG catch-up a year ago was more than $10 million, and that's very high-margin revenue. And so we would say there are 2 dynamics, that being the challenge from last year that made a tough comp. And this year, we had improved revenue in our artist services from a European concert tour, Johnny Hallyday to be specific, in France, which is low margin. So if you extract those pieces, again the OIBDA growth and margin stability across periods would be what we would exactly and traditionally expect.

[Operator Instructions] There are no further questions in queue at this time. I turn the call back to the presenters.

Okay, thanks, everyone. And we appreciate you joining the call and taking time with us today. And we look forward to speaking to everyone with our third quarter results this summer. Have a happy summer, by the way. And good morning. Bye-bye.

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