·Underlying Group revenue fell by 15.8% on a reported basis and by 12.1% at constant currency
·As announced on 18 April 2007
-EMI Music revenue fell by 15.0% at constant currency
-EMI Music Publishing outperformed the recorded music market with revenue declining by only 0.9% at constant currency
·Group digital revenue increased by 46.5% from £112.1m to £164.2m on a reported basis representing 9.4% of total underlying Group revenue
·Continued success in finding and breaking long-term talent with top performing artists and songwriters in the financial year including:
-EMI Music – Corinne Bailey Rae, Depeche Mode, Herbert Groenemeyer, Joss Stone, Keith Urban, Lily Allen, Norah Jones,RBD, Robbie Williams, The Beatles, The Kooks, 30 Seconds to Mars and Utada Hikaru
-EMI Music Publishing – Amy Winehouse, Arctic Monkeys, Beyonce, Fergie, Gym Class Heroes, James Blunt, Jay-Z, Nelly Furtado, Norah Jones, Scissor Sisters and Vasco Rossi
·EMI Music operating margin reduced from 8.7% in the prior year to 3.3%, driven primarily by lower sales reflecting tough industry conditions and an unprecedented level of stock returns
·EMI Music Publishing operating margin improved from 25.1% to 26.3%, due to a reduction in the cost base and favourable revenue mix
·Underlying profit before tax decreased by 60.6% to £62.7m from £159.3m
·Underlying diluted earnings per share decreased to 5.8p from 15.7p
·As announced on 18 April, further dividend payments have been suspended until the benefits of the restructuring programme have been fully realised. The interim dividend of 2.0p per share has been paid
31 March 2007
31 March 2006
|Underlying Group revenue||1,751.5||2,079.9|
|Group profit from operations (EBITA)(ii)||150.5||250.5|
|Total (loss) profit before taxation||(263.6)||118.1|
|Underlying diluted earnings per share(iv)||5.8p||15.7p|
|Basic (loss) earnings per share||(36.3)p||10.9p|
|Dividend per share||8.0p||8.0p|
|Return on sales(v)||8.6%||12.0%|
|(i)||EBITDA is Group profit from operations before depreciation, operating exceptional items, amortisation, interest and tax|
|(ii)||Group profit from operations (EBITA) is before operating exceptional items, amortisation, interest and tax.|
|(iii||Underlying PBT is before exceptional items, amortisation and tax.|
|(iv)||Underlying diluted earnings per share is before exceptional items and amortisation.|
|(v)||Return on sales is defined as Group profit from operations before operating exceptional items and amortisation as a percentage of Group revenue.|
|(vi)||Interest cover is defined as the number of times EBITDA is greater than Group finance charges, excluding non-periodic interest and non-standard charges.|
Exceptional items include operating exceptional items and financial exceptional items. Operating exceptional items include impairment of goodwill and intangible assets, gains/(losses) on disposal of property, plant and equipment and remeasurement of listed investments. Finance exceptional items include remeasurement of financial assets and liabilities to be included within finance charges and exceptional refinancing costs.
Eric Nicoli, CEO of EMI Group, said, “This has been a challenging year for EMI Group primarily as a result of the worsening market conditions which affected the entire recorded music industry with revenue declines in every major music market across the world.
“This led us to implement a restructuring plan which, as well as removing cost from the business, will fundamentally change the way we do business. Moving forward, we will realign our investment focus and direct our resources to areas where we will make higher and more sustainable returns.
“We believe that digital sales will continue to grow strongly and are excited about the possibilities offered by partnerships and new business models across both our divisions.
“During the past year, we have multiplied our digital distribution channels by entering into agreements with partners who will make our music available across their platforms in many different ways. Our digital activity is extensive and pro-active and we are open to experimenting with all emerging business models. In April 2007, we were the first music major to make available a new digital rights management (DRM)-free premium sound quality download product as part of our strategy to provide consumers with compelling music propositions.
“We remain confident about our long-term future: while current trading conditions are difficult, consumers’ appetite for music has never been greater. Although fewer CDs are being purchased, people are consuming more music in more ways than ever before. We are positioning ourselves to capture these new and expanding revenue opportunities as we build a progressive music business which is truly consumer focused and well-equipped for the digital age.”
EMI Group plc
|Amanda Conroy||Corporate Communications||+44 20 7795 7529|
|Pippa Strong||Investor Relations||+44 20 7795 7681|
Brunswick Group LLP
|Patrick Handley||+44 20 7404 5959|
A live audio webcast of EMI’s conference call to investors and analysts will take place at 8.00am (UK time) on 22 May 2007, and can be accessed via the Company’s web site, www.emigroup.com.An archive will be available for viewing shortly thereafter.
EMI Group performance review
Recorded music industry
EMI Music operates in a marketplace that continues to undergo significant change, primarily driven by the rapid development of the digital music industry. Global digital markets increased by 68.3% in value over the financial year to account for 13.2% of the total industry, with both mobile and fixed line platforms enjoying strong growth. Challenging market conditions saw global physical sales decline by 13.6% over the financial year, resulting in an overall industry decline of 7.6% for the period.
The digital environment continues to be dynamic with new entrants, new services and new devices. Consumers are now able to access up to 4m tracks in the legitimate digital environment enjoying access to 24 hour music stores with unlimited shelf space.
This year, more people were able to access the digital environment due to the wide availability of broadband lines and music enabled mobile phones. In the past year, mobile music in particular has developed strongly, fuelled by new services such as full audio and video over the air delivery. The last year has seen significant expansion of mobile entertainment market in the US. Music videos and user generated content are also gaining in importance bolstered by the popularity of services such as Yahoo! Music. This is creating new commercial and promotional opportunities for artist videos. Furthermore, the way people discover music is changing. The past year has also seen the increasing popularity of social networking sites. This gives EMI a new way in which to market artists and is also a valuable resource in gathering information about consumer preferences. EMI continues to actively explore commercial opportunities around social networking.
The industry has continued to make progress in combating both physical and digital piracy. We have had notable legal victories against illegal peer to peer sites and continued in our efforts to get Internet Service Providers to take greater responsibility for providing access to unauthorised content from their sites. Such successes include KaZaa (Australia), Kuro (Taiwan), and Zoekmp3 (Netherlands). This has improved the business landscape for legitimate music sales. Today there are over 498 legitimate online music services in over 40 countries.
2006/07 has been a challenging year for EMI Music. Sales declined by 15.0% at constant currency. This is partly a function of the decline within the total music industry as well as the disappointing performance of EMI Music’s portfolio compared to the prior year. We generated seventeen 1m+ selling albums in the year including successes from Norah Jones, The Beatles, Keith Urban, Corinne Bailey Rae, Bob Seger and Joss Stone. Strong performers digitally included MIMS, Utada Hikaru, KT Tunstall and OK Go. Total digital revenue represented 10.4% of total EMI Music revenue in the year.
Profit from operations before exceptional items and amortisation (EBITA) declined to £44.9m, resulting in an operating margin of 3.3%. This decline in profitability was driven by the flow through to profits from the reduction in revenues. In April 2006, we announced a cost savings initiative of £30m for the Group of which £25m was targeted for EMI Music to be achieved by the end of 2007/08. During 2006/07, the Group achieved £20m of this target which was well ahead of the planned £10m. In January 2007, we also initiated a far-reaching restructuring programme to remove £110m from the Group cost base which will be completed by 31 March 2009. The majority of these cost reductions will be generated from EMI Music.
Digital technology is multiplying the ways in which we can monetise our music assets and our key strategic priority is to continue to make our music content available on all economically attractive platforms, formats and services to ensure the widest consumer reach. In April 2007, we announced that we were launching a new premium download product which provides our music at a higher sound quality and without the restrictions of digital rights management to consumers. We are the first major recorded music company to do this and it is a fundamental step towards removing the boundaries for consumers by enabling the interoperability of digital music between services and devices. Our recent partnership with Amazon to provide our new premium product in their digital music store illustrates how the absence of DRM is promoting competition between digital retailers. By removing DRM, we are able to provide a seamless experience for the consumer, which we believe will grow the demand for digital music.
We continued to broaden our digital distribution channels globally by entering into agreements with partners who will make our music available on their platforms. During the year, we entered into partnerships including: a multi-territory deal with Apple; regional partnerships with MTV, Yahoo, Last.fm and Sony; and national agreements with Amazon in the US, Baidu in China, Napster in Germany and Playlouder and BT Vision in the UK. In addition to establishing the right relationships on the right terms, we are at the forefront of the industry in exploiting the new product, format and windowing possibilities that digital enables. For example, during the year we distributed the 30 Seconds to Mars video using the latest Web 2.0 technology. The flash technology allows users to embed videos within their own websites and social networking pages, with a click through function which allows viewers of the web page to purchase the tracks and also allows us to generate additional revenue by putting advertising around the video content. EMI Music repertoire is now available digitally in 70 countries, up from 56 countries in the prior year. We believe that we have made significant progress within the digital arena during the year and that this will enable us to enhance value for our shareholders through the growth of this market in the future.
EMI Music geographic review
2006/07 has been a challenging year for the North American market, which declined by 7.7% overall. Digital sales grew strongly by 80.1%, which was driven, in particular, by the mobile market. This growth has not compensated for the decline experienced in the physical market. Digital represented 20.8% of the total market during 2006/07.
Against this difficult backdrop, our North American business experienced a decline in revenue. We had key successes from US artists, Norah Jones, Keith Urban, Janet Jackson, 30 Seconds to Mars and Trace Adkins in combination with the effective marketing and promotion of international releases from The Beatles, Corinne Bailey Rae and Joss Stone. MIMS is our latest urban breakthrough act in the region; his debut single has performed very strongly with 1.3m ring tunes sold and 0.7m tracks downloaded globally in the financial year.
EMI Music’s digital revenue in North America increased by 64% over the year. Mobile products grew at the fastest rate but online downloads continued to represent the largest digital segment for the region. EMI Music has consistently been an innovator of new products and services. Most recently, we reached an agreement with Amazon, making us the first music major to be in Amazon’s new online music store. We were also the first music major to make its catalogue of recordings available to Qtrax, which will be the first advertising supported, legal peer-to-peer music distribution service. During the year, we provided tracks which were used as pre-loaded content when the Microsoft’s Zune player was launched in November 2006.
We believe it is important to participate across all genres and in North America we have specific labels dedicated to Country (Capitol Nashville), Christian (CMG) and Jazz Music (Bluenote). All of these labels are well known for their ability to attract high calibre talent such as Anita Baker, Amy Grant and Kenny Rogers. During the year, they generated strong sellers with releases from Norah Jones, Keith Urban and Chris Tomlin.
In September 2006, we completed the sale and leaseback of the Capitol Tower in Los Angeles which resulted in an inflow of cash for the Group.
As part of the restructuring we announced in January 2007, we have merged our two main pop labels in the region, Capitol and Virgin, to form the Capitol Music Group. The combined artist roster, talent and market share of this new label group establishes it as one of North America’s leading labels. The restructuring also involves additional overhead reductions throughout our operations in the region and an increased focus on building our digital capability.
UK & Ireland
Consistent with the global recorded music market, the UK market experienced very tough conditions over the last 12 months, particularly in the physical market which showed significant decline in the fourth quarter.Total physical sales declined by an estimated 11.8% in the year, while digital sales increased by 79.7% to give a total market decline of 8.8% over the 2006/07 financial year.This reflected the weakness in industry sales in the key Christmas period and continuing price erosion as the specialist retailers began to compete on price with the supermarkets.
The strength and depth of our UK artist roster was again demonstrated this year despite the difficult market conditions.Album releases from Robbie Williams and Corinne Bailey Rae each sold in excess of 2m physical units worldwide and The Beatles Love album sold 5m worldwide during the year. A number of new UK artists also broke through to success during the year, most notably The Kooks, Lily Allen, The Good, The Bad and The Queen and Jamie T. EMI’s British artists had tremendous success in the US with Corinne Bailey Rae and KT Tunstall breaking through in the year.12 of the top 40 best-selling UK albums in the US during 2006 were EMI releases, including seven of the top 12 which is more than any of our competitors.EMI Music continued to demonstrate its strength in the compilation market and, in the final quarter of the financial year, it had three of the top-10 selling compilations.
Our digital revenue for 2006/07 in the UK grew by 31% over the prior year with fixed line downloads increasing by 16%, mobile downloads increasing by 41% and subscription by 38% over the period. Digital delivery brings many opportunities for capturing new revenue streams which we continue to explore.For example, EMI Music UK has entered into a deal with Playlouder MSP to make available its extensive catalogue via Playlouder’s bundled subscription and ISP service.
As part of the restructuring we announced in January 2007, we have scaled back in all areas and merged some functions of our four UK labels while maintaining the four imprints.We anticipate that this will take significant costs out of the business while maintaining excellent specialist A&R skills in each label that will enable EMI to capitalise on the opportunities for marketing its recorded music around the world.
Market conditions in Continental Europe were challenging over the financial year, with total industry sales declining by 8.3%.
EMI Music delivered a very commendable market share in a tough market environment. EMI gained market share in Spain, the Netherlands Switzerland, Austria and Poland while also delivering good results in Greece, Belgium and Italy.Good performances came from a broad range of established and new artists. Herbert Groenemeyer sold over 1m units worldwide of his album 12 and it remained number 1 in the German album charts for five weeks in a row which has not been accomplished by a local artist since he also achieved this in 2002. French rap artist Diam’s achieved the best-selling album in France in 2006 with Dans Ma Bulle, reaching 1m units since its release. Diams also won Best French Act at the 2006 MTV Europe Music Awards.
We have sustained digital growth in the region during the financial year, with revenue increasing by 30%. However, our digital growth in Continental Europe is constrained by the lack of local fixed line retail stores in major markets such as Benelux and Scandinavia and a lack of marketing support for download stores. Mobile products represented a greater portion of digital sales in Europe than in the US or the UK, although fixed line sales still account for the majority of digital sales. The key issue remained the heavy level of piracy, particularly in Spain, Greece and Italy. However, EMI Music continues to explore all profitable digital models. For example, EMI Music has announced an advertising supported, pan-European agreement with Yahoo!Music, the biggest online video-on-demand service in the world together with AOL and MTV, to enable consumers of online services to watch videos from EMI’s digital catalogue free of charge.EMI has also signed a pan-European agreement with online social community Last.fm, to make music from EMI available to its users and a deal with Sony to pre-load EMI Music onto the Sony memory stick as well as a number of pre-load handset deals including with Nokia.
During the year, as part of the cost reduction programme announced in April 2006, the region redeveloped its organisation and business approach to address changes in consumer trends and the consumption of music including the establishment of shared service centres for finance processing and advanced CRM capability and practices, in particular in France and Spain.This programme will continue with the further restructuring announced in January 2007.
The Japanese market declined by 2.4% overall during the 2006/07 year with digital sales representing 12.4% of the overall industry.
Against this backdrop, our Japanese business performed strongly with its market share improving by 0.6 percentage points. This was driven by successful releases from Utada Hikaru selling over 1m physical units in the region along with local releases from DJ Ozma and Glay. International best sellers included Sarah Brightman and The Beatles. Utada Hikaru also performed phenomenally in digital format, with the Flavor of Life track selling 4.4m ring tunes in the financial year and continues to sell strongly. Overall, digital revenue showed an increase of 69% in the year, with mobile continuing to represent the majority of total digital sales. Digital revenues represented 19.6% of total revenue in Japan.
In April 2006, we announced a major restructuring of this business to improve the efficiency of our operations, to reinvest a proportion of these savings in the key areas of A&R and marketing, and to introduce a new multi-label organisational structure. During the year, we have implemented all the initiatives to ensure that we achieve the associated cost savings by the end of March 2008. In conjunction with this restructuring, we sold and leased back two freehold properties in Tokyo, with a substantial cash inflow generated from the transaction.
In December 2006, EMI announced the purchase from Toshiba of its 45% minority interest in Toshiba-EMI for £93m. We expect to complete the purchase in the first half of the 2007/8 financial year and EMI will then own 100% of our Japanese operations. Owning 100% of the business will provide us with full strategic flexibility in the region.
South East Asia
The major markets in South East Asia suffered sales declines as physical and digital piracy continued to take their toll. Overall, our business suffered a slight decrease in share in the region, but continues to deliver acceptable profit levels.
EMI’s digital growth in the region was robust, with download revenue growing by a factor of four times and subscription revenue growing by a factor of six times, as the region experienced a pick up in broadband penetration. We gained digital market share over the year and digital revenue accounted for nearly 15% of the region’s revenue. Major local releases in the region included Jolin Tsai, S.H.E, David Tao and ADA Band. Top-selling international artists included The Beatles and Robbie Williams.
Music in China is an excellent opportunity for us, particularly within digital formats. During the year, we embraced the growing market in China by being the first music major to announce a pioneering strategic partnership with Baidu to launch an advertising-supported, online music streaming service in China, the first revenue-sharing arrangement between an internet search engine and an international music company in that country.
We are currently implementing cost reductions in the region as part of our restructuring programme.
Market conditions in Australasia worsened during the 2006/07 financial year. EMI Music’s market share was modestly down. During the year, we generated releases from local superstars, The 12th Man and Silverchair, as well as selling international titles from The Beatles, Norah Jones and Robbie Williams. Our restructuring programme has already been implemented in the region. iTunes launched in New Zealand during December 2006 and this leaves the region well placed for growth in the digital market.
Our Latin American business had a disappointing 2006/07 year, largely because of problems experienced in Brazil.In October 2006, an accounting fraud was discovered in our recorded music operations in Brazil, which had a £9m negative profit impact. Following our investigation of the events and factors which led to and contributed to the fraud, we have conducted a thorough review of our policies and procedures both in Brazil and throughout our operations which we believe should mitigate the possibility of similar issues in the future.EMI Music Brazil has also been thoroughly restructured and new senior management has been appointed. The refocus of the company culture is now well underway.
Local superstars RBD had another good year,selling almost 3m units globally of their six currently released albums in the financial year.Releases from local artists Kumbia All Starz and Intocable were also successful, as were the new artists Fonseca, Shaila, Kudai and teen talent Belinda. The Latin music icon, Juan Luis Guerra, has recently been signed to EMI-Televisa.
As part of the restructuring plan announced in January 2007, the Latin American regional head office has been reorganised and each country within the region now reports directly to EMI Music International.
We believe that EMI’s Latin music business, both in Latin America and in the US, will improve its creative and business performance due to our recent management changes and to the growing economic development of the Latin demographic.We are well positioned to develop and exploit this through our joint venture with Grupo Televisa S.A., the largest broadcaster in Mexico and the largest Spanish language conglomerate in the world.
Digital revenues for 2006/07 were almost four times larger than in the previous year and the rising penetration of mobile phones in most of Latin America provides a great opportunity for the legal distribution of music in the immediate future.EMI Latin America is focused on its mobile strategy and has completed a regional deal with Telefonica Movistar as well as most of the America Movil’s carriers throughout the region. It has teamed up with Sony Ericsson and Nokia for the creation of preloaded content campaigns supporting the new albums of a number of local and international artists. For example, as part of the release campaign for Robbie William’s Rudebox, his Intensive Care album was preloaded and sold in 850,000 units of Sony Ericsson handsets.
EMI and Virgin Classics had a good year during 2006/07 with particular success in France where they grew their market share by 7% and had a huge hit with The Miracle of the Voice from the critically acclaimed soprano, Natalie Dessay. Japan also performed well with the Sarah Brightman Diva collection and Simon Rattle’s recording of The Planets.
The superstar pianist, Evgeny Kissin, has just been signed to EMI Classics joining other great names such as Nigel Kennedy, Leif Ove Andsnes and Angela Gheorghiu. Virgin Classics added the brilliant young pianist, David Fray, and the German soprano, Diana Damrau, to its expanding roster.
EMI Classics is one of the oldest record label’s in the world. EMI Classics has started a drive to tap further into this incredible resource and share it with music lovers across the globe.In March 2007, EMI Classics and iTunes teamed up to celebrate the 80th birthday of the late Mstislav Rostropovich,who was one of the world’s greatest cellists.EMI Classics is running an international campaign in conjunction with iTunes giving music lovers access to his entire EMI discography as cellist, conductor and pianist.
EMI Music Publishing
EMI Music Publishing once again delivered a solid performance for the financial year ended 31 March 2007. Profit from operations before exceptional items and amortisation (EBITA), increased to £105.6m, an increase of 4.2% at constant currency with operating margin improving to 26.3%. Due to recorded music market conditions, as well as some phasing of income, revenue decreased by 0.9% at constant currency to £401.3m. Overall, this performance reflected both the underlying health and resilience of the business, as well as the early effects of efficiencies from our comprehensive restructuring programme which, in turn, is part of the evolution of the business. EMI Music Publishing has implemented a new strategy that will reshape the business for future growth and flexibility while, at the same time, building on and holding true to past successes. There are four key pillars to this strategy: continued excellence in A&R evidenced by the signing of today’s top songwriters; helping to reform the industry’s infrastructure through licensing and rate setting initiatives; further strengthening our internal capabilities including process and systems re-engineering; and deepening and expanding our client relationships.
Continued success in signing songwriters is essential for our future profitability. This year, a broad range of songs, songwriters and products underpinned our continued ability to sign the world’s best songwriters, while reflecting the quality and depth of the catalogue. Notable successes during the period included songs by Beyonce, Fergie, Gym Class Heroes, Jay-Z, Norah Jones, Panic! At The Disco, The Fray, Nelly Furtado, Tool, Young Jeezy, Pink, Amy Winehouse, Arctic Monkeys, James Blunt, Jamiroquai, Kasabian, My Chemical Romance, Scissor Sisters, The Fratellis, The Feeling, Andreas Johnson, Estopa, Silbermond, La Roi Soleil, The Veronicas, and Vasco Rossi.
With the world’s best collection of songs, we are working to drive industry reform in order to ensure that our songwriters are paid for their works. Nowhere is this more appropriate than in the world of digital revenues.
Digital revenues continued to grow strongly during 2006/07, increasing by 35.5% at constant currency on the prior year, to £25.3m. Revenues from digital music are currently classified amongst the various revenue categories – mechanical, performance, synchronisation and other uses – based on the varying status of income collection for these new uses in different countries.
The use of songs in mobile phone products remains the most significant early digital revenue contributor for EMI Music Publishing and continues to enjoy very strong growth. For the revenue from mobile products, we have seen the percentage contribution from ring tunes increase significantly during the year whilst the contribution from ring tones has decreased. This trend is expected to continue as technology, handsets and networks continue to drive a product shift in the mobile space. Revenues from digital downloads (up 158.3% at constant currency in the year), and other newer products, such as video downloads, have also grown strongly and are starting to contribute more to the division’s growth. EMI Music Publishing remains at the forefront of digital music by fostering relationships with new media companies at all stages of development in order to maximise the exploitation of our songwriters’ music.
However, growth in digital revenues in music publishing continues to lag the recorded music industry, reflecting an under-developed industry infrastructure for the tracking and collection of digital royalties and the lack of agreements on digital royalty rates for certain products in some regions. EMI Music Publishing is at the forefront of the industry’s effort to ensure that the right structures and rates are in place to identify and collect fully all past and future digital revenues. We were pleased to join the ‘Centralised European Licensing and Administration Services’ initiative, which is based on an agreement between the UK’s MCPS-PRS Alliance and Germany’s GEMA collection societies to establish a pan-European licensing and collection mechanism for mobile and online digital rights. This pan-European one-stop shop for the licensing of online rights, which went live in January 2007, is a groundbreaking initiative in the publishing industry. EMI Music Publishing is involved in many of industry developments and rate-setting negotiations around the globe, all in the interest of making sure our songwriters are properly and fairly paid for their works.
Our mechanical revenues, which are derived from the sale of recorded music, declined by 6.7% at constant currency, reflecting the continued declines in the global recorded music market during the same period. Mechanical revenues now represent 42.6% of total divisional sales on a constant currency basis. On a regional basis, weaknesses in Eastern Europe and Scandinavia were partially offset by increases in Southeast Asia, while the US, the UK and Continental Europe were down marginally.
Performance revenues, earned when a song is performed live on stage, played in a bar or other public venue or broadcast on the radio or television, grew by 10.1% at constant currency for the year and now represent 30.0% of divisional revenues on a constant currency basis. Key drivers of growth in this business are the chart success of songs from our roster of active songwriters and the proliferation of new media channels, especially across Europe. On a regional basis, performance income was particularly strong in the US, reflecting timing differences and strong underlying growth.
Synchronisation revenue, which is generated by the use of songs in audiovisual works such as advertisements, television programmes, films, computer games and in mobile phones, increased by 5.6% at constant currency, resulting in more than 12 years of consecutive growth. From the record level achieved in 2005/06, EMI Music Publishing was able to drive meaningful growth in synchronization by gaining greater penetration in multiple channels, particularly in the US and the UK. This growth is an early reflection of our strategy to deepen and broaden our customer relationships with licensors of music. Significant licences were issued worldwide for a number of major advertising campaigns, including Toyota, Kirin Beer, Pantene, General Electric, Maxwell House, Ford, Verizon, Proctor & Gamble, Starwood, Macy’s, Pier 1 and O2.
Other revenue typically represents about 10% of revenues, although the absolute amount can vary significantly from year to year. An important driver of the change in other revenue in recent years has been revenue gained from stepped up efforts in enforcing proper use of our copyrights. By their nature, these revenues tend to be irregular and unpredictable, accounting for the overall decline on a constant currency basis in this revenue category.
EMI Group future outlook
The recorded music market continues to undergo significant change as it becomes increasingly digitised. At this stage, uncertainty exists as to the timing and extent of future market development.We have seen physical sales declining at a significantly faster rate than the industry had anticipated but the Company remains positive on the long-term trends for the industry and, in particular, that there will be continued strong demand for digital music products of all types.We believe that the launch of our DRM-free, superior sound quality downloads, will boost sales of digital music and help unlock the many opportunities of the digital market. Our premium download product will be available with various retail partners including iTunes, Amazon, VirginMega and Telenor. We are currently in negotiations with many other retail services for the launch of this product.
In January 2007, we announced a restructuring programme and an update to our strategy to secure sustainable growth in underlying profits and cash flow. These initiatives will generate annualised cost savings of £110m and we expect £76m of these savings to be achieved by March 2008, with the full run rate being reflected in the financial results for the year to 31 March 2009.
We will continue to invest significantly in A&R to allow a continuing strong focus on artist and songwriter development.We are also investing to develop further our digital expertise so that we remain positioned at the forefront of the industry in capitalising on the opportunities arising from the market’s evolution.
In the current financial year, EMI Music is planning releases from Kasey Chambers, Korn, Kylie Minogue, Lenny Kravitz, LeToya, M, Moby, Raphael, Thalia, The Chemical Brothers and Vasco Rossi.EMI Music Publishing expects to see releases from songwriters including Alicia Keys, Ashlee Simpson, Arctic Monkeys, Chris Cornell, Kanye West, Kelly Clarkson, Shiny Toy Guns, The Police, The Used and White Stripes. We have a world renowned catalogue in both EMI Music and EMI Music Publishing and we will continue to exploit them for the benefit of all stakeholders.
Financial review for the year ended 31 March 2007
Reported underlying Group revenue decreased by 15.8% or £328.4m to £1,751.5m. Excluding the effects of unfavourable currency movements the decrease was 12.1% or £252.2m. The unfavourable exchange movement was largely driven by an increase in the weighted average rate of the US Dollar against Sterling from $1.78 last year to $1.90 in 2006/07.
At constant currency, revenue in EMI Music declined by 15.0%, with notable decreases in North America, UK and Ireland and Latin America.
At constant currency, revenue in EMI Music Publishing was down 0.9% versus the prior year due mainly to declines in physical mechanical sales as well as minor phasing adjustments. The 6.7% decrease in mechanical revenue was largely offset by solid growth in performance and synchronisation revenues.
Group digital revenue increased to £164.2m from £112.1m in the prior year, an increase of 46.5%. Digital revenue represented 9.4% of total underlying Group revenue for the year.
The underlying gross margin, after distribution costs, declined from 37.2% to 34.9%. This is the result of a gross margin decline in the Music division. Royalty, copyright manufacturing and distribution costs are all largely variable with revenue and have decreased in absolute terms in the year. Marketing and promotion costs, however, were lower in absolute terms but 2.6 percentage points higher as a percentage of total sales. Controlling marketing spend is a key area of focus for the Music business this year.
In April 2006, we announced a cost saving initiative to deliver £30m of annualised savings for the Group. During 2006/07, we achieved £20m of savings, well ahead of the £10m planned, and we remain on course for the full £30m in 2007/08.
In January 2007, we announced a comprehensive restructuring programme to realign our investment approach and streamline our operations. This programme will deliver £110m of annualised savings with £76m currently anticipated to be achieved in 2007/08.
Profit from operations
Group profit from operations (EBITA)(i) decreased by £100.0m or 39.9% from £250.5m to £150.5m. Excluding exchange, the decrease in EBITA was £94.6m or 37.8%. Group operating margin decreased from 12.0% to 8.6% in the year.
EMI Music delivered EBITA of £44.9m, a decline of £100.2m or 68.2% at constant currency on the prior year. This decrease in EBITA was largely driven by the revenue declines particularly in North America, UK and Ireland and Latin America mentioned above. The operating margin reduced from 8.7% to 3.3%.
EMI Music Publishing generated EBITA of £105.6m, a growth of 4.2% at constant currency on the prior year. Operating margin improved from 25.1% to 26.3%, reflecting the partial effects of the restructuring programme and its efficiencies.
The Group’s share of profit in its associated company investments increased from £1.0m in 2005/06 to £1.8m in 2006/07. Consequently, the total underlying profit from operations for the Group is £152.3m this year compared to £251.5m last year.
(i) Group profit from operations (EBITA) is before exceptional items and amortisation and before share of profit in associates.
Group finance charges, excluding exceptional finance charges, reduced by £2.6m to £89.6m. This reflected a 3.2% decrease in average net borrowings, an increase in pension fund interest receivable offset by higher rates in three of our major funding territories (US, UK and Europe).
Underlying profit before tax declined by 60.6% from £159.3m to £62.7m, reflecting the reduction in revenue and underlying profit from operations discussed above.
The Group underlying tax rate, before amortisation and exceptional items, was 22% against 17.6% in the prior year. The increased rate reflected a movement in profitability towards countries where there were higher tax rates together with losses in territories where we cannot recognise the loss. This was offset by the settlement of prior liabilities.
As a result of the above, the Group’s underlying profit after taxation decreased from £131.2m to £48.9m, a decrease of 62.7%.
Underlying basic earnings per share(ii) was 5.8p, a decrease of 10.4p from the prior year. Underlying diluted earnings per share, the calculation of which includes the impact of the potential conversion of convertible bonds (and related bond interest) together with the possible exercise of dilutive share options, decreased from 15.7p to 5.8p.
(ii) Before exceptional items and amortisation.
Other items affecting earnings
Exceptional items and amortisation comprise operating exceptional costs, finance exceptional costs and amortisation of music copyrights and intangibles.
The Group is reporting operating exceptional costs of £256.3m compared with income of £4.0m in the prior year. Operating exceptional costs are net of a £50.2m gain on disposal of property (including the sale and leaseback transactions completed for our offices in Tokyo and the Capitol Tower in Los Angeles) and a gain following settlement of an infringement case with Bertelsmann AG in March. The exceptional costs include £191.5m for our restructuring programmes announced in April 2006 and January 2007 (largely headcount and roster reduction) and the results of our balance sheet review announced on 12 January 2007 and concluded as anticipated on 31 March 2007. The review resulted in a charge of £164.0m reported as exceptional this year. The final elements of this year’s exceptional cost are a £0.2m loss on revaluation of investments and £7.6m for aborted corporate transactions.
The Group is reporting finance exceptional net costs relating to remeasurements and refinancing costs of £17.3m compared to net income of £4.7m last year. Finance exceptionals include the loss on revaluation to fair value of the convertible bond derivative of £5.7m (2005/06: £4.1m gain), the loss on revaluation of the Eurobond embedded call feature of £21.3m (2005/06 £8.2m gain) and the foreign exchange gain on Euro borrowings of £8.1m (2005/06: £4.1m loss). The finance exceptional net costs for 2006/07 include exceptional refinancing costs of £1.1m in connection with the refinancing programme carried out in March 2007 (2005/06: £5.2m refinancing programme carried out in July 2005).
Amortisation and impairment of music copyrights and other intangibles amounted to £52.7m in comparison with £49.9m last year.
The minority interest cost reduced from a charge of £3.9m in the previous year to a charge of £1.5m this year. This was the consequence of reduced profitability in the Music business in Japan in which there was a 45% minority share for eight and a half months of the year. In December 2006, we agreed to acquire the 45% minority share from Toshiba for approximately £93m. The cash cost is due to be paid in the first half of 2007/08.
The loss attributable to members of the Company was (£288.5)m in comparison with an attributable profit last year of £86.1m.
As announced in April 2007, the Board is suspending dividend payments until the benefits of the restructuring process have been fully realised. The interim dividend of 2p per share was paid on 2 April 2007.
Total Group loss from operations (including share of associates) was £(156.7)m in comparison with a profit of £205.6m last year. This decrease was entirely due to the decline in revenue compounded by exceptional costs of £309.0m this year compared to £45.9m last year.
Total loss before taxation was £(263.6)m compared to a profit of £118.1m in the prior year. This decrease reflected the reduction in Group profit from operations above and a change in the finance exceptional from net income to a net cost.
Cash flow and net borrowings
Improvement in cash conversion and overall cash management remains a key area of focus for the Group. The net cash inflow from operating activities was £7.3m, a significant reduction from last year’s inflow of £188.3m, reflecting a significant working capital outflow in the Music division as a result of changes in trading patterns, the costs of our restructuring programme announced in January 2007 and the lower EBITA reported this year.
After the net cash inflow from operating activities, we had cash inflows of £65.8m for investment activity and cash inflows of £85.1m for financing activity including an outflow of £50.8m for dividends. Taking into account the gain on exchange of foreign currency denominated borrowings of £43.7m, year-end net debt increased by £24.7m from £879.5m to £904.2m.
The net cash inflow from operations after investing activities has approximated the operating result of both divisions in recent years.Click here to download the attachments to this announcement