33rd Annual UBS Global Media Week Conference
December 5, 2005
December 5, 2005
Caution Concerning Forward Looking Statements and Non-GAAP Financial Measures
Today’s presentation includes forward-looking statements within the meaning of the Safe Harbor provisions of the Private Securities
Litigation Reform Act of 1995; particularly statements regarding our future financial performance and the future performance of the
music industry. These statements are based on management’s current expectations or beliefs and industry publications and
surveys, and are subject to uncertainty and changes in circumstances.
Actual results may vary materially from those expressed or implied by the statements, due to changes in economic, business,
competitive, technological, strategic or regulatory factors, and factors affecting the operations of the businesses of Warner Music
Group.
More detailed information about these factors may be found in filings by Warner Music Group with the Securities and Exchange
Commission, including its most recent Annual Report on Form 10-K and Quarterly Report on Form 10-Q in the sections entitled
“Risk Factors" and "'Safe Harbor' Statement Under Private Securities Litigation Reform Act.” Warner Music Group is under no
obligation to, and expressly disclaims any such obligation to, update or alter its forward-looking statements, whether as a result of
new information, future events or otherwise.
Today’s presentation also includes information regarding the historical financial performance through September 30, 2005
of Warner Music Group and its subsidiaries, including historical financial performance as reflected in non-GAAP financial measures
such as Operating Income before Depreciation and Amortization, Adjusted Operating Income before Depreciation and Amortization
and Unlevered after-tax cash flow excluding non-recurring chargers. Please note that schedules setting out the reconciliation of
these historical non-GAAP financial measures to operating income and cash provided by operations are included in the schedules
included in the Company’s earnings release for the quarter and year ended September 30, 2005 posted on the Company’s website
at www.wmg.com and are also posted on the Company's website as an Appendix to a copy of this presentation under "Investor
Relations" and "Presentations”.
December 5, 2005
Key Investment Points
Leading the Renaissance of the Music Industry
Transforming to a Music Content Company
Driving “Margin-Share” through A&R Strategy
Ensuring Profitable Growth through Financial Discipline
Demo
Leading the Renaissance of the Music Industry
December 5, 2005
An Infinite Increase in Distribution Points
Increase in 3G mobile phones 71M in 2005 to 576M in 2009
Increase in mobile music downloads and audio streaming
$137M in 2005 to $1.6B in 2009
Limited number of Physical Stores
2005 2006 2007 2008 2009
Leading the Renaissance of the Music Industry
MP3-Player Shipments 48M in 2005 to 78M in 2008
2005: Estimated 75M points of distribution
2009: Over 500M points of distribution
Sources: IDC, Worldwide Compressed Audio Player 2004 – 2008 Forecast; PricewaterhouseCoopers, Global Entertainment & Media Outlook, 2005 – 2009; Informa Telecoms & Media, Mobile Music.
December 5, 2005
Driven by Converging Forces
ExclusiveContent Providers
Retail
Digital
Download Subscription Mobile
Customers
Leading the Renaissance of the Music Industry
Cross-Platform
Aggregators
December 5, 2005
Driven by Converging Forces
ExclusiveContent Providers
Digital
Download Subscription Mobile
Leading the Renaissance of the Music Industry
Cross-Platform
Aggregators
Customers☺☺☺☺☺☺☺ ☺☺ ☺☺☺☺☺
Retail
December 5, 2005
Stabilizing Recorded Music Industry
Leading the Renaissance of the Music Industry
$0
$10
$20
$30
$40
2000 2001 2002 2003 2004 2005 2006 2007 2008
Physical Digital
Global Recorded Music Market($ in Billions)
Notes: Traditional includes CD, cassette and vinyl albums, singles and DVDs; Digital includes downloads and subscription revenue as well as mobile revenues, such as from ringtones, mastertones, ringback tones and over-the-air downloads.Sources: Informa, Global Music Forecasts; Informa Telecoms & Media, Mobile Music; Goldman Sachs; Deutsche Bank; Citigroup.
-3%YoY Growth in % -6% -1% 2%-6% 0% 2% 3%
20%
80%
Digital
Physical
As % of Total
2008
6%
94%
2005
CAGR(2005 – 2008)
2%
$40 $39
$34 $34 $34$36 $36 $35 $36
December 5, 2005
Growing Music Publishing Industry
Leading the Renaissance of the Music Industry
$0
$1
$2
$3
$4
$5
2000 2001 2002 2003 2004 2005 2006 2007 2008
Music Publishing
Global Music Publishing Market($ in Billions)
Sources: Music & Copyright; Enders Analysis.
-3%YoY Growth in % 5% 4% 5%1% 3% 4% 5%
CAGR(2005 – 2008)
5%
$3.4 $3.3$3.6
$3.7 $4.0
$3.4 $3.4
$4.1$4.3
December 5, 2005
Piracy Contained
Legitimate Digital Distribution
EducationalFollowing Grokster ruling:
Piracy awareness has increased from 35% to 90%
Over 70% of consumers now support suing illegal downloaders, file-sharing companies or both
US unique users of P2P networks are stabilizing and down significantly over the last 2 years
Leading the Renaissance of the Music Industry
Approximately 2M tracks available for download at over 300 legitimate online music sites globally
Grokster agrees to transform into a legal service
iMesh is the first illegal service to convert to a legitimate P2P business model
LegalUnanimous Supreme Court ruling in MGM vs. Grokster sends clear message that IP will be protected and sets framework for collaboration between content and technology communities
Intensified enforcement efforts
December 5, 2005
Demo
Transforming to a Music Content Company
December 5, 2005
Transforming to a Music Content Company
Records- and Songs-Based Company
Music Content Company
Frontline Recordings
Deep Catalog
Music Video
Publishing Rights
ArtworkLyrics
Artist-Branded Content
Frontline Recordings
Deep Catalog
Music Video
Publishing Rights
Content
LPs, CDs, DVDs
DualDisc/DVD-ARingtones, Master Tones, RingbackSingles, Bundles
Video Downloads –Online & Mobile
Video GamesMerchandise
LPs, CDs, DVDs
Products
Retail
Broadcast
Music TV
Retail
Broadcast
Music TV
Alternate RetailInternet PortalsPortable Music
DeviceMobile PhoneSatellite Radio
PSP…
Channels
Transforming to a Music Content Company
December 5, 2005
Innovation through Value-Added Products
Collector’s edition
Track pack
Premium
Enhanced
Super-premium
Premium
Super-premium
Single (@radio release) Single
Standard album
New products
Pre-Release Street date/ Post-release (0-6 months)
Post-release/catalog(6+ months)
Pri
cin
g
Albums/Album bundles
Tracks/Track bundles
Cross-album/artist EP
Enhanced (pre-order only)
Transforming to a Music Content Company
December 5, 2005
Digital Bundles at Various Price Points
Transforming to a Music Content Company
SRP: $12.99SRP: $12.99
Enhanced
Big & Rich ”Comin’ to Your City”
SRP: $11.99SRP: $11.99
Bundle Contents:
Album
Bonus Track
Digital Album Booklet: album art, liner notes
Track Pack
The Click Five“Catch Your Wave”
SRP: $4.00SRP: $4.00
Bundle Contents:
Two Tracks
Interactive Album Booklet: photos, lyrics, desktop wallpaper, poster, ringtone info, bios
Enhanced
Bundle Contents:
Album
“Hung Up” single at pre-order
Music video
Digital Album Booklet: album art, liner notes
Madonna“Confessions on a Dance
Floor”
Harry Potter and the Goblet of Fire
Original Motion Picture Soundtrack
Premium
SRP: $14.99SRP: $14.99
Bundle Contents available as one week pre-release only:
Album
Three bonus tracks
Digital Album Booklet: album art, liner notes
December 5, 2005
Transforming to a Music Content Company
WMG Reaches Over 620 Million Mobile Subscribers Worldwide
South Korea19m subs.
South Korea Telecom
UK59m subs.
T-Mobile
Orange
O2
Vodafone
Hutchinson 3*
Virgin Mobile*
France44m subs.
Orange
Vodafone (SFR)
Bouygues Telecom *
(*) Denotes deals which are via aggregator
Germany68m subs.
T-Mobile
Vodafone
E-Plus*
O2
Canada14m subs.
Bell Mobility
Rogers / Microcell
Telus Mobility*
Italy63m subs.
TIM
Vodafone
Wind
Hutchinson
Japan89m subs.
NTT Docomo
KDDI
Vodafone
Australia 18m subs.
Telstra
Optus*
Vodafone
Hutchison
Benelux25m subs.
KPN*
Vodafone
T-Mobile
Telfort*
Orange
Proximus
Mobistar
Base*
Spain38m subs.
Movistar
Vodafone
Amena
US186m subs.
Cingular/AT&T*
Verizon
SprintNextel
T-Mobile
Virgin (MVNO)
December 5, 2005
Mobile Offerings Multiplying
Transforming to a Music Content Company
Images / Logos
Full-Track Downloads
MasterTones
Ring Back Tones
T-Mobile US
South Korea
Telecom
NTT DoCoMo
KDDI
Asia
Vodafone
T-Mobile
Orange
Europe
Virgin
Verizon
Sprint
Cingular
North
America
VideosPoly / Mono
December 5, 2005
Absolute Growth in Digital Exceeded Decline in Physical
$36$44
$53
$35
$25
$0
$25
$50
$75
FY 2004 Q1 05 Q2 05 Q3 05 Q4 05
WMG Total Digital Revenues($ in Millions)
In FY05, digital revenues increased four-fold
$79
($25)
$0
$25
$50
$75
$100
WMG US Recorded Music Absolute Growth / (Decline)
FY 2005($ in Millions)
Transforming to a Music Content Company
$157
($13)
Physical
Digital
December 5, 2005
Demo
Driving “Margin-Share” Through A&R Strategy
December 5, 2005
WMG Gaining US Share
WMG, 16.0%
EMI, 11.1%
Indies, 13.6%
UMG, 29.2%
SONY/BMG, 30.1%
YTD 2004
WMG, 17.2%
EMI, 10.5%
Indies, 13.4%
UMG, 31.7%
SONY/BMG, 27.2%
YTD 2005
Source: SoundScan as of 11/27/05.
Current Quarter Highlights WMG Share Momentum
Driving “Margin-Share” Through A&R Strategy
December 5, 2005
Promotional Mix Extends Product Lifecycle
WMG has focused first on developing a broad suite of content from existing superstar artists sold à la carte or in bundles
Example:
Green Day
Digital Bonus Tracks
Ringtones (music)
Ringtones (voice)
Wallpaper
UMD for PSP (1)
Video Clips
Live CD+DVD
Note:(1) UMD Universal Media Disc.
Driving “Margin-Share” Through A&R Strategy
December 5, 2005
Unwavering Focus on Innovative A&R Paying Off
Atlantic Revitalization Gaining Traction
New Artists Nurtured Through Grassroots Efforts
Incubators Driving Urban Market Share Gains
Long-Standing Artist Relationships Mined Over Time
Driving “Margin-Share” Through A&R Strategy
Demo
Ensuring Profitable GrowthThrough Financial Discipline
December 5, 2005
Solid Performance in Challenging Year
$601
$2,859 $2,924
$607$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
$4,000
FY 2004 FY2005
Music Publishing Recorded Music
WMG Total Revenues(1)
($ in Millions)WMG Total Adjusted OIBDA(2)(3)
($ in Millions)
$145
$291
$448
$145
$0
$100
$200
$300
$400
$500
$600
FY 2004 FY2005
Music Publishing Recorded Music
Adjusted OIBDA Margin
(in %)
2004 2005
Notes:(1) Total WMG revenues of $3.5bn for FY 2005 and $3.4bn for FY 2004 include $29m and $23m of inter-segment eliminations respectively.(2) Total WMG OIBDA of $491m for FY 2005 and $374m for FY 2004 exclude $102m and $62m respectively of corporate expenses and eliminations which also exclude certain non-recurring items and FAS 123 expenses.(3) Divisional adjusted OIBDA excludes certain non-recurring charges and FAS123 expenses. FY2005 recorded music adjusted OIBDA excludes $20m in IPO-related charges and $31m in restructuring charges, as well as $12m in FAS123 expenses. FY2004 recorded music adjusted OIBDA excludes $24m in restructuring charges and $1m in FAS123 expenses. FY2005 music publishing adjusted OIBDA excludes $1m in IPO-related charges and $3m in FAS123 expenses. FY2004 music publishing adjusted OIBDA excludes $1m in restructuring charges.
10.2%
24.1%
15.3%
23.9%
Strong Margin Expansion in Recorded Music
Ensuring Profitable Growth Through Financial Discipline
RM
MP
$374
$491
$3.4 bn $3.5 bn
December 5, 2005
Cost Savings Enabled by Flexible Cost Base
Ensuring Profitable Growth Through Financial Discipline
Notes:(1) WMG total cost base excludes non-recurring charges, including $5m for legal settlement charges, $24m related to restructuring, and $29m of IPO-related charges, as well as $25m FAS123 expenses.
Product Costs
Royalties
Distribution Licensing
Variable Marketing
G&A
A&R
Sales & Marketing OH
0%
20%
40%
60%
80%
100%
FY 2005
WMG Total Cost Base(1)
Fixed Costs
Discretionary Costs
Variable Costs
24%
18%
58%
As % of Total
December 5, 2005
A Revenue Base that Is Stable and Diversified
Ensuring Profitable Growth Through Financial Discipline
WMG Revenue Composition
10%
35%
38%
100% 17%
0%
20%
40%
60%
80%
100%
Total WMG Revenue
Music Publishing
Catalog New Releases (Proven Artists)
New Releases (New Artists)
Source: Management estimates of typical year revenue composition.
December 5, 2005
Driving High Cash Conversion
Notes: (1) Cash Conversion is defined as unlevered after-tax cash flow excluding non-recurring charges over adjusted OIBDA.(2) Unlevered after-tax cash flow is calculated by subtracting capital expenditures and cash paid (received) for investments from net cash provided by operating activities, as well as excluding cash interest and certain non-recurring IPO-related charges. Unlevered after tax cash flow excludes $108m in non-recurring IPO-related charges for FY2005, $103m for Q3 2005, and $3m each for Q2 and for Q1 2005.
Ensuring Profitable Growth Through Financial Discipline
WMG Cash Conversion(1)(2)
($ in Millions)
$83 $98$80
$410
$55$53
$220
$119
$491
$195
$0
$100
$200
$300
$400
$500
Q1 2005 Q2 2005 Q3 2005 Q4 2005 FY 2005
Unlevered after-tax cash flow excluding non-recurring charges
Adjusted OIBDA
43% 224%Cash Conversion in % 66% 46% 84%
December 5, 2005
Key Investment Points
Leading the Renaissance of the Music Industry
Transforming to a Music Content Company
Driving “Margin-Share” through A&R Strategy
Ensuring Profitable Growth through Financial Discipline
December 5, 2005
Demo
Q&A
December 5, 2005
Demo
Appendix
December 5, 2005
Demo
Supplemental Disclosures Regarding Non-GAAP Financial Information
December 5, 2005
OIBDA
We evaluate our operating performance based on several factors, including our primary financial measure of operating income (loss) before non-cash depreciation of tangible assets, non-cash amortization of intangible assets and non-cash impairment charges to reduce the carrying value of goodwill and other intangible assets (which we refer to as OIBDA). We consider OIBDA to be an important indicator of the operational strengths and performance of our businesses, and believe the adjusted results help improve the ability to understand the company's operating performance and evaluate our performance in comparison to comparable periods. However, a limitation of the use of OIBDA as a performance measure is that it does not reflect the periodic costs of certain capitalized tangible and intangible assets used in generating revenues in our businesses. Accordingly, OIBDA should be considered in addition to, not as a substitute for, operating income (loss), net income (loss) and other measures of financial performance reported in accordance with accounting principles generally accepted in the U.S.
December 5, 2005
Reconciliation of OIBDA to Net Loss, Twelve Months Ended 9/30/05versus 9/30/04 (dollars in millions)
Twelve TwelveMonths MonthsEnded Ended
Sept 30, Sept 30, 2005 2004(a)
(audited) (unaudited)OIBDA $322 $333
Depreciation expense (51) (67) Amortization expense (187) (201) Impairment of goodwill and other intangible assets (1,019) Operating income (loss) $84 ($954) Interest expense (182) (82) Net investment-related gains (losses) 1 (9) Equity in losses of equity-method investees (1) (13) Deal-related transaction costs (63) Loss on repayment of Holdings Notes (35) Loss on repayment of bridge loan (6) Unrealized (loss) gain on warrants 17 (120) Minority interest expense (5) (14) Other income (expense), net 7 (11) Loss before income taxes ($114) ($1,272) Income tax expense (55) (150) Net Loss ($169) ($1,422)
(a) - The twelve-month period ended September 30, 2004 is the combination of the five months ended February 29, 2004 of the predecessor company and the seven months ended September 30, 2004 of the successor company.
December 5, 2005
Adjusted Results
As previously disclosed, the current year contained a number of non-recurring charges that occurred concurrently with or in connection with our initial public offering. Such charges relate to specific IPO-related one-time events and do not reflect on-going operations of the business. In addition, the fourth quarter contained non-recurring charges in connection with our integration of the Lava label into the Atlantic Records Group and our settlement of the Spitzer investigation. The prior year also contained non-recurring items. Therefore, the company is also presenting results excluding these items and FAS 123 expenses. We consider these adjusted results to be an important indicator of the operational strengths and performance of our businesses, including the ability to provide cash flows to service debt. However, a limitation of the use of these adjusted amounts as performance measures is that they do not reflect the charges noted and, therefore, do not necessarily represent funds available for discretionary use, and are not necessarily measures of the company’s ability to fund its cash needs. Accordingly, these adjusted amounts should be considered in addition to, not as a substitute for, operating income (loss), net income (loss), EPS and other measures of financial performance reported in accordance with accounting principles generally accepted in the U.S.
December 5, 2005
Reconciliation of GAAP Operating Income to Non-GAAP Adjusted OIBDA, Twelve Months Ended 9/30/05 versus 9/30/04 (dollars in millions)
Twelve TwelveMonths MonthsEnded Ended
Sept 30, Sept 30,2005 2004(a)
(audited) (unaudited)Total WMG Operating Income (Loss) - GAAP $84 ($954)Depreciation and amortization 238 268Impairment of goodwill and intangible assets 1,019Total WMG OIBDA $322 $333Non-recurring severance and other 24Legal settlement 5Restructuring costs 7 34Loss on termination of management agreement 73IPO-related cash bonus 10Bonus related to stock awards 19Management fees 6 6Total WMG OIBDA Excluding Non-Recurring Charges $466 $373FAS 123 expense 25 1Total WMG Adjusted OIBDA $491 $374
Recorded Music Operating Income (Loss) - GAAP $215 ($934)Depreciation and amortization 165 181Impairment of goodwill and intangible assets 1,019Recorded Music OIBDA $380 $266Non-recurring severance and other 24Restructuring costs 7 24IPO-related cash bonus 8Bonus related to stock awards 12Recorded Music OIBDA Excluding Non-Recurring Charges $431 $290FAS 123 expense 17 1Recorded Music Adjusted OIBDA $448 $291
Music Publishing Operating Income (Loss) - GAAP $82 $74Depreciation and amortization 59 70Music Publishing OIBDA $141 $144Restructuring costs 1IPO-related cash bonus 1Music Publishing OIBDA Excluding Non-Recurring Charges $142 $145FAS 123 expense 3Music Publishing Adjusted OIBDA $145 $145
(a) - The twelve-month period ended September 30, 2004 is the combination of the five months ended February 29, 2004 of the predecessor company and the seven months ended September 30, 2004 of the successor company.
December 5, 2005
Reconciliation of GAAP Operating Income to Non-GAAP Adjusted OIBDA, Three Months Ended 9/30/05, 6/30/05, 3/31/05 and 12/31/04 and Twelve Months Ended 9/30/05 (dollars in millions)
Twelve Three Three Three ThreeMonths Months Months Months MonthsEnded Ended Ended Ended Ended
Sept 30, Sept 30, June 30, March 31, Dec 30,2005 2005 2005 2005 2004
(audited) (unaudited) (unaudited) (unaudited) (unaudited)
Total WMG Operating Income (Loss) - GAAP $84 $19 ($92) $27 $130Depreciation and amortization 51 11 12 14 14Impairment of goodwill and intangible assets 187 47 47 47 46Total WMG OIBDA $322 $77 ($33) $88 $190Non-recurring severance and other 24 24Legal settlement 5 4 1Restructuring costs 7 7Loss on termination of management agreement 73 73IPO-related cash bonus 10 10Bonus related to stock awards 19 19Management fees 6 1 3 3Total WMG OIBDA Excluding Non-Recurring Charges $466 $112 $71 $91 $193FAS 123 expense 25 7 9 7 2Total WMG Adjusted OIBDA $491 $119 $80 $98 $195
December 5, 2005
Free Cash Flow
Free cash flow reflects our cash flow provided by operating activities less capital expenditures and cash paid or received for investments. We use free cash flow, among other measures, to evaluate our operating performance. Management believes free cash flow provides investors with an important perspective on the cash available to service debt, make strategic acquisitions and investments, fund ongoing operations and working capital needs and pay ongoing regular quarterly dividends. As a result, free cash flow is a significant measure of our ability to generate long-term value. It is useful for investors to know whether this ability is being enhanced or degraded as a result of our operating performance. We believe the presentation of free cash flow is relevant and useful for investors because it allows investors to view performance in a manner similar to the method used by management. In addition, free cash flow is also a primary measure used externally by our investors and analysts for purposes of valuation and comparing the operating performance of our company to other companies in our industry.
December 5, 2005
Free Cash Flow (cont’d)
As free cash flow is not a measure of performance calculated in accordance with GAAP, free cash flow should not be considered in isolation of, or as a substitute for, net income (loss) as an indicator of operating performance or cash flow provided by operating activities as a measure of liquidity. Free cash flow, as we calculate it, may not be comparable to similarly titled measures employed by other companies. In addition, free cash flow does not necessarily represent funds available for discretionary use and is not necessarily a measure of our ability to fund our cash needs. As free cash flow deducts capital expenditures and cash paid or received for investments from cash flow provided by operating activities, the most directly comparable GAAP financial measure, users of this information should consider the types of events and transactions that are not reflected. We provide below a reconciliation of free cash flow to the most directly comparable amount reported under GAAP, cash flow provided by operating activities.
December 5, 2005
Free Cash Flow (cont’d)
Free cash flow includes cash paid for interest and certain non-recurring payments related to our IPO. We also review our cash flow adjusted for these items, a measure we call unlevered after-tax cash flow excluding certain non-recurring IPO related items. Management believes this measure provides investors with an additional important perspective on our cash generation ability. We consider unlevered after-tax cash flow excluding certain non-recurring IPO related items to be an important indicator of the performance of our businesses and believe the presentation is relevant and useful for investors because it allows investors to view performance in a manner similar to the method used by management. A limitation of the use of this measure is that it does not reflect the charges noted and, therefore, does not necessarily represent funds available for discretionary use, and is not necessarily a measure of the company’s ability to fund its cash needs. Accordingly, this measure should be considered in addition to, not as a substitute for, net cash flow provided by operating activities and other measures of liquidity reported in accordance with accounting principles generally accepted in the U.S.
December 5, 2005
Calculation of Non-GAAP Free Cash Flow, Three Months Ended 9/30/05, 6/30/05, 3/31/05 and 12/31/04 and Twelve Months Ended 9/30/05 (dollars in millions)
Twelve Three Three Three ThreeMonths Months Months Months MonthsEnded Ended Ended Ended Ended
Sept 30, Sept 30, June 30, March 31, Dec 30,2005 2005 2005 2005 2004
(audited) (unaudited) (unaudited) (unaudited) (unaudited)Net cash flow provided by operating activities $205 $33 ($120) $229 $63Less: Capital expenditures 30 10 6 8 6Less: Cash paid (received) for investments 24 (10) (13) 28 19Free cash flow (b) $151 $33 ($113) $193 $38
Twelve Three Three Three ThreeMonths Months Months Months MonthsEnded Ended Ended Ended Ended
Sept 30, Sept 30, June 30, March 31, Dec 30,2005 2005 2005 2005 2004
Free cash flow $151 $33 ($113) $193 $38Plus: Cash paid for interest 151 22 63 24 42Plus: Cash paid to terminate management agreement 73 73Plus: IPO-related cash bonus 10 10Plus: Cash bonus related to stock awards 19 19Plus: Cash paid for management fees 6 1 3 3Unlevered after-tax cash flow excluding non-recurring IPO-related expenses
$410 $55 $53 $220 $83
(b) - Free cash flow includes cash paid for interest and certain non-recurring cash payments as follows (in millions):