Universal Music Group Aktie

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. 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 growth there. As you say, 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 one of the things that culminated in is 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 worth reiterating, 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 Drake come all at once. and we've got more new releases coming in. Obviously, we'll get a partial quarter impact of those in Q2. 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'd signed 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 one 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, the 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 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% ad 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 that 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 to want to have methods to deepen their relationship with fans and fans want to continue to show their engagement with the artists, their fandom, 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 opportunities 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 will 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 Lucian made on our last earnings call that a few years back, the company saw that there was a 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 were playing in that space, but across different parts of the business, pulled them together and formed what we called 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 that 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 a 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. 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, one 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 the 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 at 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 that showed that advances have grown -- gross advances have grown by 8% over the past 6 years, but total revenue has grown 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 works that, that artist produces, we also get to cover them against the catalog we have of prior work from that artist, too. So it's not surprising 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 but made provision for lower margins if you were successful in driving faster growth from your lower-margin activities. Does the 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 grown 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 has lost lower-margin activities, while your margin has been constrained by your success in winning some of that lower-margin business. Warner is setting -- 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, our 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 one of your most important external relationships. BMG is acquiring Concord. What would be the impact of BMG taking at least the 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. Let's move to catalog investment. Could you talk about your approach to catalog investment, explain why it's attractive, why 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 the 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. Why are we an attractive buyer? There's really, I'd say, 2 reasons.

One, with the market knowledge, the data, 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 one 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 catalog 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 that 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 been 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 Bertelsmann have been a lot more active in catalog acquisitions. Does the perhaps lack of investor understanding and in some areas, support for 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 artists and label services, as you've seen with Downtown. We're investing 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 of -- with a strong degree of financial discipline and looking at where we think we'll generate returns.

Perhaps, if you could just touch briefly on your relationship with Chord and the benefits that brings to your catalog acquisitions.

Yes. Chord 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 Chord. We preserve some of our capital for other activities, but we also get to administer and distribute that catalog that comes in through the Chord 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 in 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 advances I mentioned earlier, we see them as working capital, but they don't necessarily move as much of a straight line as the revenue line. There's some more variability in the timing of advances depending on when we structure 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 are 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. It 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 artists 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 issue of disclosure, why not give organic growth which would address concerns that your growth is dependent on M&A and catalog acquisitions.

Yes. Yes. Hopefully, with some of the comments we 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 tells -- 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, you 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 just 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 and doesn't create actually more confusion than itself. So we'll continue to look at the right ways 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 deal types, 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 a dislocation in 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 UMG, which is AI. And you may have seen that we now have such conviction in the AI 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 will 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've seen 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 listenership is like 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 couldn't crack 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 have been difficult to do if listenership was being diverted. So you've got all those proof points out there now. And all the various surveys that say the same things. Artists want 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 it up, slow it down? If you look at the music that's on a number of social media posts, 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 that will allow a consumer to speed up, slow down, mash 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. Well, 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 consumers are 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 will be another key part of the continued growth in the industry.

Fantastic. I think we have come to end -- I'll 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.

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, very 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.

Good evening, and welcome to Universal Music Group's First Quarter Earnings Call for the period ended March 31, 2026. My name is Gavin and I will be your conference operator today. Your speakers for today's call will be Sir Lucian Grainge, Chairman and CEO of Universal Music Group; and Matt Ellis, Chief Financial Officer. They will be joined during Q&A by Michael Nash, Chief Digital Officer; and Boyd Muir, Chief Operating Officer. [Operator Instructions]

As a reminder, this call is being recorded. Please also let me remind you that management's commentary and responses to questions on today's call may include forward-looking statements, which, by their nature, are uncertain and outside of the company's control. Although these forward-looking statements are based on management's current expectations and beliefs, actual results may vary in a material way.

For a discussion of some of the factors that could cause actual results to differ from expected results, please see the Risk Factors section of UMG's 2025 annual report, which is available on the Investor Relations page of UMG's website at universalmusic.com. Management's commentary will also refer to non-IFRS measures on today's call. Reconciliations are available in the press release on the Investor Relations page of UMG's website.

Thank you. Sir Lucian, you may begin your conference.

Thank you, and thank you all for joining us. We reported today that for the first quarter of 2026, UMG had revenue growth of 8% and adjusted EBITDA growth of 4%, both of those in constant currency. This is the 19th consecutive quarter that we posted growth in both revenue and adjusted EBITDA since becoming a public company in September 2021. Our growth this quarter should be seen in the context of our exceptionally strong first quarter last year.

Many of this year's biggest releases are still ahead of us. We do not manage our business quarter by quarter. Therefore, the annual picture is far more illuminating. According to recent figures from Music & Copyright, which tracks global market share in 2025, we achieved a 33% worldwide share in Recorded Music. That is our highest in 12 years as well as a 24% in Music Publishing, also our highest share ever in Music Publishing. Obviously, I'm thrilled about both.

In the U.S., the world's largest music market, UMG ended 2025 on a 2-year high in front line market share of 37.5% according to Luminate. Before getting into our creative and operating performance, I want to discuss and address some recent capital market developments, which we announced earlier today.

What we will not be discussing today is the proposal from Pershing Square that the Board of Directors received earlier this month. We will provide you with an update once the Board has made its decision.

Since last year, the Board and management have been evaluating opportunities to optimize our capital allocation and to provide enhanced information to investors. The EUR 500 million share buyback program we announced in March of this year is just one example of the results of this review process. I have requested and the Board has approved the increase in authorized share buybacks to EUR 1 billion to include the earlier announced amount of EUR 500 million.

In connection with our original share buyback authorization in March, at that time, the Board also authorized the monetization of half of the company's equity stake in Spotify. As previously announced, artists will share in the proceeds. UMG's share of the proceeds will be used initially for its buyback program. This decision underscores the importance of our capital discipline, the expected returns from our buybacks and our confidence in the long-term growth of UMG as well as, obviously, the broader music ecosystem.

We are also compared -- committed to give more detail in areas that are key to helping understand our business and investments. One, to help investors review the growth of our underlying businesses, we are breaking out the results of our Downtown acquisition this quarter and will continue to do so for the rest of the year.

Two, along with same lines, we're providing a look back at Virgin Music's contribution to our Recorded Music results through 2025. Three, in addition to continuing to disclose segment EBITDA with our full and half year results, we're providing segment EBITDA this quarter and we'll continue providing that information each quarter.

And four, in subsequent earnings calls, we're going to be providing greater insight into the ways we have evaluated investments in our business, whether or not they be catalogs or other significant M&A activity.

Now let me turn to some updates on operating and commercial progress. Our sustained success is the result of a deliberate long-term strategy, the breadth and depth of our roster, the many ways we create value with our artists and songwriters and the continued expansion of newer businesses across UMG. Underpinning that strategy is a clear view of where this industry is headed. That's why beyond our core business of building careers for artists and songwriters, we're driving additional growth in 4 interconnected ways: one, label and artist services; two, high potential markets; three, superfan initiatives; and four, of course, AI.

I talked about these at length on our last call. So I won't cover each one in too much detail despite the fact that we have plenty to report. Artists and songwriter development is the soul of our business as well as our company and it remains the hardest, most valuable aspect of what we do. But at the same time, we just don't anticipate changes in the market, we shape them, and we expect ourselves to shape them. We have to constantly evolve.

Last quarter, I spoke about the combination of Virgin Music Group and Downtown, bringing more than 5,000 additional business clients and more than 4 million creators in 145 countries into our own ecosystem. I want to take a step back and explain the path we took to arrive here.

About 5 years ago, we foresaw a potential gap in our portfolio, something I couldn't allow. So in September '22, we launched Virgin Music Group and brought in JT Myers and Nat Pastor as co-CEOs to unify and expand our label and artist services business worldwide. That is what we've done.

We've grown Virgin's revenue at a 60% CAGR over the last 2 years. Then on top of that, with our strategic acquisition of Downtown, we've leapfrogged our competitors to become the #2 company in the fast-growing artist and label services market.

We can now confidently say what Virgin offers is best in class, a broad and flexible suite of services in high-touch support to self-service solutions. Today, we'll share more on the extraordinary performance of both our Recorded Music labels and our Virgin label services business over the last few years. Matt will walk you through it later.

But I'd like you to come away with 2 things. First, our core record label business is very healthy. We're growing year after year at attractive rates, whilst also expanding margins. Second, our Virgin and Downtown businesses are highly complementary, growing quickly and on a path to market leadership in a growing sector. Even with this momentum, we still have lots of work to do.

The next phase of our plan for Virgin is focused on empowering independent players, raising the standards of service even higher and growing our community of dynamic labels and entrepreneurs. At the same time, we see a meaningful opportunity for us to capture additional value in high potential markets.

Let's look at Indonesia, for example, as one example. It is a population of 285 million, making it the fourth most populous country in the world, and yet it's only the 34th largest music market. So we believe there's still significant headroom for growth. In '25, 4 of the top 5 artists in the market were Indonesian. That tells you something important.

To succeed in a market like this, you need sustained local investment and real local expertise, and we stay committed to that. In 2017, our Recorded Music market share in Indonesia was less than 10%. Today, we believe our share is more than 3x that and is now in line with our global share, positioning us as the market leader there.

We've achieved this all primarily through domestic A&R as well as strong local partnerships, which are critical, complemented by 1 or 2 small acquisitions. While the market had a 14% CAGR from '21 to '25, we're growing more than 50% faster at a CAGR of over 22% for the same period. We've got several other success stories like Indonesia, and I look forward to sharing with them over time. And we can't escape looking at it through the prism of opportunity in these markets and what we're doing and what we see.

Our growth across our Recorded Music Publishing and label services business is benefiting from the work we've done with our DSP partners to institute Streaming 2.0. These agreements encourage smarter customer segmentation, accelerate geographic expansion, create greater consumer value and drive ARPU growth. This quarter, we're beginning to see uplift from these agreements with more to flow throughout the rest of the year. That brings us obviously to AI.

We're leading the industry in working with established and emerging AI companies, employing AI in the development of new formats and leveraging music as a critical ingredient to unlock consumer adoption of new technologies as it has for Apple, Google, Meta, and other major digital platforms.

On prior calls, we've discussed our growing network of responsible AI partnerships from start-ups like Udio and Klay; the artist tool platforms such as Splice and Stability AI to a major technology leader such as NVIDIA. Today, I'd like to highlight one important area of the multiyear collaboration with NVIDIA that we announced in January and recently highlighted at their annual GTC event, applying AI to preserve, restore and unlock the value of UMG's vast archives and library.

We hold one of the world's most important music archives, more than 6 million recorded music assets along with video, photography, instruments, equipment and other crucial artifacts, our archive team is world-class but the scale and complexity of this work is enormous.

With NVIDIA, we see an opportunity to use AI in 2 powerful ways. First, to create a deeper understanding of the music, video and related materials stored across our vaults across so many formats dating back to the early 20th century, believe it or not.

Second, to accelerate high-quality restoration, digitization and discovery at a scale that would simply not be possible through traditional methods alone. This is not AI replacing artistry or expertise, it is AI helping us protect, understand and responsibly activate one of the most valuable cultural catalogs in the world of any sort.

Over time, we believe this work can preserve irreplaceable assets, uncover recordings and videos that have never been commercially released and enable new products and experiences that will inspire music fans for generations to come. My closing thought on this, this is exactly the kind of responsible AI partnership we believe in protecting the artists, preserving culture and creating new value from the amazing assets already within the organization.

Everything begins with our extraordinary artists and songwriters, of whom I'm so proud, a group that is unmatched in their creative brilliance as well as their commercial success. This quarter, we had new releases from global stars such as HYBE's BTS and [indiscernible] both of whom debuted at #1 in the U.S. and international success, including Frances Theodore. At the same time, UMG is leading the U.K.'s creative resurgence following the restructuring of our U.K. business with big hits from Olivia Dean, Sam Fender and Mumford & Sons.

Q2 is off to a strong start, including much anticipated albums from Noah Kahan and a massive hit single from Olivia Rodrigo, which went straight to #1 in the U.K., U.S. and Australia, for example, kicking off the long-term campaign for her third studio album for the rest of the year.

As evidence of the global appeal of our artists, let's look no further than this year's culturally significant Coachella Music Festival. More than 30 UMG artists performed and most impressively, all of the 3 headliners on the 3 separate nights were all UMG artists, Sabrina Carpenter, Justin Bieber and Karol G. Each of 3 -- all enjoyed significant uplifts in streaming numbers after their performances, but what really happened with Justin was truly historic and shows how an artist brand developed with skill and long-term vision over the years, but this is extraordinary and in an enduring power.

Justin's Coachella performance underscores an important evolution in how we see the music business, why frontline and catalog are now, in a sense, old-fashioned terms. It is a stunning example of how brilliant performance can be amplified globally to engage super fans and introduce a new generation to entire catalog and library. It is ignited the biggest ever streaming search tied to the festival. That search spread across his entire catalog of 8 studio albums, all of which are UMG's, his average daily global streams, nearly quadrupled from 31 million to 113 million.

The song Beauty and a Beat surged to #1 globally on Spotify and Apple Music for the first time since its release 13 years ago. That's why we don't view frontline and catalog as separate entities, but as one holistic opportunity. Creating and amplifying cultural moments that activate and reactivate fan bases isn't limited to just records or live performances. Our ability to ignite music consumption across entire bodies of work has been on full display in recent quarters.

Let me provide you with a couple of examples. Take our partnership with Netflix, for example. In recent months, we debuted at South by Southwest, the award-winning Noah Kahan film to coincide with the release of his new album along with a documentary on The rise of the Red Hot Chili Peppers called Our Brother, Hillel.

Together with Netflix, we've released over a dozen original series and docs, including Pop Star Academy, featuring Katseye; concert specials with the Olivia Rodrigo as well as Lady Gaga of course and the Sundance winning Selena y Los Dinos, which was the most watched music documentary on the platform in the last 12 months, according to Nielsen.

Of course, our partnerships extend beyond a single streaming platform. For example, Man on the Run, the acclaimed documentary about Paul McCartney and Wings, premiered globally on Amazon Prime in February. And coming later this year is a new CNN original series hosted by Fred Armisen that will give fans an unprecedented look into UMG's vaults, which is a really unique insight and a format, which I think could create a new format moving into the future. It's really very, very special.

Let me close with this. Over the years, my management team has built what is unquestionably the most successful music company in history. We operate a creative business in an industry that is going through breathtaking changes, a transformation that presents enormous opportunities, the signing of fresh talent, catalog acquisitions, M&A and beyond. We are confident that our breadth, scale and industry leadership give us special insight into these opportunities as well as greater ability to seize them.

Our strong balance sheet provides us with the flexibility needed to act fast sometimes, but when and only when these opportunities meet rigorous financial and strategic criteria. The entire global team is laser focused on our long-term strategy. We appreciate the dialogue with all of our investors. We look forward to the conversation as we execute against the many opportunities for growth as well as the success we're creating.

Well, that's my report. There you have it. That's what we did. That's what we're doing, and that's what we're going to do. So thank you. And now I'm going to turn it over to Matt.

Thank you. As Lucian discussed, we are confident in our strategic plan and the growth that will drive for our business over the course of 2026 and beyond. This quarter is the first in which we are consolidating Downtown's results since the acquisition closed on February 20.

With this significant expansion of our label and artist services business, we thought it was important to also provide some color on the performance of our Virgin Music business within our broader Recorded Music results over the past few years.

We formed Virgin Music Group in late 2022 and the business' performance has been impressive. Since 2023, Virgin has grown at a 16% CAGR finishing 2025 with EUR 790 million in revenue. This represented 8.4% of our total Recorded Music revenue, up from 7.2% in 2023. At the same time, the remainder of our Recorded Music business also grew strongly, achieving a 7% revenue CAGR and an 11% adjusted EBITDA CAGR.

On margins, we have frequently discussed mix, particularly growth of Virgin Music within the segment. Let me put quantitative support behind that. While UMG's Recorded Music margins were level from 2024 to '25 at 25.6%, Virgin expanded by almost a 4 percentage point in the revenue mix from 7.5% to 8.4%. This offset 20 basis points of year-over-year margin expansion in the ex Virgin Recorded Music margin.

While there are mix implications on our margin, we remain confident in our strategy to grow our artist and label services business alongside our label business in order to increase our touch points with the fast-growing independent sector. We're excited that Downtown puts significantly more weight behind these efforts. With that, let me turn to our results for the quarter.

Our results are laid out in the press release, both with and without the impact of our Downtown acquisition, and I'll provide you with some additional color in my remarks. I'd remind you that all growth rates we discuss today will be in constant currency.

Total revenue in the quarter grew 8.1% year-over-year to EUR 2.9 billion. The consolidation of Downtown, initial pricing benefits of Streaming 2.0 agreements, strong physical sales and healthy synchronization income all contributed to growth in Recorded Music and Music Partnership.

Downtown contributed EUR 86 million to total revenue following the closing, representing 3.2 percentage points of our growth this quarter. Excluding Downtown, revenue growth was 4.9%. Adjusted EBITDA grew 3.9% in the quarter, to EUR 636 million, with EUR 3 million from Downtown and grew 3.4% excluding Downtown. Margin declined 0.9 percentage points to 21.9% but this was largely related to the inclusion of Downtown as well as the EUR 10 million loss in our merchandising business, which I will discuss when I go through the segment results.

Excluding Downtown, adjusted EBITDA margin declined 30 basis points to 22.5%, with improvement in Music Publishing margin and flat Recorded Music margin. This was offset by the merchandising pressure I mentioned as well as an increase in corporate overhead that included spend on strategic technology initiatives. Adjusted EBITDA excludes noncash share-based compensation expense of EUR 60 million compared to EUR 58 million in the first quarter of 2025. Adjusted EBITDA also excludes EUR 5 million of integration and business transformation costs in 2026.

Now let me walk through the segments, which will give you more color on our performance. Recorded Music revenue grew 8.9%, including downtown EUR 72 million contribution and grew 5.4%, excluding Downtown. Total subscription revenue grew 12.5% with Downtown contributing EUR 54 million. Excluding Downtown, subscription revenue grew 7.9%.

Pricing benefits from multiple Streaming 2.0 deals, some of which are still phasing in, contributed 3 percentage points of subscription growth and ARPU weighted volume growth remained healthy. However, a lighter release schedule against both a stronger release schedule last year and a healthy competitive release slate led to frontline market share declines and drove over 2 percentage point offset to our subscription growth.

Even so, we had high single-digit or double-digit subscription revenue growth in 5 of our top 10 markets, including the U.S. and China. As Lucian noted, 2025 was our strongest year for market share in more than a decade, and we expect the share reduction in the first quarter to gradually recover as the release slate picks up during the year.

Looking ahead, we expect further pricing benefit in the coming quarters from Streaming 2.0 deals signed so far with 3 of our major DSP partners. We also expect additional Streaming 2.0 deals to be signed later this year. Ad-supported streaming revenue grew 5% and grew 1.2%, excluding Downtown. We remain in a transitional period in this category and saw uneven performance across a diverse set of our top platforms in this segment.

This reflects, one, audio platforms, advertising rate challenges and two, video's continuing category disruption resulted from the shift towards short-form consumption. We continue working closely with our partners on better monetization of ad-supported engagement, and we do expect to see sustained growth over the midterm. Physical sales were strong, up 12.7% year-over-year both including and excluding Downtown.

We saw particular strength in multiple acts in Japan and from BTS in the U.S. License and other revenues declined 3.6% or 5.1% excluding Downtown due to nonrecurring live income in Q1 last year. Underlying licensing revenue grew year-over-year, thanks to strong sync revenue.

As Lucian mentioned, we broke out 1Q segment EBITDA and adjusted EBITDA for the first time in today's earnings press release. We plan to do this each quarter going forward, and we provided historical fact sheet with 2 years of quarterly segment results which you can find on our IR website.

Recorded Music adjusted EBITDA of EUR 565 million grew 6.0% and included EUR 4 million from Downtown. Excluding Downtown, adjusted EBITDA grew 5.3% and margin was flat at 25.7%. Similar to the 2024 versus 2025 impact I discussed earlier, operating leverage driven by Streaming 2.0 price increases was offset by the impact of repertoire mix as Virgin revenue growth outpaced the rest of Recorded Music.

Turning to Music Publishing. Revenue grew 7.0% over the prior year quarter, including Downtown's EUR 14 million contribution and grew 4.3% excluding Downtown. The 4.3% growth was driven by 13.6% growth in synchronization revenue, thanks to stronger advertising trailers and Motion Picture income, 12% growth in mechanical revenue, helped by physical strength in Japan and 5.6% performance revenue growth.

Digital revenue growth of 1.3% was impacted by a difficult comparison against last year's 17% growth which contains some timing benefits. Adjusted EBITDA of EUR 135 million grew 11.6% with a loss of EUR 1 million from Downtown. Excluding Downtown, adjusted EBITDA was up 12.4% and margin improved 1.9 percentage points to 25.3%, thanks to favorable revenue mix partially offset by ongoing higher legal fees incurred in connection with copyright enforcement.

Moving on to merchandising, which was not impacted by the Downtown acquisition in first quarter. Merchandising revenue declined 2%, with a meaningful reduction in direct-to-consumer revenue due to the timing of product releases, which is particularly strong in the first quarter of last year. Retail sales also declined, while tour income saw strong growth, thanks to tours for Lady Gaga, Conan Gray, Nine Inch Nails, amongst others.

Merchandising adjusted EBITDA was a loss of EUR 10 million, driven primarily by seasonally lower revenue against our fixed overhead base as well as unfavorable revenue mix with a higher contribution from low-margin touring revenue. In addition, margin was impacted by a timing-related increase in marketing spend.

Before turning to Q&A, I wanted to take a moment to update you on share buybacks. As Lucian mentioned, the Board has increased our share buyback authorization to EUR 1 billion. With regards to the first EUR 500 million buyback program that we announced on March 30, we have purchased just over 1.85 million shares for EUR 36 million through April 24.

Our balance sheet continues to be a source of strength and gives us the ability to pursue opportunities in support of our strategy. We remain confident in our business. We continue to focus on driving long-term value and look at the business over annual and multiyear cycles as we execute against our strong and consistent strategic plan.

Lucian, Boyd, Michael and I would now be happy to take your questions. Operator, please open the line for Q&A.

[Operator Instructions] And your first question comes from the line of Jason Bazinet from Citi.

I just had a basic question on AI. It feels like when digital first started, most of the record labels were all on the same page as the DSPs got off the ground. In this AI world, it feels like there's not as much harmony among the labels, I guess, I'd say. And so I guess if you could just comment, a, is that a fair characterization? And then b, what are the key differences that you see in your industry discussions today in terms of where this should go and could go?

Jason, thank you for your question. Michael Nash here. So with respect to industry harmony, first of all, as market leaders we're looking to develop partnerships. We make our own deals. We forge our path out of the pursuit of the interest of our artists. And we believe that we've done a very effective job of activating a number of different partnerships, as Lucian articulated in his earlier comments. I think that you've seen, for example, a new service like Klay obtained licenses from multiple partners.

There have been announcements service -- new service led by entrepreneurial initiative that we did the first deal with Udio, subsequently was able to get a partnership in place with other music companies and enterprises and they're moving forward with their plans as they obtain greater industry support. And I think you've also seen strong industry action with respect to litigation. And taking a very strong position with respect to artists rights and interests.

And I think you've seen with respect to conversations with government and lobbying strong kind of industry alliance with respect to core issues in terms of regulation and in terms of legislation. So we questioned the general characterization that there are differences of opinion that would constitute a fragmented industry posture. Now you may be specifically referencing the fact that a company like Suno that we're involved in litigation against has one license partner right now and other music companies haven't licensed that partner. I think that is kind of the exception that proves the rule.

In general, I think that it's more a story of industry opportunity that a number of companies are gravitating towards. But again, to end where I started, our perspective is that we're providing leadership in this area. We're forging partnerships in the interest of our artists that we think promote benefits for the entire ecosystem. And that's an approach to market development that we're very comfortable with.

It's Lucian, I would like to add. I think you need to look at it through this lens that each company -- some of them are developing products and tools around creation and some of them around creation and distribution. And they're different at different stages in their development. So some of them are startups that you've never heard of. And there are others that are established platforms that we're creating different AI products with.

And we -- I can tell you, we'll be in the process of announcing what they are and who they're with the established platforms. So as I said, I think you've got to look at it through 2 different prisms, different companies doing different things in different ways. And that's the huge difference that there was when we started looking at digital music in the cloud and what became ad-funded and then into premium subscription.

Your next question comes from the line of Ed Young from Morgan Stanley.

You've talked to a 3-point benefit from pricing in the quarter. Can you give some color on how we should think about the benefits of that as we go through the year in more of these wholesale 2.0 agreements roll in? I just wanted a follow-up on the rationale for the Spotify stake sale. Obviously, the shares of Spotify are far from their highs. And given you have a unique viewpoint to judge the prospects for the industry, I just wondered if you could elaborate on why now is the right time.

Yes. Thanks for the questions. So I'll start with the second first and then come back to the pricing question. The Spotify sale is really a case of looking at the best use of where we want to spend money. Right now, we see that our shares are -- provide a good value for us and then how we finance that activity. We'll obviously look at the right time to execute that sale over the course of the remainder of the year here, and we'll find the best way to do that.

But what you should read into it is our confidence in our prospects going forward. We talked about the dislocation in value on the last call. And we certainly believe that's the case. And so that's why we kicked off the buyback programs. And we discussed using some of these Spotify shares to fund that. But as you noticed, what we said, we're already selling a part of that. We have tremendous faith in the existing ecosystem. We look forward to continuing to partner with everyone across the ecosystem and the opportunities across the ecosystem going forward are very strong.

On the question about the pricing benefit, as we said, we saw the first phase of those kick in, in the first quarter. They provided a 3-point benefit. As I also said, some of them had a full effect in the first quarter. Others of them were phasing in, and so we should expect to see that uptick a little bit further as we go into the rest of the year.

And of course, then there's the opportunity for other players that we haven't yet announced deals with to get those executed as well. So as we think about the rest of the year, we get the full quarter impact in Q2 of the ones we already discussed and then additional items from there, Michael. I'll see if there's anything you want to add to that?

I think that's a pretty good assessment. I would just underscore that the Streaming 2.0 deals that we've done so far only represent a portion of all subscribers not all the wholesale price increases applied to all geographies on the same time frame. Some partners are going to be raising prices in certain geographies going forward, under deals we've already done, and we expect to see further benefits in the coming quarters from new deals that we're signing. So as we pick up in terms of market share and as we experience more benefit from Streaming 2.0 deals, we do expect to see further growth in subscription.

Your next question comes from the line of Peter Supino from Wolfe Research.

I'd like to follow up on the last question about retail pricing and ask you several streamers announced U.S. price increases during the first quarter. And I don't -- I'd like to better understand the way those retail pricing actions by streamers in the United States transmit to your streaming revenue in terms of timing and magnitude and whether there's a chance of an acceleration in your business in the next quarter or 2, unless that sounds like an overly short-term question, I think the relationship between retail pricing, DSP minimums and modeling your revenue growth is a really important multiyear question for many of your constituents.

And if you've got time for it, I'd also like to ask you a question about your buybacks. We welcome the announcements, and I'm curious if you'd make a longer-term comment about how Universal thinks about cash in excess of what's required to invest in the business, what the multiyear capital proposition to investors is?

Peter, this is Michael Nash. I'll take the first question with respect to how retail pricing relates to wholesale revenue. We maintain a multipronged model with respect to the new deals that we're doing and our established deals. So we capture revenue both on the basis of an underlying per subscriber minimum and also with a percentage of retail, which means that if there's a price increase above what's anticipated based on the wholesale as translated through by the per subscriber minimum that we would participate.

We are generally speaking, doing deals where we look to fairly and comprehensively participate in the value that our artist content brings to our partners' platforms. So if you're looking for proportionality, the proportionality should be ballpark. But keep in mind that there are the different mechanisms that go into the wholesale model construct.

And as we do additional deals, we expect to layer in more benefits from pricing over time. I think we've already described some of the complexities in terms of the scope of deals that we've done, the new deals we anticipate doing, the differences in terms of geography and timing that relate to how you'll see those pricing benefits in our subscription revenue over the course of 2026.

Thanks, Michael. Peter, on your question about buybacks and how we think about it longer term, I mean, very consistent with how we've described the business for a good period of time now. And I think it starts with the fact that we have the business we have today because we've had the flexibility to consistently invest in the business, take advantage of opportunities when they come up and be in a position to, therefore, execute on our long-term strategy.

In terms of within the capital allocation framework, that means we're constantly focused on making sure we build the best frontline roster of artists. You see what we do in the catalog space when it makes sense in M&A as well. Our dividend continues to be very important to our shareholders and a significant amount of capital gets returned every year to shareholders through that mechanism. And then when we see the opportunities through buybacks, as you've seen over the last month now, when there's flexibility to do so, then we will go ahead and do that.

So we've talked for a long time now about buybacks being certainly something we think about in the capital allocation program, and we're proud to now be in a position where we can have demonstrated that, that is an important piece of it. So we'll continue analyzing what are the best uses of our capital going forward to build on the remarkable base that we have today, so that we continue to be the best and leading music company going forward.

I'd like to add one other thing, Matt, and go back to part of the original question. I think you have to look at Streaming 2.0 in terms of what underpins it as a business strategy. It's smarter consumer segmentation that allows us to grow geographically according to which markets have more or less domestic or international repertoire. We talked about Indonesia. We talked about -- we've spoken to you about Japan. Very, very strong domestic repertoire markets.

And it's going to provide -- is providing greater consumer value and general ARPU growth for everybody. So when we talk about the ecosystem, we talk about everybody. All of these phase in, in different times over the course of the individual's respective agreements, and they all come up at different times. There are small operators and global operators and local operators and partnerships, and they come over in a sequence in terms of how they get executed.

And as I keep saying to you can't -- we can't evaluate the full value of all this on a quarter-by-quarter basis because we talk about internally the ketchup bottle. And sometimes when you turn -- trying to pull tomato ketchup on to your plate, nothing comes out and then you leave it there for a few minutes, and then the whole bottle gloves up all over everything.

And I think that we've got used to looking at our revenue and as the -- how the deals get executed and how we negotiate with them and how we're changing the paradigm with all of these players worldwide. So elevated economics, different products, new consumer experiences and a sequence on how they come on stream, no pun intended.

Your next question comes from the line of Michael Morris from Guggenheim Securities, LLC.

I want to ask about 2 topics, one on AI and one on the financials. First, on AI, Spotify yesterday made a comment that they believe there is a lot of opportunity out there for creators who want to use AI tools, but no one is addressing that right now, and they don't think existing artists should be left out of AI.

So my question there is, do you agree with this that existing artists are being left out of AI and maybe in a little more detail, how are your artists using AI tools currently? And what would you like them to have that maybe they don't currently have? So that's the first question.

And then second, just on the financials, there's a question about the amount of leverage that you are using and whether you could more effectively use the balance sheet. So I'd love to just hear your point of view on what the proper use of leverage is as you run the business going forward.

Michael, thank you for your questions. Let me first address the question with respect to Spotify and established artists and AI tools. I think at the specific comments that you're referencing, which we were encouraged to hear follow-up on the earlier earnings call where Spotify executives talked about being hungry and excited with respect to AI derivative product. And they said that they saw great demand for different superfan segments.

We commented at the time that we were very aligned with that viewpoint. What they specifically talked about yesterday, Spotify management reaffirmed that they want to take this AI opportunity to existing creators with derivatives of existing IP. They said we have the capabilities and technologies we need. We are the right company to solve this problem. And we see exactly the same potential.

So I think that what they're specifically talking about our category of products. So we've indicated our consumer research suggests there is a lot of interest in. These are products that allow remixing, they'll allow mash-ups, they'll allow custom songs that enable hyperpersonalization and co-creation experience with existing IP and existing artists. And that relates to the fact that our research says that much more than any interest in just generic AI output, what consumers want is AI that makes music service work better, better discovery, better personalization and gives them a deeper relationship with the artist.

So we see the kind of products that Spotify was referring to really directed at the super fan opportunity that our research suggests is very significant. So that's something that we very much agree with and support in terms of an outlook. We see the same opportunity there. Then in terms of AI tools in general, we're very supportive and been working directly with technology partners and deals that we've announced to develop tools for artists, ethically artist tools that are developed with artists in the driver's seat, artist tools for artists that compensate artists.

So that's really at the heart of agreements we've announced with Stability AI and with Splice and it's part of what we are looking to focus on with NVIDIA. So we're very interested from the standpoint of enabling creation with ethical tools advancing the opportunities for artists. And then in terms of services enabled by AI for products that are leveraging existing IP, working with existing artists. That's an opportunity we very much believe in.

And before Matt talks to that balance, I'd like to add one other thing, that artist concerns over format evolution are not new to us. We have the T-shirt. And they're entirely, totally understandable. But I kind of quite like part of your question because in terms of what Spotify said, and I haven't heard it. But in a way, it's a sort of a call to arms in terms of what the potential change in the formats are and how we, as a company, and in partnership with our artists and talent can navigate through the various format evolutions. We've done it before with them, and we'll do it again with them.

And I think that the fact that all of these global major partners are focusing on this makes the point that it's an addition of our business and revenue. And there's nothing substitutional about whatsoever. And that change takes a period of time, and it's completely totally understandable because we are at one level talking about creativity and human imagination, but we have to work with our DSP platforms as well as ourselves internally to respect it.

Michael, on your question on leverage, as we've said in the past, we don't look to manage to a fixed target. We certainly believe leverage is an important part of our balance sheet and how we use it to fund the company. It's also part of how we think about maintaining a strong balance sheet that gives us the flexibility to invest through the cycles when opportunities arrive. So we believe maintaining the balance sheet strength allows us to continue investing when others pull back.

And this historically has been a source of very significant competitive advantage. And -- so you'll continue to see us find that right balance between using leverage, providing shareholder returns and positioning the company so that we continue to invest when the opportunities arise, that allow us to build on the great platform that we already have. And you should expect to see us continue doing that going forward.

Your next question comes from the line of Clay Griffin of MoffettNathanson.

Matt, you mentioned in the prepared remarks in terms of the Recorded Music EBITDA margins. But just maybe if you could speak to all else equal, i.e., apart from the mix considerations, how do you expect the wholesale price increases that you've laid out here today to flow through to segment EBITDA level?

Yes. Thanks for the question, Clay. So certainly, as we see those price increases, those contribute to the opportunity for margin expansion as we talked about a little bit, hopefully gave you a little more color where you can see how we talk about mix effect plays out. But underneath that mix effect, you see that Recorded Music has been expanding margin and that certainly continues and price increases absolutely contribute to how we see that. You have that combined with a very strong growth in the volumes of subscription customers.

Since we last spoke to you a few weeks ago, we saw the global numbers that the total market for subscribers globally reached 837 million last year, over a 9% increase year-over-year. So we continue to see good volume growth globally. When you add the wholesale price increases on top of that, it certainly gives us an opportunity to continue to grow our EBITDA in the Recorded Music business.

Your next question comes from the line of Adrien de Saint Hilaire from BofA.

Regarding the Spotify stake, if you were to sell it at the current share price, how much leakage would there be in terms of tax and proceeds to artists? And second question, given the volatility that we see on front line, could you consider pivoting your strategy towards being more of a, if I may say, a catalog only business and improve the monetization of that catalog.

And then maybe a last one, if I may. You talked about a market share loss of a 200 basis points impact, do you think that's going to like another major record company? Or is that going to like independents and potentially AI artists?

Look at this in an entirely different way. I don't know how many times that we have to keep saying we cannot view the release schedule through the prism of 90 days. We're comparing where we were against a very successful Q1 last year and artists are human beings, they make music and they create and they deliver according to when they're ready and also all our frontline record companies are looking at a multitude of operational issues about when to release, when they're available, what other releases there are in the marketplace, shifts in consumer behavior, et cetera, et cetera.

So I've said several times that I think that we need to look at ourselves as very much as a portfolio approach. Our market share in catalog incidentally, I think we've had our record market share in Q1.

And everything that we do around artists, new artists is -- and I gave the Justin Bieber example just earlier. Justin -- it works in our library and catalog that Justin Bieber performs and records that were created 13 years ago. And this is the nature of a company of this size with the breadth of its roster, new artists, established artists and how their new music and the quality of their new music drives their catalog and drives the past. And again, I think you have to look at this through a 12-year-old music fan is discovering new things for the first time. And that is what music and the cloud has given and there's everything between our deep catalog as well as our new artist. It's just everything that we stand for and everything that we work with the artists to actually create. And you see that in the kind of numbers and the growth that we've shown.

Yes. So Adrien, if I maybe go through your questions back with the market share impact that we discussed on our results in the first quarter, you asked if that was other labels or dependence on AI. Clearly, it's not AI volume. And as we spent a good amount of time on our last call, there is far more conversation about AI music that there is in a reality of what people are listening to. And we saw no impact from that in the quarter. Any different than what we saw last year that Michael spent a good amount of time on the last call walking you through. I'll let him add anything he wants to say on that in a minute.

In terms of your question about would we pivot to be more of a catalog business. I would say, just go back to Lucian's prepared remarks where he spent time talking about the specifics of what we do and the value it creates working with artists as they create music. That is who we are and who we will continue to be.

And then finally, on the Spotify stake, as we said consistently since Spotify did their initial listing 9 years ago now, our position remains the same as it does it. We will have some distribution to our artists that's consistent with our royalty policies when we have monetized the shares, we've consistently said we would share proceeds. We'll continue to do so. Also, as you think about the net proceeds, you need to think there will be a tax impact in there as well. So we look forward to letting you know where we have, in fact, monetized those shares and what the net amount that's coming to UMG will be.

One final thing that is important. New music drives our catalog. And when we call those artists on roster -- artists that are still signed to the company and have a contribution to make and are exciting. And conversely, new artists that you haven't heard of tomorrow are actually creating our catalog of the future. So it's a complete virtuous circle of revenue and human imagination.

And let me just add a couple of points on the AI dilution point, which I think Matt addressed very comprehensively Keep in mind that last year, as the flood of AI content was rising to the point where tens of thousands of tracks, 1/3 of all uploads as Lucian pointed out, we had our highest recorded music market share since 2013 according to music and copyright. So I think there's empirical disproof of the idea that a market share issue is tied to AI dilution. And keep in mind, as we pointed out on the last earnings call, we're very confident we have substantial countermeasures in place to the platforms, anti-fraud, anti-AI dilution, monetization thresholds, AI infringement and misappropriation protections. All those things we think comprehensively address this issue.

Our last question today comes from the line of Will Packer from BNP Paribas.

Firstly, when it comes to AI products from your DSP partners, we've heard quite a lot today about your alignment and areas where you're working together. But could you give us a bit of a help in understanding some of the challenges. Is it the walls of the sandbox, i.e., consumer rights to share? Is it the split of economics. It's a particularly important catalyst for the industry as it can help dispel the AI bear case, perhaps more than start-up. So would love to hear what are the areas of potential friction? And then secondly, in terms of the hopes of an inflection around ad streaming, are short-form video headwinds here to stay until we get new deals? Or is there anything you can do to improve trends there?

So with respect to AI products and alignment and what the challenges are, we've done multiple deals with partners that are planning to launch products later this year. I mean we have announced deals with Udio and with Klay. In terms of what we foresee, it's a broader opportunity. We've talked about super premium tiers and how AI is really core to that proposition with respect to current DSPs. Technology road map development is something that progresses over time. But there's a lot of activity in this area. We're supporting that activity. We expect to announce new deals going forward. So I don't think that there are challenges that are roadblocks that are unusual limitations here beyond what you would typically see in platforms evolving to innovate to take advantage of new opportunities.

With AI, you may have some greater complexities in terms of the nature of the technology challenge because this significant transformation in terms of the consumer offer. So you may see a greater requirement in terms of resources to be able to execute technology road maps. But I wouldn't characterize anything that we foresee in our conversations with our partners as being challenges that translate into roadblocks.

As there are no further questions, I would like to thank our speakers for today's presentation, and thank you all for joining us. This concludes today's conference. You may now disconnect.

[Audio Gap] At your memorable Capital Markets Day in 2024, the management team outlined their vision for what is described as Streaming 2.0.

How would you assess your progress towards the vision for streaming growth as outlined at that event?

Yes. I think it's been fantastic so far. I mean we laid out exactly how the industry will move in the digital age from being largely focused on just volume-related growth to a mixture of volume and rate base growth. Since that time, we have announced agreements with the vast majority of the large DSP platforms. And as we head into 2026, some of the rate increases that we talked about in each of those are starting to kick in as we go through this year.

In addition to that, around the AI side, you've seen us be very much on the front foot there and be the leading player in terms of announcing deals in that space as well. So we continue to find new ways to monetize the space we're in. But it's -- I think we've done everything the company said we would do at that point 18 months ago and very excited about the path ahead of us.

So perhaps digging in a little bit deeper on that pricing lever. We've had contract announcements with Spotify, Amazon, Google, and we've had recent price increases from both Spotify and Amazon. When should we anticipate further contract announcements and potentially further price increases?

So relating back to the context that Matt set up because I think it's really important that we were looking in Streaming 2.0 for better customer value optimization through rate increases, along with product innovation and platform integrity moves. Obviously, a lot of focus on the underlying rates. And the reason is really simple. Music as a subscription product has been significantly underpriced relative to other forms of digital entertainment, and we provided comparisons before with different datasets.

The one that I think resonates for people is in the U.S. The average SVOD household is being monetized at north of $60 a month that subscribes -- the average music subscribing household is being monetized at less than $15 a month. And if you look at the level of engagement, it's about 90% as great for music subscription households as for video subscription households. So when you look at that pretty significant gap there, we're not planning to increase music rates by 4x overnight, but we see a significant runway for realizing customer value better.

And one of the indications, proof points in the marketplace is that with each price rise that has been announced by various platforms, you basically have had no reports of any material churn. Economics 101, you raise prices, there's no churn. You have more runway. You didn't raise prices enough. So we're encouraged by the progress that's been made, and we think that there's a lot more of an opportunity.

And so in terms of cadence, what we have done is with each of the deal renewals as we have progressed into new terms with the partners, we've implemented the Streaming 2.0 framework. And so as Matt said, we've been successful in implementing a new framework with Spotify, with Amazon and with YouTube and with a number of smaller partners, too. So in terms of the expectation on cadence, there are the deals themselves. And then there's the underlying rate increase timing and then the price increases that you see manifest in the marketplace.

So that's in the process of like rolling out over the course of the last year into this year. And we've indicated that most of what you're going to see in terms of the impact of the rate increases is moving forward from here into 2026.

So alongside those deals on the Streaming 2.0, we've had some new deals that start, obviously, including Udio, NVIDIA, Stability AI, a real diverse list. The deal with Udio is particularly notable. Could you outline the key features of these new AI partnerships, how UMG monetizes the relationship and early updates on momentum?

So we're very excited about what we view as constructive disruption that's happening in the music sector with AI. We've talked about minimizing the downside, but we're much more focused on optimizing the upside. We see a lot of potential for innovation.

Udio is interesting because it's a great example of defense into offense. We focused on defending our artists' rights. Of course, we're going to vigorously defend their rights and their interests. And that's been critical to our partnership with the creative community, and we'll talk a little bit later maybe about how that feeds into their support for adoption of new models. But with Udio, out of litigation, we resolved with the compensatory piece of the new deal. But the enthusiasm that we felt in terms of the partnership is really focused on going forward, establishing a new product model.

So Udio agreed to deprecate the old product model. Their focus is on working with us, opted-in artists, ethically trained model, new product offer for consumers that enables what we think is the real commercial appeal of applying AI to a music catalog where you allow the consumer to interact directly with the content they really care about, with the artists they really care about. So this is remixes, mashups, different forms of customization, what we refer to as hyper-personalization, enabling the fans to directly interact with the artists that they love and to participate in music culture. And those are really the key drivers of the music economy, fans connecting with artists they love, fans participating in music culture. So this type of product construct really brings those two components, features together.

In the analysis that we've done, looking at what consumers are interested in with respect to product features, the thing that ranks the lowest is simulated artists, what we would call perhaps pejoratively fake artists. What they're most interested in is that direct interaction that I described. So when we test these different features, between 30% and 40% of the fans that are interested in AI and music are gravitating towards that feature set.

So we're excited about the product expression that we expect to be in the market later this year. We're really happy that the defense into offense game plan resulted in this very aligned partnership with Udio. We think that the way that they're innovating is going to put a really exciting product into the marketplace. And it really epitomizes what we're looking to bring about in terms of innovation with respect to music services and AI.

Yes. And Michael, I think you mentioned defense into offense a couple of times there. What's important here is we've done the work. We talked about it on the earnings call last week, listening to consumers, what do they want better today? And it's not fake artists. They do want a better experience. They do want to be able to kind of play around with some of the music they already know and love. So this is additive to what we see going on today rather than we're going to see a substitution from the music generated by the artists that we're all familiar with to now just being AI-generated music going forward.

So that's why we're very positive about just like every other technology that's come along, it's been additive to the music industry, the way that consumers can interact. When consumers can improve their interaction, they listen to music more, they interact with it more and they spend more on it. And we see this as just the next chapter in that book.

One of your actually enormous differentiators is the roster of superstar artists. Should we expect broad participation in your AI products or more selectivity from the biggest stars? Any early signs from the initial phases? And is it a bit more complicated than that, and actually, depends on the product suite?

Always a little more complicated than that. But first of all, by focusing on the interest of artists and advocating a very artist-centric approach to AI innovation, I think we've earned a lot of credibility with the artist community.

So going back to 2023 when we articulated a set of principles and then got YouTube to support us in articulating principles as part of launching a new set of experiments and an artist incubator. Our artists were all 12 of the founding members of the AI music incubator, and that included some major stars and very, very important artists in their genres that were part of that early experiment.

So I think that the credibility that we've established in starting the process off by working with artists and thinking about tools created by artists for artists and monetizing the content of artists, building the trust of the artist community every step of the way and making it really clear that we were only going to support models that fully embraced the integrity of their rights and fully advanced their interests, I think we're in a very good position right now. So we're deeply engaged with our artist roster through our operating units, very, very strong indications of support. We expect to launch these new products on an opt-in basis with very, very strong critical mass support from our artist community.

Of course, artists have various levels of interest and what's the word I'm looking for here, there's reservation in some cases about AI. There may be a little bit more of a wait-and-see attitude on the part of some artists. There are some artists that are extremely leaned in and want to be on the cutting edge of experimentation. We're going to respect all those perspectives. We're going to operate on an opt-in basis. And we're obviously going to work to encourage the first movers and put them in a position to have great success in the launch of these new products and then prove the model out and grow momentum over time. But the early results of our conversations with our creative constituency have been very positive, and we expect to have that critical mass to support the launch of these products.

Fantastic. And moving on to a related different issue. There was noise in 2024 and 2025 around superfan or super-premium tiers on DSPs, it seems that those have faded a little with complexity around, for example, the windowing of rights or ticketing. Are AI tools the new superfan [ tickets? ] When can we expect those kind of products to be with consumers? And should we still think of that same addressable market of one in five premium customers, as you talked to, were superfans?

Yes. In short, I think the question has characterized the succession of events that lead us to the present day. So we still believe in the feature set that we articulated around super premium. And if you look at the proof points, for example, in China with both Tencent and NetEase, achieving a significant level of consumer adoption for a higher-priced tier, 5x the standard price for the SVIP tier and trending through like mid-teens adoption. Some folks have done analysis like trending the public statements from Tencent a year ago. And they come with the conclusion that we're approaching the point where we're proving out what we said was the objective to target 20% adoption of the current subscriber base at perhaps like 2x multiple of the current price point for that feature set.

Now what's happened in terms of the major platforms is AI has overtaken that conversation the way it's taken over just about every other economic and cultural conversation in our world. And the focus of the major platforms has been to compete on AI innovation. And so the plans now have really set on how can AI be implemented and harnessed in a way that advances the music subscription proposition for the consumer. And I think what you're going to see from the major platforms now in this market in the U.S., you're going to see AI being integrated into the feature set and be a core part of the super-premium proposition. And as with respect to the DSPs, we see the superfan opportunity as being broader than that. And there are many things that we're looking to offer that are not just entirely focused on AI.

Yes. The DSPs, we think they certainly have a big role to play, but we're not waiting for them to bring some of these things in. You've seen earlier this year, we've already announced a couple of deals, one with Stationhead and one with EVEN. These are two companies that bring some of these superfan experiences to consumers. Stationhead allows artists and fans to have listen parties, et cetera, and then even gives artists the ability to make their music available earlier to a subset of fans who have paid for the service. So we've seen one of our own artists, J. Cole has with his latest release, take advantage of that.

So some of these superfan experiences may be part of an overall DSP offering. They may be stand-alone. So we continue to see it as a very important piece. We know there's a subset of consumers that want to engage with their artists more deeply, willing to pay more to do so. And we're very happy to continue to find ways and find partners who are going to help facilitate that.

So we've talked a little bit about some of the AI opportunities. Recently, AI fears have impacted global media and Internet share prices across diverse segments, including, of course, the music industry. For music labels and other content owners, I think there are two primary fears, increased competition as barriers to content creation fall; and secondly, deflationary pressure from UGC-based offerings. You've got some very unique advantages, the high catalog consumption in the music industry, your formidable market share, your fandom as the basis of consumption, but risks remain. Could you talk through those risks and how you are navigating them?

I'm happy to do so. Based on a lot of analysis and reflection, we feel like the case for AI dilution risk has been massively over-extrapolated from a few anecdotes. On the earnings call last week, we went through some data points and analysis. If you were listening on the earnings call, forgive me if I'm repeating things that you're already familiar with.

But if you look at the actual consumption of content, there was a story in Billboard about 10 different artists that were impacting the charts last year that were AI artists. So we analyzed the performance of those artists on the charts. And the #1 AI artist did not break into the top 7,000 acts last year, and #10 in that list of 10 did not break into the top 92,000. If you look at all of those AI artists, the most popular AI artists like in the English language market in the U.S., which is the furthest along in terms of adoption of AI and embrace of AI, the actual performance of that repertoire was 0.015% of the consumption of the artists in that same bracket of charting.

And if you look at the organic consumption across a platform where we have the best public data, and this is Deezer, but Deezer's data is analogous to all the DSPs because all the DSPs get hit with the same distribution pipes. They just happen to have the technology that they developed under a 2023 deal that we did with them, our first artist-centric deal with Deezer, where they have the ability to detect and manage AI content.

And what they found is the vast majority of AI content that's being consumed is associated with fraud. 85% of all the streams of AI content on their platform are detected and excluded from the royalty pool based on being fraud. The organic consumption of this content -- and this is 60,000 tracks being uploaded every day. So we don't have to theorize about what a future of AI inundation would look like. We are in the current age of AI content inundation. And 60,000 tracks today being uploaded to the platform, the organic consumption by consumers of that content is less than half of 1%. So there's very, very little content consumption.

But we put a number of protections in our deals to exclude even that level of content consumption from the royalty pool. So there are the anti-fraud provisions, and that would attack the 85% of the total streaming and catch a lot of the content that might potentially impact the royalty pool. There's also artist-centric provisions that demonetize content below a certain threshold of consumption. But then specifically, we've introduced in many of our deals, in most of our new deals that we've announced, anti-dilution protection against AI content, meaning that pure AI content is not part of the royalty pool calculation with respect to our participation in revenues from the platform. So there's very little organic consumption, and there's no material dilution of our revenues. So that level of risk is not something we're particularly worried about.

Then the issue of AI content creation with tools, we're actively supporting through partnerships that you mentioned, for example, Stability AI, also with Splice. We think developing tools with artists and incubators, so tools developed by artists or artists remunerating artists for the training, so ethically developed tools within the right parameters.

So you're not asking an artist to sort of give up their name and likeness in association with content that somebody else is creating as a derivative of their content and then competing with them. But putting it within guardrails. So you're really talking about professional content creation by artists. We think there's an incredible opportunity to amplify artists' voices and visions with a new tool set. Think of it as the synthesizer of the 21st century.

So from the standpoint of ethically developed tools and that contribution to the music economy, we think that's really significant. From the standpoint of dilution of generic like AI slop content, we think that, that is almost entirely mitigated right now, the combination of a lack of consumer interest and our ability to put protection into our deals.

Thanks, Michael. So perhaps shifting gears away from AI towards free cash flow and net content investment. Back of the envelope, it's averaged 5% of revenue over the last 5 years across both artist advances and catalog deals. Speaking to investors, a key anxiety is that's effectively maintenance rather than growth CapEx, sustaining rather than boosting growth. For each of the advances and catalog deals in turn, do they make UMG grow faster? And how will that play out in the medium-term financials?

Yes, absolutely. They are a key part of the growth strategy. We continue to be very happy to engage with artists to sign them up for additional pieces of work, lengthening our relationship with them. It's one of the reasons we are the company we are today.

And our advances higher than they were 5 years ago or 10 years ago? Yes, but so are the revenues that artists are generating. So when you think about the advances as a share of the value the artist is producing, that's why I put the additional information in the call last week over the last -- since 2019, last 6 years now, gross advances have gone up by 8%, whereas our total revenue has gone up by 10%. So there's very much a case of moving in proportion.

And then when you think about advances, especially with an established artist, it's not just recoupable from the new work that they are going to produce and provide, but it's also the catalog that we have with them. So -- and as catalog has increased in terms of its share of overall listening as we've gone into this digital phase, for an established artist, an advance has never really been safer than they are today.

So we certainly see it's part of having the largest artist -- largest stable of great artists. And you saw us announce last week that for the third year in a row, we had 9 of the top 10 artists last year. That's an incredible record. And it comes from consistently investing in our artists, being their partner of choice, helping them develop their careers that they want to have and the results speak for themselves.

And then catalog is a great way for us to continue to add to the total product that we bring to the marketplace. We think we have the ability to monetize that better than anyone else. We look at every opportunity on a stand-alone basis. When there's value to be had, we will acquire the catalog. And I think our track record on what we've delivered, the growth on revenue and EBITDA associated with that speaks for itself.

And the continued spend on catalog despite the Chord deal is a reflection of opportunity?

Yes. Look, I think Chord, we're very proud of that relationship. There's other people we work with as well in that space. Chord has been increasing their velocity. There's a number of deals that have gone there. There were some that we knew Chord was going to take, but we initially purchased and now sold on to Chord as well.

But we're not going to necessarily put every catalog acquisition through one of those vehicles. We may do -- continue to do a number of them on our own balance sheet, especially as you think about expanding globally to some markets where we don't necessarily have a larger back catalog and try to build up that, that may be better for us to do ourselves. But -- so we look at each deal on an individual basis.

Very clear. So perhaps moving on to a different and related debating topic around artist remuneration. There are concerns that increased artist remuneration will drag on both margins and free cash flow. But disentangling what's driven by changing royalty models, e.g., more distribution deals, the Downtown deal, more investment in growth, underlying artist cost inflation is very difficult. How should investors think about the outlook for artist royalty inflation and its impact on your operating margins?

Yes. So obviously, there's a number of different deal structures. You mentioned there's distribution deals we're doing through Virgin, now Downtown as well. They have very different structures than what we do through our frontline labels. The margin is lower. It's incremental EBITDA that adds to the total company profitability and cash flow. And we look at it on a return on investment basis. And as we look at those distribution deals, they meet our return criteria.

As I think about our frontline label transaction with artists, we continue to see very healthy margins in that business. The nature of a deal will evolve over an artist's career. As an artist goes from being at the early stage of their career to when they hit a high level of success, have become one of those 9 out of the top 10, you're going to see their deal structures change over time. That's based off of the level of success they've had, the comfort level we have with the catalog and how that's going to play out and so on. But in terms of the overall artists in general taking a larger share, I don't think so. I just think you see artists earn more and more as the total industry has earned more and more as well. So they very much move in relationship.

Very clear. So switching gears perhaps to your emerging market business, which is an increasingly important growth driver as volume growth shifts to emerging markets, as Western markets mature and living standards rise in EM. How is Universal Music's market share evolving from an organic perspective? And do recent deals move the needle in addition to that? And when we think about how key emerging markets mature from a streaming perspective, how do they differ from the playbook we've seen in developed markets over the last 10 to 20 years?

Yes. Certainly, the approach we're taking to the high potential markets is really threefold, right? One, we certainly want to have traditional frontline label A&R presence in those markets. But secondly, we will have our labels and services business, Virgin, expand in those markets as well so that we can work with local artists and local entrepreneurs who are already established there. And thirdly, when we see the right M&A opportunities in different markets, you'll see us participate there, done a number of deals in the last 2, 3 years in places like Vietnam and Thailand and Nigeria and so on.

So we're very excited about the ability to create the footprint in those markets and then really grow as those markets continue to grow, see very good increase in digital platforms initially, often in ad-supported streaming, but moving into subscription. And so have that ability to -- the vast majority of the consumption of music is local language, local music in those markets. And so being there, having the credibility in each of those places, having the presence there and the ability, it's not just taking a global artist and saying we can take them to all these countries. You have to have that local presence as well. Very proud of what the team has been building out and the opportunity for that to be a growth driver for a number of years ahead is very strong.

And -- so shifting gears to the recent major deal that you completed. Could you talk through the strategic benefits of the Downtown deal for the group and what it brings that's complementary to the existing UMG portfolio?

Yes. So certainly, we've been expanding significantly for a few years now, what we call Virgin Music Group. We were in the distribution business in a few different ways prior to that, but it really hadn't been a focus. And as we saw that part of the industry growing faster, I mean there's -- we like what we do with our frontline businesses, but there's only a certain number of artists that we're going to be able to service that way. So as we seen this, the other part of the business expand, it gave us the opportunity to get in there.

The team under Nat and J.T. have done a great job of building our business there, but then we had the chance to partner with Downtown, will give us a really strong business there on a combined basis as we think about everything you want to offer individual, independent artists, smaller labels, what they need as they expand the various different services. So it's not a one-size-fits-all approach to the different customers they have, and we feel we're much better positioned with that combination to really provide a great service to that part of the market, and that will contribute significantly to the overall company results.

And when we think about ad streaming, which is one of the group's primary revenue drivers, short-form video consumption among your partners has exploded, but the music industry's monetization has lagged with the perception that contracts are based on minimum guarantees rather than ad revenue share at this stage. How are these short-form video relationships evolving with Google, Meta, ByteDance from a monetization perspective? And what's driven the recent improvement in performance in that segment, excluding the impact of those deals?

So we have made progress in our partnerships with the social media players that you identified on that list and with others. And of course, we're always fighting for full participation and the value creation of our artists on our partners' platforms. And so you can be rest assured that we're working to improve the economics of those deals.

I mean one thing to keep in mind, people tend to talk about [ plats ] as though it's some sort of abstract number. In a situation where the platform doesn't have the ability to pay on a rev share basis, we haven't put that model in place, and we have proxy economics. We understand the consumption of our content on the platform, and we're strongly advocating fair participation in the deals on the basis of knowing what engagement and music is like on those platforms.

The thing with short-form and the disruption there in particular, is that you've had a big shift in consumption without the evolution of the ad products that fully address the level of engagement of consumers on those platforms. And also, the platform evolution has sort of lagged in terms of monitoring and measuring and managing the consumer engagement of that content up against monetization.

So there has been a little bit of a lag effect. But we are making progress. We expect to continue to make progress. And because of the secular migration of ad dollars online to social and video and short-form, where we play significantly, we do expect to see significant growth over time. In the most recent quarter that we reported, we had 9% increase year-over-year. We attribute about half of that to deal-based increase in value and about half of that to underlying organic growth.

We still preach caution in looking at the expansion of ad-supported in the near term. We're bullish in the mid-to-long term about our ability to grow revenues. And we are improving in terms of monetization with the partners in the short-form category in all the deal renewals that we're in the middle of.

And then jumping around a little bit in the last few minutes. The cost saving program that was announced in 2024, where have you achieved the biggest savings within your cost base? And can developments in AI complement that via greater cost efficiencies?

Yes. So through the end of last year, we've delivered about EUR 165 million of the EUR 250 million. We'll deliver the rest over '26 and '27, on track with that. A lot of it has been restructuring some of the organizational structure in various parts of the business and really getting -- making sure that we're spending time on the items that we think are going to create value going forward. And if there's things that we've worked on in the past that were useful then, but not so much going forward, that we stop doing those things. So there's ongoing restructuring activity. We started in the U.S. labels, gone to some of the overseas locations as well now, and we'll continue to do that.

You asked about AI. AI is another tool in terms of managing the business and looking at the processes that we use to deliver the products and services that we do. And it is a new tool, but it's not going to be the right tool for every situation, but it will -- it's certainly going to allow us to do a number of things faster and more efficiently and more effectively.

When you think of the amount of data that we now have through the digital services that we've been on for many, many years now, the ability to really get all the insights out of that and do it quickly is changing on a daily basis, and the team is very much engaged there. How we do some of the marketing campaigns, how quickly we can spin those up has changed. And I'm sure a year from now, we'll be talking about new things in that space as well that we're doing.

So -- but it's another tool, and it's just a case of constantly challenging the team of are we being -- increasing the efficiency and effectiveness on how we do things. We talk about programs like the EUR 250 million program, and they're important, but some of the cost work is one of those things where you're never actually ever done. And every year, we have to constantly looking at, are we being as efficient in where we're spending money? Are we spending resources, putting resources to work that are consistent with the go-forward strategy of the company as opposed to just what we've done in the past. That's something we'll continue to do.

Perhaps last question, as I know we've kind of gone over the 30-minutes timer. Could you talk a little bit through how you're thinking about capital allocation from here, the relative appeal of buybacks in the context of the recent share price dislocation, M&A in the context of the emerging market label pipeline, catalog acquisition? And in addition, sort of what's the right level of leverage for the group in the longer term?

Yes. Look, we -- the first thing that we'll always look to do is how do we make sure we're investing in the future growth of the business. That's our ability to continue to support artists, continue to look at catalogs that we think will add value and then M&A, whether it supports the emerging market strategy or whether it supports our Virgin business or any other growth part of the business where there's opportunities to invest and create value. Secondly, we're committed to a very significant dividend, right? We pay out at least 50% of our cash flow as a dividend to our investors.

As you think about buybacks, it's certainly something that the Board has conversations around when we look at different stock prices where we may want to do that. I think fundamentally, we look at cash and say the #1 thing we want to do is invest and generate a return for shareholders. But obviously, there may be the right time for buybacks. That hasn't been that case to date.

And then in terms of -- we like the leverage on the balance sheet. It allows us to invest where we need to. There's space for us to put a little more leverage on and stay within our current ratings. So we have the flexibility to think about a lot of different things, which gives us a lot of optimism about the future. We don't see us being restricted in terms of pursuing any opportunities that will come up. And with the execution of the -- and the track record of the UMG team, we feel great about having those opportunities and being able to go after them.

Well, I mean that's a great note to finish on. Huge thanks to yourself, Matt, and Michael for the detailed answers, and thanks to everyone in the audience today. Appreciate it.

Thank you.

Thank you.

Good evening, and welcome to Universal Music Group's Fourth Quarter and Full Year Earnings Call for the period ended December 31, 2025. My name is Nadia, and I'll be your conference operator today.

Your speakers for today's call will be Sir Lucian Grainge, Chairman and CEO of Universal Music Group; Michael Nash, Chief Digital Officer; and Matt Ellis, Chief Financial Officer. They will be joined during Q&A by Boyd Muir, Chief Operating Officer. [Operator Instructions] As a reminder, this call is being recorded.

Please also let me remind you that management's commentary and responses to questions on today's call may include forward-looking statements, which, by their nature, are uncertain and outside of the company's control. Although these forward-looking statements are based on management's current expectations and beliefs, actual results may vary in a material way. For a discussion of some of the factors that could cause actual results to differ from expected results, please see the Risk Factors section of UMG's 2024 Annual Report, which is available on the Investor Relations page of UMG's website, universalmusic.com. Management's commentary will also refer to non-IFRS measures on today's call. Reconciliations are available in the press release on the Investor Relations page of UMG's website. Thank you.

Sir Lucian, you may begin your conference.

Many thanks, and thank you all for joining us on today's call. As you can clearly see from our results last year was a very good year. Our artists, songwriters and labels once again wrapped up record-breaking successes. We made excellent progress across our strategic initiatives and continued our long, uninterrupted streak of strong financial growth.

I'm pleased to report that in 2025, both revenue and adjusted EBITDA grew by nearly 9%. I must begin by highlighting the creative excellence and commercial success of our artists and songwriters. Their extraordinary music continues to shape culture across the world. Every year, the IFPI, the recorded music industry's global [indiscernible] association, reveals the world's top-selling artists for 2025. 9 out of the top 10 were UMG artists, with Taylor Swift at # 1.

As you let that astonishing facts sink in, let me throw in another one. 2025 was the third year in a row that we have represented 9 out of the top 10 best-selling artists on the planet. The only recording artist whom we did not represent on recorded is [ Bad Bunny ], and he's represented by our Universal Music Publishing division. No other company has ever come even remotely close to UMG's outstanding performance year after year in developing new artists who go on to become global brands.

A quick look at the 2025 lists across major platforms reveals our remarkable industry-leading position. This slide highlights just a handful of them. Our extraordinary momentum continues to build with a string of recent #1 albums across genres and geographies from Taylor, to [ Olivia Dean ], [ King & Prince ], Mrs. GREEN APPLE, both from Japan, [indiscernible], and I could go on and on.

As to the critical acclaim and awards, I'll briefly mention how our artists and songwriters, won big at this year's Grammy's. [indiscernible] artisan songwriter, [ Hendrik Lemar ], was the night's biggest winner with 5 awards, including Record of the year. [ Kendrick ] is now the Grammy's most decorated rap artist of all time, with 27 awards.

Olivia Dean was named Best New Artist, the fourth time in the past 5 years, that a UMG artist has received that honor, that also is an unprecedented achievement. Billie Eilish, [ Lowly Young ], Lady Gaga, [ Jelly Rowe ], Leon Thomas and [indiscernible] [ Bad Bunny ] were amongst many other winners. It was also an incredible nice at last year's [indiscernible] -- sorry, last week's [indiscernible] awards, at the weekend where UMG swept the major categories. Olivia Dean took home 4 awards, including Artist of the Year, Album of the Year, and Song of the Year. Other winners include [indiscernible], Dave and [indiscernible].

The Olivia Dean success is an indication how our U.K. company is developing new artists and once again delivering them to the world across all geographies. The demand for our music continues to grow. The subscriber numbers increase, so does the consumption. Industry data from Luminate shows that on-demand audio streams topped 5.1 trillion last year, an increase of nearly 10%. We unequivocally believe that the growth of the business will continue, hitting the 1 billion subscriber mark in the next few years.

Our multipronged strategy to capture this growth, of course, includes our excellence in artist development, along with continued implementation of our streaming 2.0 initiatives. But we will also make bold moves in 4 key areas of the strategic plan, each of which will create meaningful monetization opportunities, driving growth across an entire interconnected ecosystem. And that [indiscernible] aim to connect is very significant. So today, as I want to share with you the progress we're making in those 4 areas. Expanding our presence in label and artist services, accelerating our efforts in high potential markets, strengthening our direct-to-consumer and superfan initiatives, and adding to our growing portfolio of responsible AI partnerships.

The first critical area in our services, the independent labels, entrepreneurs and artists around the world, one of the fastest growing areas of the business. Those labels operate in a diversity of markets, genres and languages, and generate meaningful revenue from artist rosters of varying sizes. As much as they differ, they share a common desire to partner with a company that provides them with the best and widest range of services. In 2021, we established Virgin Music Group to expand our expertise and resources in this fast-growing sector, which will be further accelerated by the recent acquisition of [ Downtown Music ].

Matt will go into detail about Downtown's financials later, but for now, I will say that the combination of Virgin Music and Downtown will create a global end-to-end solution designed to meet the evolving needs of independent artists, entrepreneurs and right holders at every stage of their development. The combined company will have a broad, more flexible suite of services, ranging from high touch to self-service platforms, including digital and physical distribution, marketing, business intelligence, neighboring rights, synchronization, royalties, as well as publishing rights management.

Our last acquisition of this magnitude was in 2011, which of course, was EMI. At that time, we saw the value that others did not, and double down on the traditional [indiscernible] catalog business. Today, 15 years later, that acquisition is universally acknowledged as one of the most successful and strategically important in the history of the music industry. I firmly believe that our acquisition of [ Downtown ] will be as transformational. It creates a scalable and profitable engine of growth that also elevates UMG's core label, publishing and superfan businesses, enabling us to better cover the entire industry. It is no small matter that Downtown also expands UMG's global footprint, collectively serving more than 5,000 business clients, and more than 4 million creators in 145 countries.

That last point leads us to the second critical area of our strategic plan, our growing geographical expansion into high potential markets. UAG's approach is to create a compelling array of business solutions that offer multiple ways for artists, labels and entrepreneurs to engage with us. Always in compliance with our strict investment criteria, we partner with the best of them and then deepen the partnership over time. Here is an example of our strategy in action.

In India, Universal Music had operated a multi-label structure for years already offering artists a compelling choice of brands. Earlier this year, we supplemented that choice by investing in XL Entertainment. XL is a leading film and digital content studio in a country where original soundtrack remain at the heart of the fast-growing music market. The deal gave UMG global distribution rights to [ XL's ] future Soundtrack, while our Publishing division became [ XL's ] exclusive music publishing partner, and the two companies will launch a dedicated [indiscernible] music label.

On top of this, through Downtown and Virgin Music Group, we now service approximately 100 clients in the region, including new deals with Punjabi Label, Just Records and South Indian label, Millennium records. When you take a step back, you can see how UMG has built multiple points of entry into the Indian market. Each of our business units operate with its own unique creative and commercial expertise, but also has access to UMG's powerful global systems and resources. As a result, our ability to capture growth efficiently is increasing. This is an approach that is working well in many other dynamic highly populated markets, including China.

Moving on to our third key strategic effort. I'm very bullish about [ superfans ]. As you all know, given the enormous demand for great products and exciting experiences, we believe this segment is massively under monetized. Our own [indiscernible] business has grown to 1,600 online stores and generates hundreds of millions of dollars in revenue. This only scraped the surface of our potential. We will further scale our B2C business by stimulating an entire category of third-party superfan platforms, each with its own distinctive approach and model. These will operate alongside the premium tiers being developed by the traditional DSPs, as well as what we're creating, and how we're creating an ecosystem in which special events, experiences and products will entice superfans in both the virtual and physical worlds.

As more common -- competition develops more innovation will result. Connectivity to fans will increase and the opportunities to drive monetization will continue to multiply. We recently announced two partnerships in this space. The first is with [ Station Head ], a live music segment platform that connects artists and fans through real-time listening experiences, community interaction and integrated commerce. With over 250 UMG artist events in 2025, [ Station Head ] contributed billions of premium UMG artist streams on subscription platforms across millions of active users. Their weaker release listening parts contributed to eleven # 1 albums across the entire industry. They've executed very successful fan campaigns for UMG. Artists such as Sabrina Carpenter, Billie Eilish, [indiscernible], [ Nicki Minaj ], [indiscernible] and many others.

The second partnership is [ with Even ], which provides superfans with early access to music, exclusive content and community features. [indiscernible] [ J. Cole ], for example, used even for multiple direct [indiscernible] campaigns, including the tenth anniversary of Forest Hills drives, and the prerelease strategy for his latest album. Both projects leveraged [ Even's ] white label solution to reach hundreds of thousands of fans and sell millions of dollars of physical product. The [ Eden ] campaign was a significant factor in the falloff [indiscernible] his new album debuting at #1 in the U.S.

We don't need to develop a new platform, but both Station Head and [indiscernible] integrate directly into UMG's current architecture and its direct to consumer architecture, capturing fan data and fostering a deeper relationship between artists and fans. Superfan opportunities are rapidly evolving, and we will be right there at their evolution. This evolution is being super judged by AI, which leads us to, obviously, the fourth focus of our strategic discussion.

Our embracive responsible AI technologies continues to be very aggressive. We're forging partnerships across a spectrum of artist creation and fan engagement initiatives. And they are two separate initiatives. I'm very aware the largest wave of the investment community looks at the intersection of AI and media, and sees only some of the risks. I want to be very clear, we fundamentally disagree with that view. We believe AI represents an unprecedented commercial opportunities for UMG and our artists in both the near and the long term. We're working tirelessly to shape the business models, and the legal and legislative frameworks that will form the foundation of a responsible AI ecosystem. I encourage people to spend time to really understand the work that's being done and the opportunities that lie ahead.

Personally, I've never really been more energized about the possibilities that we are pursuing. And once again, we face another exciting transformation. Here are just a few of the things that I'm excited about.

On our last call, we discussed our agreements with Udio and [ Stability AI ]. Not long after that, we announced our licensing agreement with [indiscernible] large music model is trained entirely unlicensed music -- licensed music. It will evolve AI experiences for superfans while respecting the rights of artists and songwriters. We're excited about this company vision and applaud their commitment to ethically [indiscernible] in generative AI music.

In December, we then revealed we're also collaborating with [ Spice ], the world's most popular music creation platform. Together, we're building a road map for the development of commercial AI tools rooted in creative control and [ sonic ] excellence.

Last month, we unveiled the first of its kind alliance with NVIDIA, the world leader in AI computing. Our shared ambition is to transform and enrich the music experience for billions of music fans around the world. This collaboration will cover everything from [indiscernible] to music discovery to fan engagement. NVIDIA articulated the relationship perfectly when they said we're entering into an era where a music catalog can be exploited like an intelligent universe. Conversational, contextual and genuinely interactive, and we'll do it the right way. Responsibly, with safeguards that projects artist's work, ensure attribution and respect copyright. How phenomenal. Our work with NVIDIA will be a multiyear partnership, and like our AI initiatives create significant win-win potential in market-led solutions.

Our strategy for these AI deals is informed by a significant amount of consumer research, both our own and third party. We're just not sticking our finger in the wind. Our Insights team recently conducted a global study on consumer attitudes towards AI and music. The key takeaway is that consumers want AI driven by human intent, or AI as an enhancement of, and not as a replacement for, human creativity. Plus consumers are asking for transparency with respect to how AI is used in the creation of music.

This research underscores our belief that AI isn't just an incremental revenue opportunity. It's going to introduce entirely new formats. The superfan AI experience I mentioned earlier at just the beginning. We see entirely new AI formats that will offer fans greater personalization, hyper-personalization and social expression through artist-centric music experiences. Given the high level of interest in AI from both the creative and investor communities, I've asked Mike Nash, who you know well, our Chief Digital Officer, to present more on this in more detail later on this important topic, so that we see how excited we are.

What I've covered in my remarks, is only a fraction of what we're executing every day at UMG. With an artist roster and a music catalog that [indiscernible] industry, we're also the biggest [indiscernible] of new subscribers to the DSPs. And because we've earned a unique level of credibility and influence, working with both established and emerging innovators, we continue to expand our already broad portfolio of revenue streams. Our vision is a stronger, more connected and ever-growing ecosystem that is attracting new entrepreneurs, expanding our full global footprint, accelerating our D2C business, creating new products and experiences, and leveraging AI to take music to places fans can barely imagine, and in ways in which they can barely imagine.

In short, we're designing and building a strong foundation for a profitable and exciting future for our artists and our songwriters. For our company, for the industry, and obviously, for our shareholders. We are extremely confident about the path ahead and look forward to a really strong 2026.

Now on that basis of excitement and optimism, let me hand it over to Michael, and then we'll hear from Matt. Thank you.

Thank you, Lucian. I'll take a few moments to discuss in more detail how we're advancing the best interest of our artists and their fans with our AI strategy, while promoting innovation. I'll do that by addressing two topics that are critical to better understanding the risks and benefits of AI for our business.

The first topic is the perception of risk of AI revenue dilution, and the thoughtful measures we've taken to neutralize any negative impact. The second topic relates to consumer receptivity to responsible AI innovation.

First, misunderstandings have resulted from anecdotal press reports that AI-generated content has somehow overtaken the charts. Nothing could be further from the truth. Stories about #1 AI sums have been reported based on digital download charts were 2,500 units of a $0.99 legacy product can manufacture a chart number one. As you can see from the data on this slide, a handful of anecdotes have been completely over extrapolated. We assembled this top 10 of chart debuting [ AIX ] as identified by billboard and Luminate. Consumption of this top 10 has been immaterial. The most streamed act [indiscernible] to the top 7,000 globally in 2025, and the #10 Act didn't break into the top [indiscernible]. In the aggregate, the most prominent AI content barely registers, even in the leading market for this English language repertoire, totaling less than 1 -- excuse me, to less than [indiscernible] of the percent of the streams of the top [indiscernible] artists in the U.S. last year.

Some commentators say, that's right now what about the future? We don't have to theorize about the future of AI saturation as it's become a marketplace reality with 60,000 AI tracks being uploaded a day at present. What impact is [indiscernible] of these tracks having on our revenue? Most of this content is AI swap, or broad butter associated with royalty diversion schemes. 85% of AI streams on one representative platform, [indiscernible] were identified as fraud and then excluded from Royalty Pool allocation.

Apple recently reported that its efforts to address the flood of AI uploads included exclusion of 2 billion fraudulent streams last year. Platforms like Spotify have also outright removed tens of millions of spanning AI tracks from their services. So despite the huge volume of AI uploads, the aggregate organic consumption of AI content by actual consumers is less than half of 1%, based on the best available data. That's consumption. What about revenue?

It's important to take account -- it's important to take into account all 3 aspects of our deals to protect us from a revenue perspective. In addition to one, if I brought provisions, there's two, demonetization of generic AI [indiscernible] under UMG [indiscernible] agreements. And three, anti-AI dilution provisions and numerous UMG agreements you previously announced and discussed. Anti-AI dilution stipulations generally mean that pure AI-generated content similar to other nonmusic content is removed from the calculation of share of streams by the DSP for purposes of terminating our artist royalties. Therefore, while we remain vigilant in addressing in bringing AI services, we're seeing no indication that AI royalty dilution is a material issue for UMG from a revenue perspective.

When you take into consideration the significant opportunities to commercialize AI innovation through new products and services that Lucian outlined, and the empirical data demonstrating insignificant and comprehensively mitigated risk thoughtful analysis will conclude that the impact AI will have on our business will be overwhelmingly net positive. The data on this slide makes it very clear that consumers are rejecting AI slop and [indiscernible]. What do they want from AI innovation, is applied to their music experience instead? That's the second topic I'll address with another set of data points.

As Lucian noted, UMG conducts rigorous consumer research on strategic topics. Related to the highlights he covered, here, you see some key findings that emerged from a survey of 28,000 consumers, conducted in 13 countries, representative of the global music marketplace. Use of AI is fast becoming mainstream with 54% of global consumers expressing familiarity. Not surprisingly, the predominant use case of search, and among those users, nearly half report conducting music-based queries. Such as what to listen to? What merch is available for my favorite artists? What concerts are near me?

We see this as an early indication of the promise of AI that it holds for elevating discovery, recommendation and contextualization, as AI becomes more integrated into music services. The vast majority of consumers continue to prioritize human artistry. They want clear disclosure in AI labeling and most seek transparency, safeguards and ethicality in AI music development and deployment. Confirming what the consumption [indiscernible] on the prior slide by an almost 7:1 ratio, consumers expressed disinterest versus interest in so-called AI artists. In fact, over 2/3 of consumers want to be able to block purely AI-generated music entirely. In the U.S., where AI awareness is highest, nearly 3/4 of consumers want a block AI [ bump ].

With this backdrop of attitudes and preferences, let's focus on music applications. Roughly half of consumers under 45 expressed interest in AI for music, predominantly interest in AI for enhancement of music experience, meaning deeper personalization of the experience and customization of music. Restoring, remixing and reinterpreting favorite songs. And interactive and cocreative music experience. These emerge as key triggers of consumer interest and perceived value. The expression of interest translation to some of the most important components we are focused on with the partners Lucian highlighted, [indiscernible] the innovative new AI music services. What consumers are injecting and what they want to embrace will define the business landscape of significant opportunity for UMG moving forward with AI innovation.

And with that, I'll turn it over to Matt.

Thank you, Michael. 2025 was another excellent year for UMG, both creatively and commercially. Lucian outlined the strong sustained performance of our artists, songwriters and company, and how our multipronged strategy will continue to propel our growth. Before I get into the details of our financials, I want to address our proposed U.S. listing.

With the uncertainty in the market creating meaningful dislocation in valuations, our Board does not see this as the right time to move ahead with the listing. Should that change, we will update the market.

Turning to our results. Once again, in 2025, we achieved healthy growth on both the top and bottom line. As always, we present our results on a constant currency basis. FX movements impacted 2025 revenue growth rates by 3%. And based on currency markets, we expect 2026 to include a 4% to 5% headwind to revenue. For the year, in constant currency, revenue grew 8.7%, which was more than 1 point of acceleration above the previous year's growth rate, and adjusted EBITDA grew 0.6%. This resulted in an adjusted EBITDA margin of 22.5%, in line with the prior year.

Cost savings and operating leverage helped us maintain margins for the year despite headwinds from revenue mix and [indiscernible], cost pressures in our merchandising business and incremental overheads from business combinations. 2025 adjusted diluted EPS grew to EUR 1.03, up from EUR 0.96 in 2024. We remain on schedule with our EUR 250 million cost savings program, which began in 2024. We achieved our planned EUR 90 million in cost savings in 2025, including the expected EUR 40 million in savings in the second half of the year. We continue to expect that an incremental EUR 40 million to EUR 50 million in Phase 2 savings will be realized in 2026, with the remaining EUR 35 million to EUR 45 million benefit to benefit 2027.

Before turning to the results for the quarter, I'd like to mention certain items that impact the comparability of our results versus the prior year. This detail is laid out on the slides you see in front of you as well as in our press release.

First, the fourth quarter of 2025 includes a legal resolution contributing revenue of EUR 45 million and EBITDA of EUR 26 million. This is booked in downloads and other digital revenue in recorded music. We call out settlements for purposes of comparability. But as a reminder, legal recoveries are common in our business and represent real revenue earned from the copyrights we own. In fact, you may recall the fourth quarter of 2024 included two legal assessments. Together, they accounted EUR 40 million of revenue and EUR 29 million of EBITDA, and were booked primarily in recorded music licensing with a small amount in music publiclishing.

In addition, the fourth quarter of 2024 included catch-up income of EUR 20 million from a DSP partner related to new product rollouts in the second and third quarters of 2024. This was booked in recorded music subscription revenue and had associated EBITDA of EUR 12 million. Since this revenue related to activity in the second and third quarters of 2024, it does not impact comparability for the full year results.

So with that out of the way, let me turn to the quarterly results where I will also provide figures adjusted for the items impacting comparability. In the fourth quarter, total revenue grew 10.6% in constant currency. Adjusted EBITDA grew 6.4%, while adjusted EBITDA margin of 22.5% was 70 basis points lower than the prior year quarter. Excluding the items impacting comparability in both years, total revenue grew 11.2% and adjusted EBITDA grew 8.6%. Margin was down 40 basis points to 22.0% primarily due to headwinds from revenue mix and repertoire mix in Recorded Music, and cost pressures in our merchandising business. Now let me turn to the results of each of our business segments.

Recorded Music revenue grew a very strong 13.9% for the quarter and 9.3% for the year. Excluding the items impacting comparability, Recorded Music revenue grew 14.4% for the quarter and 9.1% for the year. Recorded Music adjusted EBITDA grew 9.6% for the year. Excluding items impacting comparability, adjusted EBITDA grew 9.7% in 2025. Adjusted EBITDA margin expanded 20 basis points to 25.5%. The [ method ] of cost savings and operating leverage more than offset margin headwinds from repertoire mix, outside growth in lower-margin physical sales and incremental overheads from business combinations. The margin pressure from repertoire mix includes strong growth in Virgin Music, which has a different business model and margin structure than our traditional frontline label business.

Looking further at Recorded Music revenue. Subscription revenue grew 7.7% for the quarter. Excluding the DSP catch-up income in the fourth quarter of 2024, subscription revenue grew 9.6% for the quarter, largely thanks to continued healthy subscriber growth at many global, regional and local DSP partners. 6 of the top 10 markets, including the U.S., saw high single-digit, or double-digit subscription revenue growth. The acceleration in subscription growth in the fourth quarter was primarily driven by retail price increases in some smaller markets, which more than offset minor 2024 price increase benefits we have now begun to lap.

Subscription revenue grew -- Subscription revenue grew 0.6% for the year, not very different from the rate of growth seen in 2024. Even with a lower contribution from pricing, and encouraging results as we look forward to the benefits still to come from our new streaming 2.0 deals. 2025 growth did include an approximate 1% benefit from various acquisitions. We expect 2026 subscription revenue to benefit from improved wholesale rates in these agreements with the benefits layering in throughout the year.

Ad-supported streaming revenue grew 9.3% in the fourth quarter and was up 4.7% for the year. Stripping out some contractual benefits in the quarter, underlying growth was mid-single digits and was driven by slightly better performance of several key platform partners. Physical revenue grew 21.3% in the fourth quarter, and 11.4% for the year. The strength in the fourth quarter was largely driven by [indiscernible] sales of Taylor Swift's, the life of a [indiscernible], which drove outsized direct-to-consumer growth in the U.S. and Europe.

License and other revenue also performed well, up 18.1% in the fourth quarter and 11.0% for the year. Excluding the legal settlements in the prior year, license and other revenue grew 26.8% in the quarter and 13.6% for the year. In addition to underlying licensing growth, the quarter benefited from strong live events and other related income, primarily in Japan, as well as from a compensatory repayment as part of a strategic licensing agreement with an AI music platform.

Turning now to Music Publishing. Revenue grew 1.4% in the quarter, or 2.8% excluding the prior year settlement referenced earlier. The slower growth in the quarter was due to the timing of collections from certain societies and other sources, which helped results in the fourth quarter of 2024. Underlying growth in the business remains healthy. While the growth rates vary, Music Publishing reported revenue by quarter in 2025 was much more consistent than 2024.

The performance of our publishing business is better [indiscernible] on a full year basis. In 2025, Music Publishing revenue grew 9.3%, or 9.8%, excluding the prior year settlement. The strong Music Publishing growth for the year was fueled by strength in digital and synchronization revenue while performance in [indiscernible] revenue also grew. The growth benefited from the inclusion of core and a major television studio business win in this year's results, and we have now lapped the inclusion of both of these items. Music Publishing adjusted EBITDA grew 10.0% for the year, or 10.5%, excluding the items impacting comparability. And adjusted EBITDA margin expanded 20 basis points to 24.3%.

Moving to merchandising. Revenue was flat both in the quarter and for the year as this is a transactional business with release and to schedule driven volatility. In the fourth quarter, growth in touring and direct-to-consumer revenue offset lower retail sales. Merchandising adjusted EBITDA for the year declined 61% due to higher manufacturing and distribution costs, driven by both product mix and broader cost pressures. We are continuing to take steps to improve the profitability of our merchandising business, including investing in our D2C business and working to reconfigure our manufacturing supply chain. Net profit for 2025 amounted to EUR 1.53 billion, compared to EUR 2.09 billion in 2024, resulting in earnings per share of EUR 0.84, compared to EUR 1.14 last year.

The decrease in net profit in 2025 was due to a smaller increase in the valuation of investments in [indiscernible] companies, which increased EUR 283 million in 2025, compared to EUR 1.2 billion in 2024. Net profit included the EUR 227 million in noncash share-based compensation expense of 2025, compared to EUR 329 million in 2024. We expect a similar level of share-based compensation expense of 2026. In addition, net profit reflects restructuring costs of EUR 95 million in 2025 related to our strategic organizational redesign, as well as EUR 45 million of costs related to our U.S. listing and certain M&A advisory costs compared to EUR 169 million of restructuring costs in 2024.

Adjusted net profit grew 7.0% to EUR 1.91 billion in 2025, resulted in adjusted diluted EPS growth of 7.3% to EUR 1.03, compared to EUR 0.96 in 2024. In line with our commitment to pay a dividend of at least 50% of our net profit as adjusted for certain noncash items, UMG has proposed a final dividend for 2025 of EUR 514 million, or EUR 0.28 per share. If approved at our AGM, this would bring our full year dividend to $0.52 per share, in line with our 2024 dividend.

Before I turn to [indiscernible], I'd like to take a moment to talk about the importance of our long-term minded and financially disciplined reinvestments in our business. With our focus on long-term value creation, we continue to reinvest in the healthy growth we see enduring in our business for years to come. This could take a number of forms.

For one, it, of course, includes signing new artists and resigning, broadening and extending our relationships with existing artists. It includes investing in our infrastructure and technology to maximize opportunities in an evolving landscape. For example, around AI, data and analytics, direct-to-consumer and superfan efforts. It includes the addition of music and publishing catalogs to our best-in-class collection, and it also includes M&A., as we strengthen our presence in high potential music markets and expand our independent label services businesses through Virgin Music Group.

I'd like to take a minute to speak about the resigning of artists and specifically royalty advances. As a reminder, advances are recoupable against artist's future royalties. Cash royalties are paid once an advance is fully recouped. There's a very low level of risk and advantage to our most established artists, given that we have a long history of how they have performed, the visibility of the returns, and a unique understanding of where opportunities exist to expand our partnership beyond recorded music, or music publishing rights.

Further, deals are most often structured to extend until advances are recouped, giving us added protection. The advances are normally recoup not just through the future releases from our artists, but also the catalog of the prior work that audiences continue to engage with. Our spend on advances is a strong reflection of the health of our business. We have an unprecedented roster of the world's best artists, which continues to expand. And we expect continued healthy growth in the monetization of our robust catalog of songs and recordings.

In 2025, we proactively extended and expanded deals with some of our big recording [indiscernible] and songwriters, as we expect to do in 2026 as well. We've given a successful long-term relationships with our superstar artists and songwriters as the truest reflection of the value UMG provides them. In many cases, these artists are not only extending their existing partnership with UMG, but broadening into new areas where they haven't historically worked with us. It's important to recognize that advances in 1 year don't typically relate to revenue in that particular year, and recruitment is not necessarily associated with advances made in the same year. Therefore, it's difficult to draw any meaningful conclusion from looking at net advances in a given year, or from advances as a percent of sales.

Looking over a longer period allows for a more meaningful analysis, so consider this view of the past 6 years. Between 2019 and 2025, gross advances grew at an 8% CAGR. During the same time frame, UMG's revenue grew by 10%, and adjusted EBITDA improved 14%. In combination with the other areas of investment I mentioned such as accelerating our investment in Virgin Music and expanding our growth in high potential markets, we have put in place a EUR 1 billion bridge facility to help fund this investment cycle. With the underlying growth in our EBITDA, our leverage remains unchanged at 0.9x as of December 31, 2025, and we are committed to maintaining our current credit ratings.

UMG is the company that is today due to the consistent investment in the future that Sir Lucian and the team have made year after year. We remain financially disciplined and are best positioned to assess and value any music assets in the market. The level of investment in our sector by nontraditional players in recent years shows the conviction that others have about the future of music. And we couldn't agree with that more. Our optimism about the future means that we intend to continue our disciplined investing to ensure that UMG remains the industry leader.

Now let me turn to free cash flow. In 2025, our net cash provided by operating activities before income taxes paid was EUR 2.14 billion, compared to EUR 2.10 billion in 2024. As I mentioned, 2025 included a step-up in royalty advance payments related to the timing of major artist renewals. Royalty advance payments, net of recruitments, amounted to EUR 402 million in 2025, compared to EUR 186 million last year. Income taxes paid increased to EUR 403 million from EUR 349 million in 2024. Our net interest and other financing activities was EUR 90 million, compared to EUR 70 million in the prior year. Free cash flow before investing activities amounted to EUR 1.6 billion in 2025, similar to '24. Conversion to free cash flow before investments was 55% of adjusted EBITDA. While this is at the lower end of our historical range, it reflects the variability of the timing of artist advances, which I discussed the importance of a moment ago.

This significant cash generation allowed us to continue our long-term investment in the business. We spent EUR 854 million on investments in 2025, including on CapEx, catalogs and other strategic acquisitions, compared to EUR 1.1 billion in 2024. Free cash flow amounted to EUR 702 million compared to EUR 523 million last year, driven by the strong cash generation of the business and lower level of investments year-over-year.

To give you a bit more color on our investments, in 2025, we spent EUR 290 million on catalog acquisitions net of divestments of intangible assets, similar to our net spend of EUR 266 million in 2024. The divestments include the catalogs transfer to Board, as well as other intangible sales. We spent EUR 195 million on CapEx and other intangible asset investments, which mostly includes CapEx-like software investments compared to EUR 183 million in 2024. We expect CapEx to be EUR 100 million to EUR 200 million higher in 2026 due to real estate projects in a number of our key locations.

The remainder of our other 2025 investment spending of EUR 379 million focused largely on deals which push forward our strategic initiatives, including deals in Thailand, Vietnam, Indonesia and Japan, as well as certain superfan initiatives. We also used EUR 104 million on further [indiscernible]. This number will obviously be higher in 2026 with the inclusion of the Downtown and [ XL ] investments together with activity still to come during the year.

Before we move to Q&A, I want to take a moment to comment on our recently closed Downtown acquisition. For purposes comparability, we plan to break out quarterly revenue and EBITDA for Downtown in 2026. To give you a sense of the scale of their business, in 2025, Downtown's unaudited results show revenue of EUR 891 million, and EBITDA of EUR 40 million. With the strong 2025 results, we paid a 17x 2025 EBITDA on a pre-synergy basis and expect the post-synergy multiple to be closer to the 13x. We're very excited to welcome Downtown to the UMG family, and I'm encouraged about the future for Virgin Music Group.

In summary, 2025 was another year of strong financial, strategic and operational performance and provides us with the optimism for the opportunities ahead of us in 2026 and beyond. And with that, Sir Lucian, Boyd Muir, Michael Nash and I will now take your questions. Operator, please open the line for Q&A.

[Operator Instructions] The first question goes to Omar Mejias of Wells Fargo.

Maybe first on subscription growth. You've now delivered subscription growth of 8-plus percent over the past 6 quarters with little to no material benefit from pricing and now growth this approaching double-digit levels with streaming 2.0 agreements kicking in and DSPs implementing price hikes. Are there any offsetting items that would prevent subscription growth from further accelerating over the next couple of quarters? Just trying to get a better understanding on some of the puts and takes impacting growth going forward.

Thanks, Omar. Let me start with that, and then Michael will add some color commentary as well. So thank you for pointing out the strong growth we've had for 6 quarters now over 8%, as you say, without really the benefits of streaming 2.0 benefits kicking in.

In terms of any offsetting items, of course, the only thing I refer to is, as I said in my prepared remarks, we had a small benefit last year from some of the companies we added. But we expect to see the pricing changes kick in during the course of 2026, you won't see a full effect come in all at once as of January 1. But as you said, we're excited that we've created this level of momentum as we now come into this new period of time.

So with that, Michael, I'll let you add.

Let me just add, referencing Capital Markets Day, we provided a framework for thinking about the streaming 2.0 deals that we were looking to implement. We've now announced 3 of those streaming 2.0 deals. As Matt said, we're looking for the benefits from the rate rises to start to impact the results. And I would still reference the 8% to 10% CAGR midterm guidance that we gave you for the period from 2023 to 2028. That's the target that we're delivering to. We would be delighted if we have opportunities to accelerate. But at this time, I would just focus on the fact that we establish the game plan. We're executing the game plan, and we expect to be able to continue to deliver to the targeted guidance.

The next question goes to James Heaney of Jefferies.

Can you just talk about the strength that you saw in streaming revenue in the quarter? How much of that do you think is overall improvements to the ad products at the DSPs versus just general ad market strength? Anything to parse out there would be helpful.

Yes. Thank you for the question. As I mentioned in the remarks, we have a diversity of partner services and formats in every quarter. We see some differences in the comps related to different deal terms and timing of renewals. About half of the growth in 4Q was actually due to a contractual benefit that came through. I think if you look at the low to mid-single digits, underlying growth posted in prior 3 quarters, that gives you probably a better sense of where the -- as we think about that revenue stream going forward there. So certainly enjoyed the jump up there in the fourth quarter, but would expect something more in line with prior quarters going forward.

Michael, you can talk a little more about our ongoing efforts in that space.

Yes. Moving forward, we do continuously urge caution in revenue growth expectations here. As we have reminded you all on these calls over the last several quarters, but we remain highly focused on driving growth over the midterm. And -- what we reflect on as we look at market evolution is there is a secular migration of advertising spend from analog to digital. We see a focus on video and social as being very attractive categories to be recipients of that spend. We believe in working with our partners on better monetization of ad support listening, the increased engagement with social video platforms, and we do expect to see sustained growth over the midterm in ad supported.

The next question goes to Julian Roch of Barclays.

Two questions for Matt, if I may. On [indiscernible] acquisition, you did [ 280 ], which was higher than [indiscernible] my understanding is that [indiscernible] would some of the catalog acquisition that you had done directly in the past. So could you give us an indication for [indiscernible] in 2026? I understand it depends on the opportunity, but some indication would be useful.

And then you had a whole speech about net content investment in [indiscernible], how it comes with positive returns. But you also said that '26 would see an elevated level like 2025. So is the interpretation that the '26 level will be broadly around EUR 400 million of [ '25 ]? Is that the right interpretation of what you said?

Yes. Thank you, Julian. Thank you for the question. So look, '26 advances will depend on when certain artist deals close, but it's really not [indiscernible] that in a growing industry, where royalties are increasing, the advances would all be increasing. So as I mentioned earlier, since 2019, advances have grown by an 8% CAGR and revenues have grown by 10%. So you can see certainly, those things are moving together. And just based off of the -- both the roster of artists that we've had for a while, and you heard from Lucian's comments the success we've had with new artists, again, in 2025, as shown at the two award shows over the past couple of weeks that we continue to bring more successful artists into the roster, and that's going to continue to drive advances that we pay out and also recoup again.

So we'll wait and see which deals close during the course of the year to see where that goes, but I actually see increases in our advances outstanding as a sign of a healthy growth in the industry going forward.

In terms of expectations around catalog acquisitions in 2026, and Boyd maybe you can jump in on this one as well. Again, it's a little bit of very early in the year here, and we'll see what comes out. We're excited about the progress the court has made as they continue to acquire catalogs as we work closely with them. As I mentioned in my remarks, we had not only our investment -- our initial investment in them in 2024, we made an incremental investment last year because they are continuing to find good catalogs to invest in and we're happy to partner with them and expect to continue to see strong volumes of catalog transactions, and we will be in a fair share or more of those, I'm sure as the year goes on.

I mean excuse me, [indiscernible] just to add to what, Matt [indiscernible] You said we've got very clear if you look at the priorities that are the strategic priorities that Lucian [ runs through ] you. Clearly, aligning ourselves in the growth markets to a similar market share position as we have in the more developed markets is incredibly important, particularly as we see the increasing number of subscribers being added into those growth markets. So we've stated that as our objective.

One aspect of this is clearly is M&A. It's all local language. The deals are all relatively [indiscernible] But over the last 3 years, we've acquired 18 businesses in these growth markets, and we're looking at -- we have a pipeline of deals that we're working on at the moment. And just similarly on [indiscernible], has performed very well. 20 capital acquisitions it is basically [indiscernible] first full year. [indiscernible] been part of the -- associated with Universal Music [indiscernible] And also what is good is that their ability to attract a long-term -- long-term time horizon investors has been very strong in 2025. So I think we're very positive about where we are with [indiscernible].

The next question goes to Peter Supino of Wolfe Research.

I wanted to ask you a question at the intersection of investment and growth. As your cash investment pace normalizes in the '27 or 2028 time frame as contemplated in your Capital Markets Day. Can Universal still maintain a 7% like sales growth rate which was the view expressed at that time? Or is that a growth rate, which includes the normalized benefits of heavy acquisitions like you've made in the last 2 years.

Yes. Thank you, Peter. So look, certainly, when we gave Capital Markets to guidance, we were focused on the view of the business about 5 years at that point in time. I would say, [indiscernible] the business today, there is nothing that changes our positive outlook for the business. Not just through 2028, but beyond. Certainly, we expect to continue to invest in the business as well, and that will supplement the growth. But there is still significant runway in the core part of streaming and subscription business for both increased subscriber volumes and increase in ARPU. We don't expect those things to in aggregate, or flat line 3 years from now.

So Michael, I don't know if you want to add anything as we...

I think that everything we've seen with the evolution of the market makes us confident in what we have projected as the performance of the business on an organic basis. So we're not, at this point, saying that we need to change the allocation of cash to support the objectives that we identified, which we're delivering to.

And the other thing that I would add in the guidance that we gave, we did note that -- that guidance did not include any transformational M&A. And we talked, Matt, and Lucian talked about the acquisition of Downtown, and that clearly is a transformational transaction.

The next question goes to Clay [ Griffin ] of [indiscernible]

Matt, you framed the advance -- the change in advance well, I think. But just maybe just step back and explain, or help us think through the competitive dynamics in that space. Are you seeing renewed pressure from PE in some of these JV structures? And how is that impacting your ability to retain top-tier talent?

So great question. As I think about it, we see more activity in the catalog space than in the advanced space in terms of those, what I would refer to as newer entrants to the music business. So that's where we see them show up more. But as I said in my remarks, we're advantaged from the standpoint that our view of the value of any music asset is based off of the largest data set in the industry. So that helps us ensure that we believe we know the right value for each catalog that comes to market and is available. But we do see more of them showing up in processes. We're also involved in the catalog space more than the [indiscernible]

The next question, go to Michael Morris of Guggenheim.

Wanted to ask first, just go back to the first question in your response about subscription growth in 2026. It sounded like your answer implied that -- or maybe explicitly said that you expect the growth rate to be within the range that you provided at the Investor Day of 8% to 10%. Is that a fair characterization? Or do you think that this is one of those years where you could exceed that range of growth?

And then my second question is about these consumer-facing AI services. If I could, they appear close to rolling out the majority of the discussion seems to be around newer players like Udio and [ Clay ], rather than sort of your established DSP partners. Do you expect the majority of that engagement with AI tools to come from new players? Do you expect launches from your DSP partners? And do they have the rights to launch products at this point?

Yes. Let me start with your first question, Michael, thank you for both of them. The -- just to be clear, while I provided some factors that will drive subscriber growth this year, and we're certainly excited about having the new deals actually show up in our revenue streams this year. I did not say that our expectation is that subscription growth this year would be in the range that we provided for the full 5-year period [ of 8 to 10 ]. So we'll see where it plays out during the year. We're confident that with the continued growth we see and those new price points kicking in, there will be a positive benefit for 2026.

Michael, I'll let you [indiscernible]

[indiscernible] The work that we've done over the last with the DSPs. They feel like our established business partners. And of course, they are. But you have to remember that 15 years ago, no one had ever heard of them. So the work that we're doing and the work that they're doing, Spotify, Apple, Amazon, YouTube, obviously. What I've seen, I'm extremely encouraged by. And we will be working with them. We are working with [indiscernible] I'm not able to talk about the array of other conversations that we're having with companies and platforms which are equally dilitative and exciting and well funded.

They're investing many, many billions in infrastructure, as we all know. And whenever there's a new technology, any format comes out of it. So we've got an encouraging environment where we're working to keep every single format that we have going, growing and improving in terms of what the technology and the products can provide. At the same time, is -- and I've said this before, we want to be and are the [ hostess with the mostest ]. We want to be every single dinner party that there is around town. And that's what we continue to do.

These formats and these businesses are not mutually exclusive. We are working with them all. And it comes back to why we're as excited about what the products are about the opportunities for [indiscernible]. I've seen them. They're incredibly compelling. In the same way that I saw ad-funded streaming, and I saw that the dream of its streaming was going to be into premium subscription. And we are right -- we've seen this. I've done it. We've managed these transformations.

If you really want to go down memory lane, I've gone through from [ LP Vinyl ] into the [ CD ] then into the digital downloads. I like what's going on. I like what I see, and we're attacking it, and we're excited by it.

The final question goes to Sylvia Cuneo of Deutsche Bank.

I wanted to ask about Downtown Music. Since the completion of the acquisition, could you please elaborate on the first strategic priorities for the business and the main revenue drivers for 2026? Any color on the recent terms will be helpful.

And then secondly, regarding your AI partnerships, particularly with [ Audio ], can you comment about what is expected as a contribution of the audio licensing to your 2026 finances, perhaps at a high level and from when? And if you could comment about the potential AI licensing opportunities pipeline in 2026?

I'd like to just comment before I hand it over to the team on some of the specifics. It's on high-level strategy with regard to downtown in the same way that I spoke just a few moments ago about sort of parallel businesses and parallel activities, I see exactly the same with Downtown.

You can see our performance year in, year out. For the last 3 years, we've had 9 out of the top 10 best-selling artists in the world. So that's the top of the market. But we are very aware and we can all see that the rest of the market is also growing. So Downtown gives us an opportunity to grow our artist and label services, and we've got a 2-step twin approach to everything that's going on within the marketplace. So in the same way that we talk about Mrs. GREEN APPLE, or [indiscernible] in Japan, or BTS out of Korea. We are also looking at and talking about tuck-in investments and bringing in entrepreneurs and providing label services throughout the rest of the world through the Downtown [indiscernible] strategy.

You have to remember, Virgin is, I suppose, the brand name is Virgin acquired Downtown. And we also have another company in there, which is a white label business called [indiscernible]. So we've actually bought 3 interfacing businesses at various stages of the artist entrepreneurial label services business and function, which is growing. And I'm excited about what we're doing, and I'm excited that we're able to close Downtown, and that's one of the reasons why we did it. We're covering every single blade of grass in terms of region, content, culture, genre, format technology, and that's how we're doing it.

With respect to the second question regarding the planned launches of some of the announced new services and the pipeline. I think that we've said publicly in the announcement of some of the services that they have plans for launching this year. To be more specific about that, obviously, that would be a conversation with the individual services, but we're working to support the launches of the partnerships that we've entered into.

In terms of giving you any guidance with revenue contribution, that's not something that we typically do in any category or would be doing with respect to the launch of new services. But in terms of the pipeline, I'm going to direct you back to -- Lucian called an action note in October of 2025, in which she talked about a dozen different partnerships potentially being in the pipeline. We've obviously delivered on a number of those new deals since then. But you can rest assured that we're speaking with every single relevant party whether that's a new entrant, or that's an established platform about potential to harness AI innovation in developing their services. So we're very focused in delivering on that pipeline.

With respect to scope of opportunity. One point that I would make is we've talked about super premium, and our research suggesting that 20% of the current subscriber base is the target for a significantly improved offer, they'd be willing to pay double the current subscription price for. What's happened over the last year is that AI innovation has kind of overtaken the conversation around technology innovation with all the service providers and with respect to the evolution of music. We're going to see AI being a significant component of what will become the super premium tiers of 2026 and beyond. So that gives you some sense of scope of opportunity.

But then as Lucian mentioned, AI is not just an incremental revenue opportunity. AI is an introduction of a new set of formats. This is a [indiscernible] change in the landscape with respect to innovation and the evolution of music. So we believe that this is something that, over time, implemented in a number of different ways, including things like agentic AI, could potentially lead to significant opportunity for customer value realization at the end of this decade and into the next.

Thank you. This now concludes today's call. Thank you all for joining, and you may now disconnect your lines. Goodbye.

Good evening, and welcome to Universal Music Group's Third Quarter Earnings Call for the period ended September 30, 2025. My name is Alex, and I will be your conference operator today.

Your speakers for today's call will be Sir Lucian Grainge, Chairman and CEO of Universal Music Group; and Matt Ellis, Chief Financial Officer. They will be joined during Q&A by Michael Nash, Chief Digital Officer; and Boyd Muir, Chief Operating Officer. [Operator Instructions] As a reminder, this call is being recorded.

Please also let me remind you that management's commentary and responses to questions on today's call may include forward-looking statements which, by their nature, are uncertain and outside of the company's control.

Although these forward-looking statements are based on management's current expectations and beliefs, actual results may vary in a material way. For a discussion of some of the factors that could cause actual results to differ from expected results, please see the Risk Factors section on UMG's 2024 Annual Report, which is available on the Investor Relations page of UMG's website at universalmusic.com.

Management's commentary will also refer to non-IFRS measures on today's call. Reconciliations are available in the press release on the Investor Relations page of UMG's website. Thank you.

Sir Lucian, you may begin your conference.

Thank you. Hello, and welcome to all of you for joining us today. I'm very pleased to report that for our third quarter, we once again continued to post strong financial results whilst also making significant advances on the implementation of our strategic plan.

For the quarter, revenue grew 10% and adjusted EBITDA grew 12%, both in constant currency. Matt will go into greater detail on the numbers later. But before he takes the mic, I will focus my remarks today on 3 strategic areas.

First, how we continue to propel our new and established artists' careers to new heights, including how we extend the value of their IP by bringing our artists' music and stories into areas such as feature films.

Second, our work with partners to develop commercial and creative opportunities for artists, songwriters and fans, specifically in leveraging responsible GenAI technology.

And third, our ever-growing presence in established and high-potential markets around the globe.

I'll begin my remarks by highlighting just a few of the stunning successes our artists continue to rack up around the world. In the U.S., UMG had 7 of the top 10 albums for the third quarter, with Morgan Wallen, I'm the Problem at #1, and our publishing company had interest in 7 of the top 10 albums.

And of course, there's Taylor Swift. What Taylor has achieved with her 12th studio album is literally breathtaking. The biggest first week in music history now belongs to The Life of a Showgirl, over 4 million U.S. and 5.5 million global album equivalent sales. The album shattered a slew of other records as well. By debuting at #1 on the U.S. Billboard album chart, Taylor now has the most #1 albums, 15 by any artist in the 21st century as well as the most #1 albums ever by a solo artist. I can't tell you how proud we are of her.

The soundtrack for the animated film, KPop Demon Hunters on Republic continues its historic chart success, twice hitting #1 in the U.S. The lead single Golden has spent multiple weeks at #1 around the world, including 9 weeks in Australia and 8 weeks in both the U.K. and the U.S. It is also the first soundtrack album in U.S. history to have 4 of its singles in the top 10 of the US 100, all at the same time.

Sabrina Carpenter's Man's Best Friend also debuted at #1 in the U.S., spent 2 weeks at #1 in the U.K. and hit #1 in 13 other countries as well. It's her second #1 album.

And KPop Group Stray Kids album Karma is their seventh #1 album in the U.S., breaking the record for the most #1 albums by a group on the Billboard 200 chart this century.

I'm excited about the progress I'm seeing that's happening in the U.K. market as well. Olivia Dean secured the #1 album spot and the #1 single, a feat that made her the first British female solo artist to claim both top spots simultaneously since Adele did in 2021. And also in the U.K., we're thrilled that Sam Fender was awarded the prestigious Mercury Music Prize for his third album, People Watching.

That's the kind of artist development that we like. Something which means a great deal to us as a global company is we're thrilled to see several of our Japanese artists now beginning to gain traction globally. As you know, Japan is the world's second largest music market, but there's been a misconception that opportunities for local talent outside of Japan are limited. Well, I'm extremely proud to report that UMG is shattering that misconception in several ways.

For example, BABYMETAL, the group released its first album after signing with Capitol in the U.S. in August. The album debuted at #9 on the Billboard 200, making them the first Japanese group ever, ever to reach the top 10 in the U.S. in partnership with our Japanese company.

Here's another example, the recent tour by superstar Ado in 33 cities across Asia, Europe, the U.S. and Latin America, attracting 0.5 million fans, was also a historic first for a Japanese artist purely outside of Japan.

And here is a third example of a Japanese artist gaining global traction. Fujii Kaze, his enormous success with his third album, released in September by Republic Records and next year, he's set to perform at Coachella. This is quite a major development. I've also believed that we can break more local talent from Japan around the world. I'm really thrilled to see this progress, and it's really, I think, what sets us out and defines as a creative company.

Helping our artists reach new levels of success also means extending their IP in ways that deepen connections with their existing fan base whilst introducing their music to a new generation of fans. One way we do this is through film. For example, the documentary produced by UMG's Polygram Entertainment, offering an intimate look at the life and legacy of Mexican-American artist, Selena. The film was awarded at the Sundance Film Festival earlier this year and was acquired by Netflix, who has recently announced its November release.

Amazon MGM Studios has picked up Man on the Run, another Polygram Entertainment documentary, exploring Paul McCartney's creative rebirth after The Beatles break up. Man on the Run will be released in select theaters and then hit Prime Video globally in February next year. It will coincide with tour dates across North America this fall as well as the release of his book, Wings: The Story of a Band on the Run. I've seen it. And it's special, thoughtful, dramatic and emotional.

The last film I'll mention is Song Sung Blue from Focus Features. It stars Hugh Jackman and Kate Hudson as the Neil Diamond tribute band Lightning & Thunder. The film features performances from Neil Diamond's iconic songwriting catalog and opens in the U.S. theaters on Christmas Day.

I'm not exaggerating when I say I could go on and on about many more of our other artists' stellar achievements and projects. But I'd like to shift gears and speak a bit about our strategic advances, starting with our work with partners to develop commercial and creative opportunities for our artists as well as their fans.

First, I'm pleased to report that we have successfully concluded our third major Streaming 2.0 agreement, this one with YouTube, covering both recorded music and music publishing. The agreement includes all aspects of YouTube's various music services and platforms, embodies our artist-centric principles and drives greater monetization for artists and songwriters. And as part of our new YouTube deal, we've secured really important guardrails and protection for our artists and writers around GenAI content, which brings me to my second topic.

We're seeing significant creative and commercial opportunities in GenAI technology, which is why UMG is playing a pioneering role in fostering its enormous potential in music.

Our foundational belief is that artists, songwriters, music companies and technology companies, all working together will create a healthy and thriving commercial AI ecosystem in which all of us, including fans, can flourish. For several years now, we've been driving initiatives with our partners to put artists at the center of the conversation around GenAI. We struck artist-centric agreements, establishing foundations and parameters for innovation, new products -- sorry, innovative new products that will unlock the power of its revolutionary technology. And both creatively and commercially, our portfolio of AI partnerships continues to expand.

You will have seen, I hope, yesterday's announcement that we have reached an industry-first strategic agreement with Udio, under which the companies settle copyright infringement litigation and will collaborate on an innovative new commercial music consumption, interaction and hyper-personalization streaming product.

The new platform, which is expected to launch in 2026 will be powered by cutting-edge generative AI technology that will be ethically trained on authorized and licensed music and will provide further revenue opportunities for artists and songwriters and UMG.

The new subscription service will transform the user engagement experience, creating a licensed and protected environment to customize stream, share and share music responsibly on the Udio platform.

We also entered into an agreement and then a strategic alliance with Stability AI to codevelop professional AI music creation tools for creators of video, images and now music. The purpose of this agreement is to provide our artists and labels with an opportunity for direct feedback into the construction of professional studio music product that uses AI to generate music ideas and demos.

As we've said all along, artists should be at the center of the AI conversation, and this agreement aligns closely with the objective. These advancements are made with both global and regional partners. For example, just last month, Universal Music Japan announced an agreement with KDDI, a leading Japanese telecommunications company that will establish a collaboration to use GenAI to develop new music experiences for fans and artists in that really important market.

Even as we lead the way forward on creating commercial and creating opportunities with our new partners, we're also working closely with established partners on the AI front, which includes making sure that the safeguards are put in place to protect them and their work.

Spotify recently announced critical steps they are taking to advance our artist-centric initiatives as they relate AI. We look forward to the products that will be introduced through this partnership. As I said, at the time of their announcement, it's essential that we work with strategic partners such as Spotify to enable GenAI products with a thriving commercial landscape in which artists, songwriters, fans, music companies and the technology companies can all flourish, as I've said.

As we strike agreements with other companies, we will only consider AI products based on models that are trained responsibly. We're in discussions with numerous other like-minded companies, whose products provide accurate attributes and tools, which empower and compensate artists' products, both that protect music and enhance its monetization and the entire experience.

Ensuring safeguards is also the reason we partnered with SoundPatrol, a company led by Stanford scientists. SoundPatrol deploys groundbreaking neural fingerprinting technologies for detecting copyright infringement in music, including in AI-generated works.

Based on our experience with RAI Partners, and discussions underway with possible future partners, we can confidently say that AI has the potential to deliver creative tools that will connect our artists with their fans in groundbreaking ways and on a scale that we've never encountered. Further, I strongly believe that agentic AI will dynamically employ complex reasoning and adaptation, has the power to revolutionize the manner in which fans interact with and discover music.

Imagine interacting with your favorite music through a sophisticated, highly personalized chatbot. We envisage that exciting possibility on the horizon.

We see the bottom line like this. As we successfully navigate the challenges and seize the opportunities presented by new AI products and others yet to come, we will be creating new and significant sources of future revenue for UMG and our entire ecosystem artists and songwriters.

Now I'd like to move on to another area in which we've recently made meaningful progress, and that is the expansion of our presence in established and high-potential markets.

In Japan, we recently increased the majority stake we bought earlier this year in A-Sketch, the Japanese label and artist management business by acquiring from KDDI, its minority stake in the company.

In August, we entered into a strategic partnership with Maddock Films, one of India's most prolific Hindi film production studios in its newly formed music label, Maddock Music. Under this partnership, Universal Music India is now Maddock Music's global strategic partner for future film tracks and other businesses and product offerings. The partnership deepens our presence in domestic film music, which is the largest music category in India.

In Vietnam, Virgin Music Group formed a partnership with The Metub Company, Vietnam's leading digital entertainment and creator company. This innovative venture will focus on signing and servicing local talent and independent labels to help them grow their music, both domestically and internationally.

In Ghana, for example, Virgin Music Group took another step in its ongoing mission to invest in Africa's music and creative scene by announcing a global distribution partnership with MiPROMO, one of Ghana's longest-serving creative media platforms. I'd also like to briefly mention a significant development for our business in China, Universal Music Greater China announced the appointment of Zhang Yadong, one of the most iconic producers in the Chinese music industry to the role of Chief Music Adviser at Universal Music China. Widely recognized as a visionary whose work had defined the sound of Mandarin pop for more than 3 decades, he's going to work along with UMG's worldwide infrastructure to introduce the next generation of Chinese artists to international audiences. We're extremely excited and committed about the moves that we've made in China. And we'll be investing and are investing in next-generation local talent.

I'd like to close with this. The third quarter, whilst obviously just a snapshot, marked another great quarter where we delivered strong financial growth, drove exceptional success for our artists and songwriters, shape the future direction of our company with groundbreaking announcements and continue to expand our global footprint.

The consistency of our performance, combined with the continued execution of the strategic plan demonstrates that with UMG's entrepreneurial energy, we'll continue to bring artistry and creativity of the world's most brilliant and beloved music makers that we have to every corner of the globe and at the same time, leaning into distribution and business models for the future in new and innovative ways.

So on that, thank you, and I'd like to hand over to Matt.

Thank you, Lucian. I'm pleased to have joined a great business and team at such an exciting and promising time. And I'm equally pleased to be presenting our results for the first time this quarter.

Q3 was another quarter of solid revenue and adjusted EBITDA growth at UMG as we continue to execute the strategy the company laid out a year ago at Capital Markets Day.

On top of the continued strong predictable subscription growth we saw once again this quarter, our results also display our healthy breadth with multiple drivers of long-term growth as our strong physical and merchandising revenues reflect the opportunity to directly serve superfans. All of the growth figures I will discuss today will be in constant currency.

UMG's revenue for the quarter of EUR 3.02 billion, grew 10.2% year-over-year while adjusted EBITDA of EUR 664 million grew 11.6%, with margin expanding 40 basis points to 22.0%.

Recorded Music revenue grew 8.3% in the quarter with strong performances from the KPop Demon Hunters soundtrack, Mrs. GREEN APPLE, Taylor Swift, Sabrina Carpenter and Morgan Wallen, among many others.

Within Recorded Music, our well-diversified subscription revenue grew 8.7% for the quarter. This result was driven largely by growth in subscribers. Within the top 10 markets, there was double-digit subscription revenue growth in China, Brazil and Mexico and high single-digit growth in the U.S. and we saw a double-digit or high single-digit revenue growth from 4 of our top 5 DSP partners.

With healthy subscriber growth from a range of partners across both established and high potential markets and the monetization benefits of our Streaming 2.0 initiatives soon to follow, we remain encouraged by the trajectory of the subscription business.

Turning to ad-supported streaming, revenue was largely flat against the prior year quarter. Growth continues to be challenged by the shift to short form consumption, which is not yet adequately monetized. We plan to continue addressing this through our deal negotiations.

Physical revenue was better than anticipated, up 23%, driven by strength in Japan led by Mrs. GREEN APPLE and Fujii Kaze as well as initial shipments of Taylor Swift's latest album, The Life of a Showgirl. While physical revenue performance may be less predictable and have more seasonality than subscription revenue, it's important to note that over a longer time horizon, this is a growing business that reflects increasing demand by fans to own physical products, connecting them with the artists they love.

Moving on to Music Publishing. Revenue grew 13.6% in the quarter with digital revenue growing 17%, driven by the strength of streaming and subscription, particularly in the U.S., U.K. and China. Performance income also grew 17%. Growth in both digital and performance revenue benefited from the inclusion of Chord and a major television studio business win in this year's results.

In Merchandising and Other, revenue increased 15%, driven by the strength in the U.S. and U.K. This was a result of very healthy growth in touring merch revenue which was partially offset by a decline in D2C sales due to the timing of product releases. Our touring merch revenue strength this quarter was driven by the Weeknd, Morgan Wallen, Lady Gaga and Nine Inch Nails, amongst others.

Now let me turn to adjusted EBITDA. As I mentioned at the beginning of my remarks, adjusted EBITDA of EUR 664 million grew 12%, and adjusted EBITDA margin expanded by 40 basis points to 22.0%, helped by revenue growth, operating leverage and cost savings from Phase 2 of our previously announced realignment plan. This was partially offset by the negative margin impact of the revenue mix, in particular, the strong physical sales and touring merch growth.

We're very pleased with our results this quarter and excited by the momentum and opportunities that lie ahead. With improved Streaming 2.0 monetization just ahead of us and fans looking to engage with their favorite artists in new immersive ways, UMG is at the center of a healthy and growing industry. Thank you.

Lucian, Boyd, Michael and I will now take your questions. Operator, please open the line for Q&A.

[Operator Instructions] Thank you. Our first question for today comes from Peter Supino of Wolfe Research.

Matt, welcome, nice to work with you again. I wanted to start by asking you for your perspective on the physical business. Your comments stood out that you see it as potentially a growth business, and certainly, that's not the consensus among the investors. So I wonder if you could share any figures or thoughts that would help us extend that concept in our models?

And then the second question, if you could just talk about the investment section of the cash flow statement. It's been elevated for the last couple of years, and we have some commentary from your Capital Markets Day that it will moderate in the next couple of years. Is that a good thing or a bad thing? Do you see that investment spend as high ROI or not more maintenance-oriented?

Yes. Let me start with the second question there around the investment section. And do I think that the investments in the business are good or bad thing? They are 100% a good thing. We have the business we have today because of the investments that the company has made across many, many years now. And the investments we're making are consistent with the strategy that we laid out, whether that's continuing to support our existing roster of artists or continuing to build out where we expand.

Lucian spoke about our geographic expansion. We went into detail at Capital Markets Day about those plans, and you've seen us execute against that since then. So investments will continue to be an important part of the business as we execute on the strategy going forward. And I think you'll see that continue to be an important use of cash. And as we've discussed in the past, it is the first part of our capital allocation strategy is that investment in the business.

In terms of perspective on the physical business, incredibly proud of the results that we've seen from our artists this quarter with the strength there. As you look at the fourth quarter, certainly, we expect to see good results. I would remind you that very strong comps from the fourth quarter in Japan a year ago and the prior year that we'll be coming up against. But that demonstrates that this continues to be a growing part of the business.

And you ask if it's a good thing or not, absolutely is a good thing. What our fans are showing us is when they have opportunities to engage in many different ways with our artists, they want to do that and they will spend money doing that. So what the team has done is find ways to meet that demand that is inherently out there. So yes, you should expect to see continued growth in the physical business. Boyd, would you like to?

Yes. Thanks, Matt. Maybe just to add a little bit about the -- what you're inferring in the question, I mean there's 2 pieces to this, the old-fashioned format transformation that's going on. The reality is the CD in most of the markets in the world is very much a declining format. But we're talking about something really quite different here. This is -- this business is morphing into how we connect the fan together with the artists through a physical product, the most -- 2 most significant examples of that so far is the growth in vinyl and the collectible aspect of that.

As we've said before, 50% of vinyl that is sold is sold to people who do not own record players. So this is about a collectible.

And clearly, the growth in merchandise is just another aspect of all of this is connecting the fan together with the artist. So it's that aspect that is growing. It's not a format evolution of the audio format in itself. And a very significant part of this is now coming through us directly connecting the fan with the artists through, say, calling a D2C business or a [ D2Fan ] business, where around that new release of these album products, we are seeing somewhere in the region of 2/3 to 75% of the total volume actually coming through our own managed stores in relation to this product. So we're having a direct relationship with the fan. So that's much more about the evolution of this going rather than just being a tired old format transformation.

I'd also add that it's the fans telling us that the belief that we have in the superfan and how we're able to provide products and services, both physically as well as what they look like digitally in the future, they're telling us about behavior and about connection.

Our next question comes from Jason Bazinet of Citigroup.

I just had one question about superfan. It seems like going back to your Capital Markets Day, you guys are maybe more optimistic about this opportunity than some of the other labels. And I didn't know if that was a function of a different vision that you have about what superfan is going to be or if it's a function of maybe different agreements that you have with your artists that may allow you to participate in sort of superfan economics in a way that might be different than other record labels.

Jason, thank you for your question. And if I can infer that in part what you're asking about, goes to superpremium tiers on subscription services. I think that there is a component of it that is simply about the opportunity to monetize more valuable fans. And as we've stated before, if you look at the digital download era, the top quartile of consumers were spending 3x the average. So the propensity to spend is there. And we think about this in terms of direct-to-consumer and Matt and Boyd talked about vinyl and what that means in terms of monetizing super fandom.

There are different components to the equation but we have strong conviction about that we have invested directly in.

With respect to superpremium tiers, we're engaged with all of our partners, talking about the opportunity. There is technology change that's going to promote opportunities, I think, around innovation to introduce more sophisticated, higher value offers to consumers over time, and we're engaged in those discussions. We're encouraged to see executives at some of the platforms like Spotify talk about their excitement, their desire to get this right. Seeing great demand for different superfan segments. So it's not just Universal Music Group seeing that. We can't speak about the perception that other music companies have regarding the opportunity.

We've made our perspective clear, but I think it's important to keep pointing out that one of the world's top 5 music subscription platforms, Tencent Music in China, has, over the course of the last year plus empirically demonstrated that a super VIP product, as I characterize it, priced at 5x the average price of subscription in that market, a market regarded as a challenging market to monetize music consumption. In that market, they've gained a very, very significant traction.

They recently reported 15 million SVIP subs, 12% of their subscriber base growing at 50% year-over-year. And they said that, that resulted in a doubling of their revenue growth versus the rate of increase of subscriber growth in that reporting period. So we're seeing that in a market where you've got some innovation leadership. There's clear demonstration of the opportunity. We believe industrial logic prevails here where research clearly demonstrates that at least 20% of the subscriber base is the target market for a superpremium offer and you see a focus on innovation.

And as Lucian said, we think that AI will be a significant component of the focus on innovation in terms of new digital products in the future. We think this is going to play out over time. That's the viewpoint that we have. We can't account for the viewpoint of other music companies.

Our next question comes from Ed Young of Morgan Stanley.

I'd love to add a little bit more color on the AI partnerships, particularly if it's launching in '26. You sound confident that you'll be able to sort of solve the artist-centric monetization challenge where requests are generic or by genre style versus them being by artist name. So I'd love to add a little bit more on that.

And then second and related, you've spoken often as a management team about developing new business models and diversifying revenue streams. Do you think or do you see agentic AI companies as likely to join the distribution landscape?

Thank you for your question, Ed. I'm assuming that the first question relates to recent announcements and in particular, what we've announced with Udio. In terms of artist centricity, what's significant there is that the product vision is to focus on a superfan experience for customization, deep engagement, hyper-personalization of the experience for fans interacting through AI technology with the artists that they love.

So if you think about this in terms of where the marketplace is, from our perspective, the economics of the music ecosystem are really driven by fans' desire to engage with artists and by fans' desire to participate in music culture. So we're envisioning products that deepen both of those things that enables deeper engagement that is very artist-centric and that enables the fans to participate in music culture. So I hope I'm answering the thrust of your question. Yes, the vision regarding the products that will be enabled by initiatives we're supporting and specifically the one that we announced with Udio will be very artist-centric.

In terms of the question regarding agentic and new music models, we're very excited about what we see in terms of the evolution of the technology and as it relates to consumer interest. So we recently did some research in the U.S. market. And in that research, the readout was 50% of music consumers are very interested in AI in relationship to the music. But that's in relationship to their music experience. The thing that ranks the lowest is artist simulation, what we would call fake artists. And you're seeing there's a lack of traction around that other than the occasional novelty phenomenon that may capture some headlines. That's not what fans are interested in.

What fans say that they're interested in is AI application that makes their music service better, that improves discovery, that enables them to better organize playlist to have a better recommendation system against their express preference.

So the thing with respect to agentic AI that we see as a significant potential point of innovation, imagine a perfect seamless blending of lean forward and lean back, where the interface that you have for music consumption is in a position to understand not just your music preferences, but the films and television shows that you watch, the books that you read, the countries you travel to, the conversations that you're engaged in, really, really sophisticated management of recommendation and also an understanding of listening conduct, drive time versus dinner party versus workout.

We believe that the application of technology to really enhance the consumer experience in relationship to music appreciation, music discovery and contextual listening, that suggests a possibility that makes music all the more valuable that increases the connection between artists and band, all of that we see has been very virtuous.

Our next question comes from Adrien de Saint Hilaire of Bank of America.

I've got a couple of questions, if that's okay. Given the price increases that were recently announced by Spotify and presumably your new wholesale deal kicking in next year with that platform, do you have enough visibility today to see subscription growth accelerates into 2026?

And second question, I'm really, sorry, if I missed this in your prepared remarks, but are there any additional details that you can provide on the timing for your U.S. listing?

Yes. So thank you, Adrien. Regarding the U.S. listing, as you know, we announced in July that we had confidentially filed with the SEC. We're in the SEC review process right now. Obviously, the U.S. government shutdown makes everything there a little bit more complicated. So we're working against that backdrop. And we'll have an update of the market when we have additional news, and it's appropriate to do so. So I look forward to doing that at the right time.

In terms of the price increases on Spotify, as you mentioned, glad to see those come through. Michael, you're closer to that than anyone.

Yes, happy to elaborate there, Matt. So with respect to -- and looking into your question to make sure I'm covering the gist of what you're interested in, the price increase impacts and the outlook for 2026. Of course, we don't provide quarterly or even annual guidance on metrics like that.

In the fourth quarter, we're going to have a tough comp against some pricing changes, but we'll also see some benefit, small benefit from the Spotify price increases that were announced earlier this year. So those things pretty much trade off.

We do foresee that in 2026, we are going to start to see the pricing benefits from our Streaming 2.0 agreement.

Other than that, I would simply point to the guidance that we provided on Capital Markets Day a year ago with respect to 8% to 10% CAGR in the midterm. That's the way you should really be thinking about the impact of the price increases as they play out over time.

Our next question comes from Silvia Cuneo of Deutsche Bank.

A couple of questions from my side. The first one regarding AI, you announced 2 strategic agreements today. Could you elaborate on your expectations for future similar partnerships and how meaningful this could be in terms of financial benefits compared to, for example, social apps licensing? And specifically concerning Udio, could you help us understand the mechanics of these agreements, particularly whether there are variable revenue elements tied to Udio's growth?

And then secondly, quickly, regarding your cost initiatives, could you please remind us of the key cost areas that Phase 2 of your strategic design is addressing and in comparison, especially to Phase 1?

I'd just like to frame some of the conversation before maybe Michael or Matt actually add some of the detail. Sequence is critical in all of this. Search, the power of possibility of what the technology is providing all of these businesses, and you're talking about AI and Udio and all the other companies that we anticipate or we will make deals with. I've got -- I think it's important to say this. I have exactly the same feeling about this progress that I did 15 to 16 years ago when we were looking at what was the transaction business and the really early fledgling what was perceived at the time of the disruption of the album into something called ad-funded streaming. And then ad-funded streaming became premium subscription.

So we are in a sequence of how the technology and how the platforms with us, as a company and as an industry, integrate and learn together how to actually create products and to provide what artists want and consumers and fans want in an organized monetized way.

So we are at the front, at the vanguard of a new era. And it's one of the reasons why we're positive, we're confident and why we continue to invest right across the board in all aspects of what we anticipate will be the growth and is the growth not only in the company but in the marketplace. So on that, maybe you guys like to add some more of the actual functional details of what the question was.

That's a great strategic framing, Lucian. So within the question regarding the new agreements and our outlook, let me start out at a more general level and then talk specifically about the 2 new agreements that we've announced in the last 24 hours.

As Lucian said, we clearly established our position in this sector as being the industry leader, developing new business models, supporting new products, numerous agreements that we previously announced to enable entrepreneurs working with established platforms, and that goes back to 2023.

So the most recent set of announcements and initiatives is building on that foundation of industry leadership. And you might have noted that Lucian sounded a call to action where we started to mobilize to prepare to be able to effectively execute and implement new deals and talked about the scope of ambition being up to a dozen different conversations in which we're engaged. We're very excited about the opportunity for innovation.

With respect to commercial opportunity, as Lucian said, we believe the commercial opportunity is potentially very significant. These new products and services could constitute an important source of incremental additional new future revenue for artists and songwriters.

Now we're just preparing the way for market entry of these new products. Some of the things we've announced are 2026 in terms of scheduling scope on product launches. So it's too soon to provide commentary on more specific in terms of opportunities scope, but we do believe this is potentially significant.

In terms of product scope, the recent announcement, I think, provide a very clear indication of what we're thinking about in terms of new AI products targeting the superfan, deepening the relationship between artists and fans, enabling fans to more deeply participate in music culture and providing tools for our artists that are being responsibly developed to enable them to narrow the gap between imagination and creation of content to broaden the palette of options they have in terms of artistic tools to be able to create content.

Specific to Udio, and let me just elaborate on Lucian's comments. We entered into an industry-first strategic agreement where we've settled copyright infringement litigation and we're collaborating on this innovative new product suite, new commercial music consumption, interaction, hyper-personalization, sophisticated curation, those are the elements that are going to define this product suite.

The new platform, plan is to launch in 2026. It's going to be powered by Udio's cutting-edge generative AI technology, ethically trained, responsibly trained and authorized license music content, all those things very critical and obviously to the benefit of our artists, songwriters and to rights holders.

The new service we see as potentially really transforming the user engagement experience within a walled garden, enabling this deep interaction with the content.

And I just want to briefly highlight, in terms of artist tools the announcement with Stability AI, this is really a groundbreaking product development collaboration that we're announcing with Stability. Stability is organizing their effort to create new tools for professionals in a category of gaming with Electronic Arts, in terms of marketing, advertising with WPP, in terms of film production with their investor and Board member, James Cameron.

So UMG joins that group of significant players in their categories as the leader in the music vertical, and that puts us in a position to directly engage in a very artist-centric way the conversation with our creative community around the evolution of these tools and puts us in a position where we're going to be able to provide the best opportunity for new creative potential out of AI responsibly trained for the ranks of artists and songwriters that we work.

This is happening. It's on, and we're on.

Silvia, on the cost question you had, obviously, as you said, we're in the second phase of the program. A lot of the activity that you've seen to date has been successful in both our U.S. and U.K. platforms. Boyd, you've lived this program for the past couple of years, so you could add a little bit more detail.

Yes. Well, maybe just to take a step back to level for everyone. I mean the strategic alignment, which we announced, I guess, a couple of years ago now, it's a proactive initiative. It's not reactive. It's a proactive initiative. It's designed to achieve efficiencies and targeted cost areas, but at the same time, providing our labels with capabilities to deepen -- basically to deepen artist connections with new kind of areas of commerce, experiential and the like.

We're focused very much in designing the label of the future, providing our labels with enhanced access to highest-performing internal teams and access to additional resources. And Lucian mentioned in his opening comments actually about the success that we're seeing in the U.S. and the U.K. And there's little doubt that this is as a result of the strategic alignment initiatives that we're pursuing.

Our next question comes from Adam Berlin of UBS.

I just got one question left, really, which is, you mentioned that Q3 physical benefited from early shipments of Taylor Swift's Life of a Showgirl. Can you talk about how much of the revenue that, that album will generate has already been captured in Q3? And is there still a lot more to come in Q4?

Yes. So Adam, thanks for the question. So yes, certainly, we did see some benefit, especially with getting the initial volume out to retail stores ahead of the October 3rd launch of the album. We've never broken out results by a particular artist or a particular piece of work. Not going to do that. Obviously, the initial shipments were significant.

As Boyd said in his comments around our fan business, a significant number of vinyl sales is now in our D2C business, not going through retailers that we work with. And so those would have been on a different time line. So the vast, vast majority of the benefit from the physical sales of the album will be in fourth quarter, but we certainly did see some of the uplift, the 23% growth in physical year-over-year was due to those initial shipments, combined with the strength we saw in Japan that I mentioned. So we see this benefit, not just related to one artist. Our fans want to connect with all of our artists in geographies around the world.

Our next question comes from Joe Thomas of HSBC.

A couple of questions, please, on my side. Firstly, you were talking about the -- I think you were talking about new deal with YouTube and you've got protections across the whole gamut of what they provide. I'm just wondering if you could tie that into your comments on streaming and the difficulty of monetizing short-form video. Have you reached some sort of solution there? And what could we expect to come in the future?

And then the second question is back to the cost savings. I realize there's costs coming out. There's also costs, sounds likely, going in as you invest in the capability of the business. What is the net cost saving over the quarter, please?

Joe, thank you for your question. In terms of the YouTube deal and the benefits of the new deal, the scope of it and then also how it relates to disruption of short form and monetization of that supported.

So yes, we were very excited that we had an opportunity to complete this agreement with an important strategic partner. As Lucian said, our third Streaming 2.0 deal, we have a long-standing, very productive partnership with YouTube.

With respect to the components of the deals related to monetization, obviously, every deal-making opportunity, we consider the unique attributes of potential licensee, circumstances or category, product plans, business strategy, that certainly applies to a major and uniquely diversified platform like YouTube.

In talking about the new partnership in terms of Streaming 2.0 deal, we certainly are advancing important components of our core objectives here, taking into account these unique and multifaceted components of their platform and the foundational principles that we're carrying across in all of our negotiations with our partners. And as Lucian said, we secured key protections in the agreement on AI, which is a critical achievement in promoting interest of our artists on their platform.

With respect to monetization of short form, improved monetization of short-form video is certainly an objective that we're actively advancing across multiple deal renewal discussions, including this one.

Beyond that, I'm not going to comment on a specific component of a deal as it relates to an individual category. But our efforts to work on better monetization of short format to address the disruption the short format has brought to the ad-supported sector is a broad-based effort across multiple different deal renewal conversations.

Yes, I'd also add that we look at the rights as an overall category, and our strategic relationship and partnership with YouTube as an overall strategic partner on the music subscription, on short form, on long-form video and obviously, all the work that we're doing on AI. So it's an entire category with one strategic partner. And as the marketplace and as our products, their products, the technology grows and develops, it all blends and all sits together to actually create value for everybody.

With respect to the cost savings question, Joe, we don't really view it from the lens of the -- how you think about the net cost savings. We continue to invest in the business, whether or not we have a cost savings plan in place at a particular point in time.

When you think about the margin expansion for the quarter, up 40 basis points again this quarter, you see the benefit of those investments driving the continued revenue growth, but also the operating leverage that then delivers and that again supplemented by the cost program.

So we continue to look for ways to run the business more efficiently. As Boyd discussed, setting up -- continue to evolve the business as the industry evolves and what we do evolves so that we have the resources to continue to invest and provide the support to the business that we have. And I think you've seen the success of that.

Our final question for today comes from Julien Roch of Barclays.

Coming back on the Udio deal you just signed. Could we have some indication of the payment mechanism. Will you get a share of their revenue? Will you get micro payments every time a song is created. So some color on how the money flow will work, without giving number detail. That's the first question.

And then coming back on the deal you signed with Spotify, you gave one concrete example of what those products could be, Lucian did early on. I wonder whether we could get another couple of concrete examples of what those new AI products can be.

Julien, thank you for your questions. With respect to detail on the business models, you will probably not be shocked to hear that I can't go into granular detail. I will say this that obviously, the advent of AI with respect to new consumer products on new service categories on platforms, obviously introduces an opportunity for us to be creative and innovative in terms of the evolution of the business model and accounting for all aspects of the value that our content and artists bring to these platforms in terms of the establishment of the model's capability and in terms of the products themselves.

We're obviously looking at all the components of the consumer experience and the value created and our participation in that value. So rest assured that we're working thoughtfully with new partners and certainly with Udio and reaching the agreement with them to be able to develop a sophisticated model that is going to deliver the value to our artists and songwriters and the rights holders that it should.

In terms of more specific product concepts, with respect to how we envision the future, I think Lucian provided a great general sense of our outlook. But I would just encourage you to look at the specifics of the Udio announcement and the comments that have been made by their CEO and the comments that we've made, we now have a specific product development plan that has been set in motion by a new agreement for a service that's going to be launched next year.

I think that what's being described there is the attributes of this customization, hyper-personalization, engagement with the artist content in a superfan experience in a walled garden on the platform gives you a good starting point for envisioning what the product scope is going to be. I think it's a good example of the kind of thing that's possible.

We talked a little bit about on the horizon, things like agentic AI and obviously, that is to be constructed and developed in new conversations. So it's premature to go beyond a statement of kind of aspiration and outlook there.

Thank you. That concludes today's conference call. Thank you all for joining. You may now disconnect your lines.

Good evening, and welcome to Universal Music Group's Second Quarter and First Half Earnings Call for the Period Ended June 30, 2025. My name is Drew, and I will be your conference operator today.

Your speakers for today's call will be Sir Lucian Grainge, Chairman and CEO of Universal Music Group; and Boyd Muir, Chief Operating Officer. They will be joined during Q&A by Michael Nash, Chief Digital Officer; and Matt Ellis, Chief Financial Officer. [Operator Instructions] As a reminder, this call is being recorded.

Please also let me remind you that management's commentary and responses to questions on today's call may include forward-looking statements, which, by their nature, are uncertain and outside of the company's control. Although these forward-looking statements are based on management's current expectations and beliefs, actual results may vary in a material way.

For a discussion of some of the factors that could cause actual results to differ from expected results, please see the Risk Factors section of UMG's 2024 Annual Report, which is available on the Investor Relations page of UMG's website at universalmusic.com. Management's commentary will also refer to non-IFRS measures on today's call. Reconciliations are available in the interim financial review and unaudited condensed consolidated interim financial statements for the 6-month period ended June 30, 2025, on the Investor Relations page of UMG's website.

Thank you, Sir Lucian, you may begin your conference.

Thank you, and greetings to everyone from us here in Hilversum. As you've now had an opportunity to see UMG's strength of strong financial results continued for both the second quarter and the first 6 months of the year. For the first half year, revenue is up 7% and adjusted EBITDA is up 8.5%.

Before Boyd goes into the numbers in greater depth, I want to take a few minutes to walk you through a few achievements of which we are justifiably proud, namely the extraordinary commercial and creative successes that our artists and songwriters continue to achieve around the world and the ongoing progress we're making on the strategic evolution of our company, driving growth, pursuing new opportunities, and creating greater efficiencies.

I'll start with the artist successes. Put very simply, we provide the global platform, the expertise and the resources to support and deliver our artists' historic success. Everything we do is fueled by an entrepreneurial culture that is music-driven and artist-centric. It's a culture that is attuned to change and forever innovating artistically, commercially and technologically. Here are just a handful of examples of what that culture has recently achieved in partnership with our artists. In the U.S., for the year so far, UMG had 8 of the top 10 best-selling albums with Morgan Wallen at #1. And Universal Music Publishing Group songwriters were represented in all 10 of these albums. Of the biggest selling album debuts this year, UMG represented the top 6 with the top 5 being Morgan Wallen, Weeknd, Playboi Carti, Drake and PARTYNEXTDOOR, as well as Lady Gaga.

We also had all of the top 6 most streamed tracks for the first half of the year, including 3 from Kendrick Lamar, who had the #1 song, as well as tracks by Lady Gaga and Bruno Mars, Drake and Morgan Wallen. UMPG had 8 of the top 10 tracks on this same chart. Not only did Morgan Wallen have the #1 album in the U.S. for the first half of the year, but he also held the #1 spot on the Billboard 200 for the entire first 2 months. In the history of the Billboard 200 chart, the only male artists who have spent more weeks at #1 than Morgan are Elvis Presley, Garth Brooks, Michael Jackson and Sir Elton John, not a bad group to be immediately ahead of.

Another exciting U.S. success for us so far this year, the soundtrack of the animated Netflix Fantasy Musical KPop Demon Hunters. According to Netflix, the film has already achieved 80 million views making it one of the biggest animated films ever. The soundtrack released under a new Republic Records joint venture with Visva is the highest charting soundtrack of the year and the single recently hit #1 on the global chart.

Speaking of Global, let me take you now on a brief spin around the globe. First, Japan, the world's second largest music market by revenue. The continued success there of the band, Mrs. GREEN APPLE is truly historic. Mrs. GREEN APPLE is now the first JPop act in history whose catalog has exceeded 10 billion total streams in Japan. For the first half of the year, they've held the #1 spot on each of Billboards Japan's artist, album and song charts with Seventeen, &Team, and HYBE and King & Prince, Universal Music Japan also had 4 of the top 10 on the Oricon Albums chart, the local key indicator.

Moving over to Europe. In the U.K., UMG had 6 of the top 10 albums for the half year with Sabrina Carpenter at #1 and Sam Fender at #3. Sam's album is the U.K.'s biggest new album of 2025, the fastest-selling album by a British artist in the last 3 years and the fastest-selling vinyl album of the century. On the U.K. singles chart, UMG had 7 of the top 10 with the breakout Lola Young, Gracie Abrams, and Chappell Roan, all in the top 5. In Germany, we had 7 of the top 10 albums with Billie Eilish, Lady Gaga and The Weeknd, all in the top 5, and our local artist [indiscernible] had the #1 single.

Here in the Netherlands, where we are today, UMG had 3 of the top 5 albums and 5 of the top 10 singles, including 2 from local artists, [indiscernible] Lustrum UBSD. In France, UMG has the 2 biggest breakout artists of the year so far with Theodora and L2B gang. And finally, China, our continued strategic investment in our frontline business in that country continues to bear fruit. Universal Music Greater China signed a new partnership with Mando pop artist David Tao and his company, Great Entertainment.

Over the past 3 decades, David, who is considered the godfather of Mandarin R&B, has played a key role in redefining the sound of Mandarin Pulp. Also in China, we took a meaningful step forward in growing our multi-label operations there with the launch of Deutsche Grammophon China and Blue Note Records China. The latest expansion of 2 of the most iconic and influential labels in classics and Jazz. You can see the breadth, the blend throughout the world of our international artists, our global artists, as well as the domestic talent that we've invested in over the years and most recently.

I'd like to shift now to the second topic I want to cover, the steps we keep taking to advance our long-term strategy. First, health and wellness. Increasingly, scientific research supports what we've intuitively known all along that music is a powerful force for healing and well-being. For nearly a decade, our company has been a leader in promoting health and wellness advancements in the music space, whether that's FDA-approved prescription digital therapeutics or employing music to support treatments for dementia, anxiety and more.

But when I say UMG is a leader, I'd like to be clear about 2 things. First, because music's presence in the health and wellness space is still in its embryonic stage. We see a great deal of upside in tapping into music's potential in the growing field. And secondly, while we, of course, license our artist music, we have also been developing our own health and wellness-related technology as well. Just over 2 months ago, that homegrown technology of ours was validated in a very big way. In May, one of the largest and most innovative technology companies in the world, Apple, in a first-of-its-kind partnership, introduced Sound Therapy, an innovative audio wellness collection designed to help listeners attain clearer focus, deeper relaxation and better sleep.

Available exclusively on Apple Music, Sound Therapy blends songs as a subscriber already knows and loves with scientifically calibrated soundwaves designed to enhance the listeners' daily routines whilst retaining the artist's original vision. Powered by UMG's proprietary audio technologies, including our own ethically developed patented GenAI system, the collection has been crafted by a team of producers, scientists, and audio engineers at Sollos, a groundbreaking music wellness venture incubated, developed and owned by UMG.

The technology that is serving as the underpinning of Sound Therapy is not the only technological innovation we've built in-house that harness AI. Since 2020, we've been hard at work to bring our expertise to bear on numerous applications that employ artificial intelligence to support artist marketing, analytics and obviously, distribution. And to accelerate and scale the development of our patents, we recently partnered with Liquidax Capital, an IP Asset Management investing advisory firm. Under the partnership, they will support UMG's efforts, filing patent applications and licensing our technological inventions. Our greatly expanded patent portfolio can then become a catalyst to accelerate introduction of products to the marketplace.

Liquidax, on our behalf, has already filed 15 patents in the fields of musical collaboration, multimedia content and campaign creation. AI threat protection, music administration and rights management. With our industry-leading track record of consistently developing the most successful artists in the world, quarter-after-quarter, year-after-year, we are also taking advantage of some of the many opportunities around extending our label and artist brands into new realms. Take, for example, our investment in virtual artist experiences such as ABBA Voyage or our experiential Hospitality Venture, UMusic Hotels.

These are capital-light investments that expand our artists and label brands, support our e-commerce and D2C strategies and create powerful commercial ecosystems around our artists as well as deeper experiences for fans. That strategy of brand extension is at the heart of our recently announced venture with WTSL, the Silver Lake-backed investment firm founded by a long-time entertainment leader, Patrick Whitesell. The venture will accelerate our ability to unlock opportunities that extend music's value across film, television, fashion, consumer brands, branded experiences and other emerging growth areas.

Combining our strategic expertise and networks, the 2 companies will capitalize on how cultural influence is leveraged, making artists and their music the foundation for building scalable, multidimensional businesses that connect with audiences in a new lasting way. But of course, even as we grow and expand, we always remain laser-focused on our cost base, exploring and instituting new ways to improve efficiency. To that end, I'm pleased to report that after having achieved EUR 125 million in cost savings from the Phase 1 of our strategic redesign, we are on track on the second phase of our plan.

Amongst a number of strategic areas, this phase has included reorganization of one, our U.K. company, which subsequently has had its best domestic artist success in many years with Sam Fender, Lola Young and Olivia Dean to name just a few.

Our D2C and e-commerce functions, which now have greater integration with our frontline labels to achieve more streamlined decision-making and impactful artists and catalog campaign; and thirdly, our IP organization to leverage AI and other technologies to drive greater efficiencies and improve support of all our business units, and we are working at a tilt to integrate all of this within all areas and all structures and all markets of the company worldwide, how we integrate AI, how we use it and how we adapt alongside our artists to something that we see as a great opportunity and very positively.

Our long-term strategy continues to be remarkably effective. UMG has evolved far beyond the old definition of the music company. We have become a dynamic global enterprise, constantly evolving and reinventing itself. Whether in our core businesses of recorded music and music publishing, or in emerging fields such as health and wellness, AI or brand extension, UMG is a hub of creative innovation, and that's how we have to be. And all our efforts, they share the same purpose and goal to help support our artists, their music and their brands.

One last thing I'd like to add. Last week, we received notice that we've entered Phase 2 of the European Commission's review of Virgin's acquisition of Downtown. Because the combined company will help support the growth and success of independent labels and their artists everywhere in what is a very highly competitive artist services space with more than 100 companies, we remain confident that the transaction will pass that review and will be completed before the end of the year.

I think now, I'd like to turn things over to Boyd, who after today, will be handing over to Matt Ellis, our new CFO, the responsibility for reporting the financials on our next earnings calls. For today, Matt will be joining us for the Q&A and is here with us in Amsterdam. So if you will, for this one last time, please save the dulcet tones of Boyd's Scottish accent and his brogue as he walks us through the financials. And also please welcome Matt Ellis as he joins our bad. Thank you.

Lucian, thank you very much. Here is the dulcet tones about to go. The second quarter marked another quarter of solid constant currency revenue growth, adjusted EBITDA growth and margin expansion for UMG. We are pleased with the strong growth in subscription, ad-supported and music publishing revenue, which more than offset particularly difficult comparisons in physical and merchandising revenue. This quarter's revenue composition once again reflects the breadth of our business and supports our conviction about our ability to deliver constant healthy growth.

In the quarter, revenue grew 4.5%. Adjusted EBITDA grew 7.3% and adjusted EBITDA margin expanded 60 basis points to 22.7%. In terms of the difference between EBITDA and adjusted EBITDA, we had EUR 53 million in noncash share-based compensation expense for the quarter as well as EUR 12 million in U.S. listing preparation costs and certain M&A advisory costs compared to EUR 69 million in noncash share-based compensation expense in the prior year quarter. For the half year, revenue was up 6.9% and adjusted EBITDA grew 8.5%, driving margin expansion of 30 basis points to 22.7%.

Total adjusted EBITDA margin reflects 70 basis points of margin expansion in Recorded Music and a decline in corporate overhead, partially offset by margin contraction in Music Publishing and Merchandising, which I will come to when I discuss each segment. The first half of the year had a total of EUR 110 million in noncash share-based compensation expense compared to EUR 171 million in the first half of 2024. We continue to expect about EUR 230 million in noncash share-based compensation expense this year. Earnings per share for the first half of 2025 grew to EUR 0.78, up from EUR 0.50 and adjusted diluted earnings per share grew to EUR 0.48, up from EUR 0.44 in the first half of 2024.

Now let me turn to the segments. Recorded Music revenue grew 3.9% for the quarter and 7% for the half year. This revenue growth drove adjusted EBITDA up 9.9% for the first half, and adjusted EBITDA margin expanded 70 basis points to 26.1% for the half year. The margin expansion was driven by a combination of cost savings, revenue mix and operating leverage. Looking further at Recorded Music revenue. Subscription revenue grew 8.5% in the quarter, largely similar to our results for the last several quarters. This growth continues to be driven primarily by growth in the number of subscribers and to a much lesser extent, certain price increases with a small drag this quarter from a decline in fitness platform revenue.

Similar to last year, this quarter's subscription growth was supported by solid growth in high ARPU established markets, including the U.S. and Japan. The quarter's performance was also driven by double-digit growth in other top 10 markets, including Mexico and Brazil. Given that Luminate's midyear data shows that these 2 markets are now the third and fourth largest markets globally for total streaming consumption, we're particularly pleased to see double-digit paid subscription growth.

For the half year, subscription revenue grew 8.9%. We've now reported 4 consecutive quarters of high single-digit subscription revenue growth. The last 3 quarters of growth being primarily volume driven, and we have posted these results prior to realizing the impact of improved monetization from our streaming 2.0 partnerships. Ad-supported streaming revenue growth accelerated this quarter, increasing 9.1% as comps eased, and we saw modest incremental improvements in account performance and monetization across most of our major partnerships.

The sequential improvement in year-over-year growth was substantially supported by an easier comp as we partially anniversaried the loss of our premium music video license with Meta and also comped against the month of being off-platform with TikTok in the second quarter of 2024.

For the half year, ad-supported streaming revenue grew 4.6%, which should give you a more normalized view of how our ad revenue is performing. Going forward, we expect this revenue to remain challenged in the near term by the shift to short-form consumption, which is not yet adequately monetized. And then there's continued uncertainty in the overall macro environment.

Downloads and other digital revenue grew 50%, thanks to a settlement with an Internet service provider. As you know, these smaller settlements happen regularly in our normal course of business, and in this instance, amounted to EUR 31 million of revenue and EUR 15 million of EBITDA. For the half year, downloads and other digital revenue was up 17.2%.

Moving now to physical. As expected, physical revenue declined 12.4% in the quarter, with the U.S. and Europe down against last year's release of Taylor Swift's, The Tortured Poets Department. Physical sales in Japan grew strongly in the quarter, driven by several local releases. For the half year, physical revenues were largely flat, and we continue to expect physical sales for the year to be relatively flat given the difficult comp. Beyond that, we remain excited about the physical revenue opportunity, driven by vinyl and other collectibles and reflecting an important component of the opportunity around superfandom.

Licensing and other revenue had a timing-related decline of 6.5% in the quarter also as a result of a difficult comp as last year included improvements in live and audiovisual revenues. For the half year, licensing and other revenue grew 8.6%.

Now turning to Music Publishing. Revenue grew 14.5% in the quarter, with strength across digital, performance and sync revenues, thanks to the remarkable performance of our songwriters. The strong growth also reflects the Chord administration business as well as our continued success in growing our film and TV administration business. For the half year, Music Publishing revenue grew 12.1% and Music Publishing adjusted EBITDA grew 7.9% as margin declined 90 basis points as a result of revenue and repertoire mix.

Turning now to merchandising. As expected, merchandising revenue declined against last year's extremely strong growth, which was helped by direct-to-consumer sales tied to Taylor Swift's album release [indiscernible]. This quarter, merchandising revenue declined 12.7%. For the half year, merchandising revenue fell 10% or EUR 36 million year-over-year, while adjusted EBITDA declined EUR 21 million to negative EUR 3 million. The loss is a result of lower revenue and higher manufacturing and freight costs. The higher manufacturing and freight costs were due to partly product mix as well as higher tariffs, which drove a need to find quick solutions for alternative manufacturing. We are taking several steps to improve the profitability of our merchandising business, including investing in our D2C business and working on ways to reconfigure our manufacturing supply chain.

As we previously mentioned, this is the only area of our business impacted by tariffs. Net profit for the first half of 2025 amounted to EUR 1.4 billion compared to EUR 914 million in the first half of 2024, resulting in earnings per share of EUR 0.78 compared to EUR 0.50 in the first half of 2024. The increase in net profit includes a EUR 1.1 billion increase in the valuation of investments in listed companies compared to an increase of EUR 565 million in the first half of 2024, which was partly offset by the related increase in deferred tax expense. Net profit also included the EUR 110 million of share-based compensation expense in the first half of 2025 compared to EUR 171 million in the first half of 2024.

In addition, net profit reflects restructuring costs of EUR 49 million in the first half of 2025 related to our strategic organizational redesign as well as EUR 12 million of costs related to our planned U.S. listing certain M&A advisory costs compared to EUR 113 million of restructuring costs in the first half of 2024. Adjusted net profit, which adjusts for, amongst other items, the revaluation of investments, the share-based compensation expense restructuring costs and the listing and M&A costs I just mentioned, grew 9% to EUR 882 million in the first half of 2025, resulting in adjusted earnings per share of EUR 0.48 compared to EUR 0.44 in the first half of 2024.

In line with our commitment to pay a dividend of at least 50% of our net profits, the interim dividend for 2025 will be EUR 440 million or EUR 0.24 per share. As Lucian discussed, we have begun to implement Phase 2 of our strategic organizational redesign, which we first introduced to you in early 2024. We continue to remodel our organization to enhance our capabilities in the areas most critical to our future growth and success. These changes are strengthening our leadership team, fostering innovation and creating efficiencies across our business. As a reminder, the overall plan will generate EUR 250 million in run rate cost savings and will be implemented by the end of 2026 as expected.

We completed Phase 1 of the program in 2024, which resulted in EUR 125 million of run rate cost savings, EUR 75 million of which was realized in 2024, with the incremental EUR 50 million realized in the first half of 2025.

In late 2024 and early 2025, we commenced our work on implementing Phase 2 of the program. You heard Lucian speak about some of the areas, which we are improving our operations. The key areas that we have been addressing as part of Phase 2 of the plan include our direct-to-consumer business, our catalog business, activities in our international operating companies, including the U.K. and Europe and central corporate functions such as technology, supply chain and data and analytics. I'm pleased to announce that Phase 2 is on track and is expected to lead to an additional EUR 40 million of realized cost savings in the back half of 2025, bringing the total 2025 realized cost savings to EUR 90 million.

The Phase 2 actions already taken during 2025, combined with additional actions to be taken in 2025 and 2026 are expected to generate an incremental EUR 85 million of realized savings over 2026 and 2027. In 2025, we expect to incur total restructuring charges of about EUR 95 million, of which EUR 49 million fell into the first half of the year. Now let me turn to cash flow. Our net cash provided by operating activities before income taxes paid for the first half of 2025 increased 11.9% to EUR 488 million. This improvement is driven by the strong growth in operating profit, partially offset by an increase in net royalty advance payments, which amounted to EUR 377 million, up from EUR 315 million in the first half of 2024.

This increase was due to the timing of certain major artist deal renewals and extensions, including in Music Publishing. In addition, the increase in net cash provided by operating activities was also offset by the EUR 61 million in cash restructuring related to the organizational redesign. Net cash provided by operating activities also reflected EUR 95 million that we paid to settle employee tax liabilities arising from equity plan grants and associated obligations. You will recall that for the past 3 years, we've opted to fund the taxes with cash rather than issue shares, which reduces the dilutive impact of the grants. In total, we have used EUR 420 million in cash to fund these taxes over the past 3 years, which has lessened shareholder dilution by just under 1%.

Even with the increase in royalty advances and the payments made to cover employee tax obligations, free cash flow before investing activities was EUR 143 million in the first half of 2025. Let me remind you, the second half of the year is a consistently stronger cash-generating period for our business. We also continued our long-term strategic investment into the business. We paid EUR 149 million for catalog acquisitions in the period. although about half of which are catalogs that will be moved into the Chord vehicle in the coming months. Chord is successfully raising capital and building a strong deal pipeline. The structure is working exactly as we envisaged, enabling us to move quickly to acquire high-quality catalogs without significant capital allocation over time.

To maintain our share of ownership in the vehicle, we also made a EUR 30 million incremental equity investment into the business in the first half of the year. This is included in our other investing activities, which totaled EUR 173 million and also included a number of additional strategic investments, such as our majority stake in [indiscernible] in Japan. Free cash flow in the first half improved to an outflow of EUR 179 million compared to an outflow of EUR 460 million in the first half of 2024.

We encourage you to look at cash generation on a full year basis rather than for a half year as working capital movements and the timing of investments can vary considerably during a shorter time frame. We remain excited and encouraged by the path ahead of us with an expanding ecosystem and market opportunity, we continue to be an invaluable partner to our artists whose music is an ever more vital component of a growing number of platforms and businesses.

Before I close, let me note that on July 21, we announced that we had confidentially submitted a draft registration statement to the SEC relating to a proposed U.S. public offering of our ordinary shares held by certain shareholders. Due to U.S. securities rules, we are unable to provide any further details at this time, but we look forward to sharing additional information when we are able to. So thank you.

And with that, Lucian, Michael Nash, Matt Ellis and I will now take your questions. So operator, please open the line for Q&A.

[Operator Instructions] Our first question comes from the line of Jason Bazinet from Citigroup.

I just have one question. You mentioned that the 2.0 partnerships were not part of the results that you putup so far. How optimistic are you in the next 12 months, you're looking to see some benefit from that will be [indiscernible]?

Jason, thank you for your question. You were breaking up a little bit. If I can rephrase and please correct if we got your question wrong. Your question was regarding the fact that we had stated that our growth did not yet reflect the significant benefit from the 2.0 deals that we announced, and you want to know the timing of when the 2.0 deal benefits would kick in. We're obviously not going to get into confidential details regarding those deals when we announced the Spotify and the Amazon deals at the end of December and in January, we talked about their 2.0 characteristics.

You can tie that back to the definition that we gave of 2.0 on Capital Markets Day in September, where we talked about the different components that would contribute to growth. And I think that the best way to gauge the impact of those deals is to consider our midterm guidance that we provided of 8% to 10% subscription growth in the midterm. So we expect our Streaming 2.0 deals to significantly contribute to our achievement of that guidance. But as Boyd said in his comments, the benefits that we're going to realize from those deals are not yet included in our results.

Our next question comes from Ed Young from Morgan Stanley.

My first question is on super premium tiers. In its recent Q2 call, Spotify peers talked down prospects for that in the near term. Are you confident that other DSP partners may still do so this year? Or is it perhaps going to be somewhat slower process to pull products together? My second question is on AI. The company has obviously made very good progress signing principled AI fair use agreements with many of its partners and counterparties, but the legal protection backdrop in the U.S. and the EU, if we take the recent AI code of practice, for instance, does appear weaker than it did, say, maybe 12 months ago.

So how do you see the prospects for UMG as a rights holder for your artists, obviously, with the balance of the specific agreements you've got with partners to protect versus the sort of general legislative and legal direction of travel?

Ed, thank you for your question. So regarding the question on super premium tiers. In terms of the breadth of our conversations generally, we're deeply engaged with all of our key partners including Spotify on what we view as a very important category of opportunity. We're encouraged by the direction of those conversations. These partners have product road maps and business development requirements around execution, which impact their timing.

We hope to be able to publicly elaborate on these collaborations plans in the coming quarters. With respect to your reference to Spotify and their comments, we were encouraged to hear Spotify executive's comments on this week's earnings call about their excitement regarding engaging super fans and confirmation that they're "building something great for them." We appreciate their commitment to what they described as very high value standards for such product releases. That's, of course, what we want to see in the marketplace as well. And we understand the things they cited in terms of product and business development that do take time.

We also certainly agree with Spotify executives that there's a big opportunity to monetize more valuable customers, and we're encouraged to hear them say that they "see great demand from different superfan segments."

It's important to point out that a very successful super premium tier has now been in the market for over a year, launched by one of the world's leading music platforms, Tencent Music. The empirical data is impressive. We were very encouraged to hear in May on their earnings call, Tencent Music's earnings call, the growing success of their SVIP tier, which they credited with playing a very significant role in elevating their ARPU and thus driving revenue growth to 16.6% year-over-year at twice the rate of increased subscriber growth, 8.3%.

So 16.6% compared to 8.3%, and they said that the most substantial contributor to that growth was implementation of the SVIP tier. Now we see this as a very strong validation for our position. Note that they previously indicated low teens percentage penetration, so I think 13%. You're talking about 120 million subscribers. That's 15 million SVIP subscribers. I'm just extrapolating map. I'm not disclosing any confidential information, but just based on their public statements. And that's at 5x the standard tier pricing in a market that is widely regarded as being one of the most difficult in the past to monetize. So we see the empirical data from Tencent Music and their SVIP tier as a great indicator of the scope of opportunities. We've said before, more than 20% of subscribers is our target globally at 2x the price point ultimately.

This level of consumer demand that we're seeing in the research and that we've seen empirically demonstrated, the innovation potential of our partners, our deep commitment to supporting this market evolution, we expect all of this together amalgamates into industrial logic that's going to prevail in the rollout of super premium tiers in the not-too-distant future.

Now with respect to your second question on AI and legal, let me address this from a couple of different vantage points. And you also asked about protections that we have on our deals. We've actually seen some very positive developments in the U.S., for example, on the legislative front. Just last week, Senators Hawley and Blumenthal introduced bipartisan legislation to very specifically prohibit AI training on copyrighted works without permission. And earlier this month, the U.S. Senate voted 99:1 to remove a proposed 10-year moratorium on the enforcement of state laws on AI, some of which has been very helpful to protect artist rights and publicity and ensure AI developers are transparent about their training materials.

In the EU, the AI Act has been enacted and will start to take effect for various platforms. It's not comprehensive and specific implementations still work in progress, but it has some positive features such as provisions for part and transparency on the part of AI companies. And in the U.K., the creative sector's advocacy effort has been very strong. The government suffered its first to the parliament after the House of Lawrence back amendment to the data bills bolstering -- amendment, excuse me, to the pleural amendments to the data bill, bolstering creators' intellectual property protections. Major media campaigns are underway.

Petitions opposing a government's proposal have garnered tens of thousands of signatures from creators. All in all, spirited advocacy that's ratcheting up.

So then in terms of our commercial deals, I'm glad that you point that out on your question because we continue to secure very important AI protections in our agreements with music services. These measures vary according to the nature of different partnerships, but they include working to ensure that AI models will not be trained on our artists work without consent. AI recording to train on our content will be removed. AI-generated music will not dilute our artist royalties and AI content that misappropriate our artist identities and infringes upon their right of publicity will also be removed. And various monitoring requirements are also included in these agreements.

And I would say, finally, to echo Sir Lucian's comments earlier, we believe that we will be able to effectively work to ensure that our artist rights and interests are advanced and on balance that AI innovation is going to be a significant net positive for the music industry.

I'd like to add, actually, thank you for that, Michael. With all of these products that we talked about in terms of super premium, Spotify, et cetera, that getting the product right is more important to us than launching it too early. And I really want to emphasize that. We've got specific views on what we believe the fans want based on our own extensive consumer research that we've shared with the platforms. And what we like about that is they've got their own data as well. And so they have -- each of them has their own views on their own unique customers, consumers and road maps.

And we're kind of blending them together. Finding, I suppose, the right marriage of this is absolutely essential, and it takes time. I'd love to say that it will be in 89 days or 91 days. We are not going to do anything to jeopardize the quality or the value of what the product is, in order to rush it out. And I wouldn't expect them to either. We continue to be bullish about the enormous opportunity of the super fan. And I know that it's a view that over this next period that we share with the platform.

On AI, I've been through so many technological changes and the industry has, for the last 70, 80, 90 years. And every time we've been through a change, we've -- it's been an enormous positive. We -- over this period, over this most recent period, we've enabled numerous and many entrepreneurs. And we're in dialogue with so many, if not all of the important players in the AI space. Some of them we've announced deals with and others, there are constitutions and ideas and products and partnerships, which are in the works. So I just thought I'd add that on top of what you said.

Our next question comes from Julien Roch from Barclays.

Yes. My first question is you grew subscription streaming in Q1, 9.3%, 8.5% in Q2. Warner did 4% in Q1, consensus at 4% for Q2, Sony did 4% in Q1. I don't have consensus for Q2. So it looks like you are significantly outperforming your peers, which is great. But when I look at available market share, Luminate in the U.S., for instance, your market share, again, don't seem to explain all of the outperformance. So I was wondering whether there's an extra factor in your subscription streaming growth in H1 on top of market volume and market share, for instance, changes in some contract terms or something else or nothing?

That's my first question. And then the second one, going back to last year, you reported 9% subscription streaming in Q4, but you said it was actually 7.2% because there was a phasing of a deal where you got paid more in Q4 versus previously. And so Q2 and Q3 should have been higher growth, but I don't see if you ever gave us what the underlying growth was in Q2 and Q3 last year.

Julien, thank you for your questions, and let me unpack them, and I want to make sure that I'm targeting the essence of what you're asking. So first of all, just to clarify, in terms of the recent quarters, in Q4 of 2024, growth rate that we cited was 7.2%, excluding OTIs. That's the number that we've been very public about. It was 9.3% in the first quarter of this year, and then we just reported 8.5% for the second quarter of this year. In fact, going back 4 quarters, we've essentially been in this range, 8% or higher in our subscription growth. So we've been pretty consistently delivering that.

With respect to the question regarding the growth that we are reporting in subscription and outperforming the competition, I would simply say that we don't have visibility to their deal terms to the internal dynamics of their operations to what drives their reporting. But we have very clearly articulated in the presentation we made at the Capital Markets Day, Streaming 2.0, how we define it and what we're looking to secure in our deals. We believe because of the incredible performance of our artists and songwriters, the strength of our repertoire that we are well positioned to work with the platforms on win-win deals that secure fair economics that reward us for the value that we bring to their platforms. That's a simple philosophical statement.

But ultimately, I think if you go to what we define as our execution projected out from Capital Markets Day, you know how we're doing what we're doing. We can't really comment on what the competitors aren't doing in relationship to that. We'll have to leave it to you to form your own judgments. I hope that, that was responsive to your question.

Our next question comes from the line of Rich Greenfield from LightShed Partners.

This is Mark Kelly on for Rich. There's clearly a desire among consumers to use AI to interact and create an alter music. So could a super premium tier morph towards those AI features in 2026?

We're excited about the potential for AI to bring innovation to many different aspects of streaming services and the new types of products and services for consumers. We did some recent research that maybe points to the opportunity that might kind of clarify how we're thinking about this. We talked to consumers about their interest in AI and music. 51% of U.S. consumers expressed interest in AI integration and music, but half of those really wanted to focus AI integration to improve their music consumption experience, meaning better recommendations, better discovery, better content interaction.

Of the various AI music categories, I don't think anyone will be surprised to hear that simulation or imitation of artists rank the lowest. And there's tremendous interest by consumers in a connection to the artists. I mean we kind of define that as a moral code, where 75% of these consumers interested in AI said, they believe that human creativity is essential. A similar percentage, say, connection to artists is key to their interest, and this is consistent across age groups. Now packing that up into an answer to your question, we think that one of the most appealing components of AI might be to provide fans with a deeper experience of artists work for the artists that are interested in engagement with fans, enable new forms of content interaction, new forms of hyperpersonalization.

And certainly, if that improves the value of the music subscription experience, you would think that you'd want to price into that value proposition. So your question has an interesting premise and the consumer research suggests that consumers are definitely looking for improvements in music subscription from AI. We believe that it can only support and help.

Our next question comes from Lisa Yang from Goldman Sachs.

I have 2 questions, please. The first one is on the margins. Just a bit surprised by the margin is not much more in Q2 given the significant decline in difficult and [indiscernible] and the boost from the settlement [things]. So just wondering if you can maybe give us a bit more detail in terms of what were the headwinds in that quarter, whether it was artist mix or the headwind from distribution. And I think on H1 as well, publishing and merchandising margins were down. So I'm not sure if you could elaborate on that and whether you expect that trend to continue? Or it should reverse in H2?

And the second question is more capital allocation. There's been quite a few changes to the Board composition lately. So I'm just wondering how you're thinking about implication for maybe your future capital allocation strategy, whether you might consider using your cash to buy from certain selling shareholders, whether you rethink about the balance between buyback over dividends?

Lisa. This is Boyd. A few comments around about margin because one of the comments that I made was that there was EUR 50 million of cost savings delivered in the half year. And that -- if you look at that, what does that mean in terms of the total for our company, it's about 90 basis points. And clearly, you're not seeing the 90 basis points in these numbers. So I think you've hit upon the right answer. It's more about business mix. And the reason that I I'm emphasizing that is if you look at our Music Publishing business, year-to-date, 12% revenue grew 14.5%, I think it is for Q2. I mean the reality is they're outperforming the market. And I highlighted Chord in particular, and I referenced the generic kind of film and TV business administration.

Those are very, very important strategic opportunities for us. They don't come at the same margin as other parts of the business. But they're incremental to EBITDA is somewhat dilutive to the margins.

Just going back again to Recorded Music. The margins in Recorded Music expanded 70 basis points. So closer to what I was mentioning about the $50 million in terms of cost savings. The majority of the cost savings sits in Recorded Music and also the kind of the consolidated UMG level. So I think the way to look at it is -- and let me go talk as well about the merchandising because if you look at the merchandising, although the revenues were down for the reason that I mentioned just because of the comp to last year.

The reality is that we also had over and above that, the kind of impact in terms of our manufacturing and freight costs where we had to kind of scramble somewhat to change the sourcing of our products in merchandising for the reasons that I gave, which is tariffs. So the fundamentals of the business in Recorded Music, I don't think there's anything to be concerned about there.

Our next question comes from the line of Michael Morris from Guggenheim.

A couple of questions. One, can you share where you stand on the Streaming 2.0 renewals with your other major partners, not Spotify or Amazon? Any update on progress or what the time frame might be? And do these new deals -- in the past, you've spoken about your compensation being on the greater of -- with the per subscriber minimums being a component of that. Do your new agreements have the same principles of greater of? And then one other thing, Boyd, you mentioned that short form is not yet adequately monetized and that consumption there is growing. Can you expand a bit on that gap and share what the next steps may be to closing that gap?

Mike, thank you for your questions. Let me take the first one in terms of Streaming 2.0 deals and the structure of those deals. You can rest assured that we are in dialogue with all of our partners about moving forward with the 2.0 construct.

Obviously, I can't reveal any confidential details or insights into specific conversations with any partners or provide you with the timetable. But that is our road map for engineering this change in the marketplace where we're looking to provide equal emphasis on customer value and ARPU along with overall subscriber growth. That is the template that we're working off of. Those are the conversations that we're having with everybody.

And in terms of the underlying model, I'm glad you asked this question because I think that there's been a little confusion on this. As we look to implement Streaming 2.0 deals, we're still working with the construct where with subscription, we would set a per subscriber minimum, and then we would also have a greater of formulation, that would enable us to set a rate, that's a floor, but also participate in increased prices that might happen during the term of the deal.

Now there's -- we talked about the 3-pronged structure, and there's also typically a per play component in there. But the 2 things that really matter in terms of the revenue we generate from the partners, the per subscriber minimum and the rev share. And that construct remains constant moving into Streaming 2.0.

Okay. And perhaps I could start with an apology to Lisa, because I missed the second -- or your second question. I mean our capital allocation, I mean, the way we look at this is it's about organic reinvestment into the business. That's the first and most important aspect of capital allocation. We then also want to reinvest into the business to support our strategic priorities. So there's M&A, and we've talked about this from time to time, M&A in growth markets, M&A in areas where -- which are adjacencies, which we don't have the skill set as we're kind of broadening our offering to the artists and the songwriters.

So there is M&A there. And last but -- well, it's not last, but the returning capital to shareholders, we do, do that. We just do it in the form of the dividend. We just announced for the half year, $400 million of capital being returned by way of a dividend for the first half of the year. And that's reasonably significant. Moving forward, as you referenced about would we use our balance sheet to participate in share buybacks. It's a very important consideration for the Board. And that debate about share buybacks is never very far away in terms of the conversation that we have with our Board.

We're stepping towards a U.S. listing. And although we actually can't say very much at this moment in time, all of these considerations are important as we step forward over the coming months.

And finally, sorry, I mean, just to add to Michael's comment, I feel very inadequate answering this with Michael Nash in the room. But you did ask me, Michael, so you'll get the inarticulate version. I mentioned about short form, not monetize, and this is where I steal Michael's line. It's very difficult to put a 15-second pre-roll in front of a 15-second piece of content. But the problem is not -- it's not just ours.

This is a problem across all platforms and all advertisers. And the advertisers will need products that will enable them to engage with audience. So it's a problem to be solved across not just us, but the wider kind of advertising industry. But we still -- I mean, just -- we continue to see increased engagement. We continue to see the migration from analog to digital. It's still moving, which might surprise you. So the activity is impressive and just the short-form content monetization needs to evolve more.

That concludes today's Q&A session. Therefore, that concludes today's call. Thank you all for joining. You may now disconnect your lines.