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Crisis? What crisis? EMI delivers!
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PostPosted: Mon Nov 24, 2003 7:54 am    Post subject: Crisis? What crisis? EMI delivers! Reply with quote  Mark this post and the followings unread

EMI Group Plc Interim Results To 30 September 2003
http://www.mi2n.com/press.php3?press_nb=59555

EMI Group – continued progress 
* Turnover held firm at £960.3m, outperforming recorded music industry sales which declined by 10.4%
* Operating profit (EBITA) up 0.9% to reach £79.7m
* Adjusted PBT of £39.4m compares with £42.2m, with decline due entirely to increased interest charges
* Profit before tax (PBT) of £11.9m compares with £194.4m last year, and was affected by:
-          an operating exceptional charge of £21.8m due to unprecedented levels of retailer de-stocking in Japan and a reorganisation in EMI Music Publishing
-          a non-operating exceptional gain of £20.5m relating to property disposals
-          a non-operating exceptional gain of £174.8m in prior year
* Operating cash flow increased by £192.0m to £45.0m for the half 
* Net debt reduced by £137.7m to £946.8m
-          Net debt / EBITDA ratio improved from 4.0 to 3.2 
* Debt restructuring programme completed in early October, diversifying the Group's sources of funds and extending average debt maturity
* Interim dividend declared at 2.0p per share, in line with last year
 
Recorded Music – outperforming the industry
 
* Turnover broadly maintained at £758.6m, prevailing over the industry decline of 10.4%
* Share of industry sales improved by 1 percentage point to reach 12.9%, with particularly good performance in North America where industry share rose 1.4 percentage points to 11%, reflecting improved creative output
* EBITA increased by 0.7% to £28.2m
* Continued expansion in digital music offerings in North America, Europe and Asia
 
Music Publishing – continued stability
 
* Turnover declined only slightly by 0.2% to £201.7m, in spite of pressures from the declining recorded music industry
* EBITA increased by 1.0% to £51.5m
* Performance and synchronisation income increased strongly, offsetting the weakness in mechanical income
 
Eric Nicoli, Chairman, said: "EMI continued to make good progress in the first six months of the fiscal year delivering a small increase in operating profit and level sales in the context of a global recorded music industry decline of over 10%.  It is most encouraging that, in these extremely challenging industry conditions, both of our businesses, recorded music and music publishing, maintained sales, operating profit and margin at last year's level and outperformed the rest of the industry.
 
"Especially pleasing in the half year was the improvement in cash flow.  Good cash management and the on-going sale of non-core assets, allowed us to make further investments in Jobete (the Motown catalogue), in new technology, as well as in our artists, and still end the half year with net borrowings £137.7m lower than one year earlier.
 
"We also successfully restructured the Group's debt, completing a programme in October to diversify our sources of funding and extend debt maturity.  The strong acceptance of our debt offerings demonstrates the financial community's appetite for our credit and confidence in our disciplined approach to managing the business, now and for the future. 
 
"As we move forward, we are committed to building a company with the capability to meet the challenges of an industry undergoing unprecedented change.  We aim to improve and increase our creative output while continuing to invest in the people, processes and systems necessary to assure our future.  Our progress over the last two years is evidence of our determination to succeed. 
 
While it is too early to predict accurately the industry trends for the second half of the year or our performance within it, we are sharply focused on delivering a solid performance for the year as a whole.  Against that background, the Board has maintained the interim dividend at the previous year's level of 2p per share."
 
"We announced on 22 September that EMI had entered non-exclusive discussions with Time Warner Inc. about a possible transaction involving the recorded music division of the Warner Music Group.  Those discussions have progressed well and are at an advanced stage.  We have made a firm proposal to Time Warner which, we believe, would create substantial value for the shareholders of both companies.  As soon as we are able, we will make a further announcement.  It would be inappropriate to say more at this time."

Chairman's Statement
 
The results for the six months to 30 September 2003 show that EMI continued to make good progress in the first half of the fiscal year delivering a small increase in operating profit and level sales in the context of a global recorded music industry decline of over 10%.  It is most encouraging that, in these extremely challenging industry conditions, both of our businesses, recorded music and music publishing, maintained sales, operating profit and margins at similar levels to last year and outperformed the rest of the industry.
 
EMI Group
 
For the Group as a whole, operating profit before exceptional items (EBITA) increased 0.9% to reach £79.7m against £79.0m last year.  Exchange rate effects were almost neutral, costing £0.1m.  The benefit to our results from the stronger Euro was offset by the adverse impact of the weaker US Dollar.  The EBITA result is based on turnover down 0.1% to £960.3m.  Return on sales increased to 8.3% from 8.2% in the prior year.  As a consequence, basic adjusted earnings per share increased to 3.6p per share from 2.9p per share last year. 
 
The profit before tax, amortisation and exceptional items (adjusted PBT) for the six months of £39.4m compares to £42.2m last year.  The decline is entirely driven by an increase in interest charges that is a direct consequence of the move to longer-term debt and the additional interest payable arising from a credit rating downgrade at the end of the prior fiscal year.
 
The Group is reporting operating exceptional costs of £21.8m as well as £1.7m shown as exceptional finance charges, and non-operating exceptional credits of £20.5m.  The net tax credit in respect of these items is £5.8m.  The operating exceptional charge comprises the cost to EMI of the unprecedented returns in Japan of £16.9m and £4.9m in respect of the reorganisation of Music Publishing.  The non-operating exceptional credit is entirely in respect of gains on sale of properties.
 
The profit after taxation, amortisation and exceptional costs and minority interests was £8.8m compared to the previous year's higher level of £138.4m, which included after tax profits of £136.6m from the sale of HMV Group plc shares and other assets.
 
Especially pleasing in the half year was the improvement in cash flow.  Good cash management and the earlier sale of non-core assets allowed us to make further investments in Jobete (the Motown catalogue), in new technology, as well as in our artists, and still end the half year with net borrowings £137.7m lower than a year earlier.
 
Under the leadership of CFO Roger Faxon, the Group successfully restructured its debt, completing a programme in October to diversify sources of funding and extend debt maturity.  The strong acceptance of our debt offerings demonstrates the financial community's appetite for our credit and confidence in our disciplined approach to managing the business, now and for the future. 
 
The Board has declared an interim dividend of 2.0p per share, in line with last year.
 
Recorded Music
 
The step change in our recorded music division's strategy and performance, so evident in 2002/03, has continued in 2003/04.  With improved creative output, Recorded Music realised gains in its share of industry sales, reaching 12.9% industry share globally, with a particularly good performance in North America where share rose to 11%.  By delivering music that consumers wanted to buy, EMI achieved flat sales within a very challenging environment.
 
EBITA before exceptional items and after central costs grew from £28.0m to £28.2m.  A key driver was the major step forward in profitability in North America where a loss in the first half of last year was transformed into a sizeable profit this year.  Disappointingly, the performance in Japan declined substantially, due in part to an anticipated weaker release schedule as well as the effects of difficult industry conditions.  The major regions of UK and Ireland and Continental Europe both showed increased profitability.
 
In addition, the second phase of restructuring activity, which Alain Levy and David Munns outlined in March 2002, is also now well under way. The elements of this phase comprise enhanced IT support to the business, harnessing the digital revolution to the benefit of the business and transforming the division from a record company to a music company. We are now seeing the first deliverables of these projects which will fuel the division's future growth.
 
Music Publishing
 
Our music publishing division has once again delivered strong results overcoming the pressures of the declining recorded music industry.  For the half year, EBITA before exceptional items and after central costs grew from £51.0m to £51.5m on sales 0.2% down to £201.7m.  Our Continental European businesses performed particularly well during the half.  Under the leadership of Martin Bandier, EMI Music Publishing achieved strong growth in performance and synchronisation revenues, offsetting a downturn in mechanical revenue.
 
Recognising the changing and challenging environment, the music publishing division launched a reorganisation programme designed to enhance efficiency and take cost out of the business.  This resulted in a one-off exceptional charge of £4.9m in the period but is expected to lead to good ongoing cost savings.  The components of the programme are headcount reductions in excess of 5% of the staff at the outset, and an increased focus on technologies that can provide more automation and efficiency.
 
Continuing discussions on a potential transaction
 
EMI announced on 22 September that it had entered non-exclusive discussions with Time Warner Inc. about a possible transaction involving the recorded music division of the Warner Music Group.  Those discussions have progressed well and are at an advanced stage.  We have made a firm proposal to Time Warner which, we believe, would create substantial value for the shareholders of both companies.  As soon as we are able, we will make a further announcement.  It would be inappropriate to say more at this time.
 
Recorded Music Operating Review
 
The six months ended 30 September 2003 saw the continuation of the turnaround in performance that was evident in 2002/03.  The background to the performance was a further fall in the global music industry, with a decline of 10.4% in the half year.  Each of the geographic regions saw declines in industry size over the last six months.  Within this environment, EMI improved global industry share by about 1 percentage point to reach 12.9% and, as a result, sales were almost flat at £758.6m against £759.3m last year.  Exchange effects were favourable at £3.2m but, even at constant exchange rates, the turnover decline was restricted to £3.9m or 0.5%. 
 
The range of the top selling albums was encouraging; strong sell through on earlier releases from Norah Jones and Coldplay was complemented by new releases from established artists like Robbie Williams, Radiohead and Pur and by breakthroughs from Chingy, Stacie Orrico and The Thrills.
 
Before central costs, EBITA grew from £35.2m to £36.7m, whilst after these costs, it grew from £28.0m to £28.2m.  Growth at constant exchange rates was £0.1m higher. 
 
One of the strongest achievements of the period was the continued improvement in our performance in North America where EBITA grew from a loss to a profit, as our industry share increased from 9.6% to 11% for the half.  Each of the main business units reported improved results as the benefits from the widespread restructuring programme of the previous eighteen months were felt.  In particular, Capitol Records posted a strong increase in sales with releases from such artists as Chingy, The Beach Boys and Radiohead.
 
The Latin American recorded music industry continued to struggle, with a decline of 19%.  It was disappointing to see the Brazilian industry, which had recovered in 2002/03, turn down again in the last six months.
 
In the UK and Ireland, our business continued to perform very well.  Growth was achieved in EBITA, even after a strong prior year performance, as a schedule of releases from, amongst others, Radiohead, Robbie Williams, Blur and Iron Maiden sold strongly.
 
In Continental Europe, our performance in sales and EBITA was flat over the previous year, which is a commendable result given the industry conditions. We witnessed some strong local releases from Pur, IAM and Helmut Lotti.  Even though most territories recorded a higher share than they did in 2002/03, the two main countries, France and Germany, each experienced industry declines of about 20%.
 
The disappointment of the period was in Japan.  Continuing industry declines caused an unprecedented level of returns for the industry.  Retailers undertook a major de-stocking, exacerbated by amended trading terms, in the early part of the first half.  As a result, we had to take a £16.9m exceptional charge.  Our Japanese business was expected to see a decline as its release schedule for this half was not comparable to that of the prior year.  While releases from 175R and the American artist Stacie Orrico met with strong consumer acceptance, other releases had sales that were lower than expected.
 
In business development, we continue to make progress in two areas.  Firstly, through intensive investment in technology, we are transforming the ways we manage our music and do business.  Secondly, we are continuing to make strides in developing our digital distribution platform.
 
Both physical and online piracy continue to be a major problem for the industry.  A flood of blank CDRs, mainly coming from Asia, has fuelled physical piracy in many parts of the world and is contributing to industry declines.  In the online world, even though the US industry has shown a small decline in illegal file sharing as a result of industry action, online piracy continues to do massive damage.
 
We will continue to need heavy investment in preventative measures, government lobbying and consumer education in the coming years, as well as robust legitimate online services to meet consumer demand.
 
Our second half release schedule includes albums from Janet Jackson, Norah Jones, Renaud, Utada Hikaru, The Beatles, Coldplay, Kylie Minogue, Tiziano Ferro, Atomic Kitten and Blue.
 
Music Publishing Operating Review
 
EMI Music Publishing has once again delivered strong results in a difficult environment, demonstrating the versatility and flexibility of our catalogue and our continued ability to identify and develop new uses for our songs.  Sales for the six months, at £201.7m, were 0.2% down on the prior year, of which adverse currency exchange movements accounted for 0.1%.
 
Before central costs, EBITA grew from £52.5m to £53.3m.  EBITA after central costs was up 1.0% at £51.5m, at both constant currency exchange and actual rates.  The operating margin in the first half of 2003/04 was 26.4% against 26% in the same period of 2002/03, reflecting favourable variations in revenue streams as well as tight cost control.
 
Underlying the achievement of broadly flat turnover, is EMI Music Publishing's continuing ability to generate new and additional uses of music so as to reduce its reliance on mechanical revenues, which are primarily derived from the sales of recorded music.  Mechanical revenues declined year-on-year and now account for 51% of total revenues.  Performance revenues, earned from the public performance of songs, show a good increase and now contribute 27% of total revenues.  Synchronisation revenues, which are generated from the use of songs in audiovisual works such as advertisements, television programmes, films and computer games, grew strongly and now represent 15% of divisional turnover.  Other revenues also moved upwards and now contribute 8% of the total. 
 
On a geographic basis the most notable profit improvements were in Continental Europe, particularly in France, Italy and Belgium.  Contributing to the first half success around the world were Pink, Pharrell Williams, Alan Jackson, Sean Paul and Evanescence.
 
Revenue from theatre productions has assumed a significant importance in recent years.  We Will Rock You and Mamma Mia continue to be successful shows in the US and London; and the former opened recently in both Spain and Australia.  Rod Stewart's Tonight's The Night has also opened well in London.  Songs licensed to EMI feature in all of these performances.
 
Within the period we launched a reorganisation programme that has the objectives of increasing the division's efficiency and lowering costs.  The key components are headcount reduction and the decommissioning of systems which are now obsolete.  The cost in the period was £4.9m, which has been reported as an operating exceptional item. This programme offers an attractive payback, including a modest contribution to these results.
 
The acquisition of a further 30% stake in Jobete was completed in April 2003.  We are delighted to increase our ownership of this successful catalogue of Motown hits, featuring writers such as Smokey Robinson, Marvin Gaye and Stevie Wonder.
 
The second half will see releases from a range of artists including Sting, Ludacris, Alicia Keys, Enrique Iglesias, Jay-Z, Texas, Busted and Pink.
 
Financial Review
 
Group turnover decreased by £1.2m to £960.3m in the first half of the year (at constant currency the decrease was £4.1m).  This comprises a decrease in first half sales in Recorded Music of 0.1% (decrease at constant currency of 0.5%)and a decrease of 0.2% in Music Publishing (decrease at constant currency of 0.1%).  Turnover in North America grew by 5.0% at constant currency over the first half of the prior year.
 
Group operating profit before exceptional items (EBITA) for the first half grew by 0.9% to £79.7m (at constant currency an increase of 1.0%).  Both divisions contributed to this increase.  The Recorded Music contribution, after allocation of central costs, grew from £28.0m to £28.2m whilst the Music Publishing contribution grew from £51.0m to £51.5m. The operating profit in North America grew from £19.9m to £43.2m (£46.3m at constant currency) driven by a significant increase in the Recorded Music business.  On the other hand, the result in Asia Pacific fell from £23.2m to £1.7m (£1.2m at constant currency).
 
Group finance charges before exceptional items increased from £36.0m in the first six months of 2002/03 (excluding our share of HMV Group plc's costs) to £40.1m. The increase in the interest charge is a direct consequence of the move to longer-term debt and the additional interest payable arising from a credit rating downgrade in March 2003.
 
The Group profit after tax and minority interest for the half year was £8.8m, in comparison with £138.4m in the prior year, a decrease entirely attributable to the reporting of £136.6m after tax profit on non-operating exceptional items in 2002/03.    
 
The basic earnings per share is 1.1p in comparison with 17.7p in the first half of 2002/03 but the adjusted diluted earnings per share, from which the exceptional items are excluded, has increased over the same period from 2.9p to 3.6p. 
 
Other items affecting earnings
 
Amortisation of goodwill and copyrights, including that on associates, amounted to £24.5m in the first half in comparison with £22.7m last year because of the impact of recent acquisitions.
 
The Group reports operating exceptional costs of £21.8m and non-operating exceptional income of £20.5m as against £nil and £174.8m respectively in the first half of the prior year, the latter arising principally from the gain of £181.1m on the sale of HMV Group plc shares.  The costs comprise £16.9m in respect of the product returns resulting from the retail destocking programme in Japan, consequent upon the sharp market deterioration and exacerbated by amended trading terms, and £4.9m in respect of a business reorganisation in Music Publishing.  The income represents gains on sale of three properties.
 
In addition, £1.7m is reported as an exceptional finance cost, being the write-off of borrowing costs previously capitalised in relation to bank facilities that were terminated on 3 October 2003.
 
The Group tax charge for the first half, after amortisation and exceptional costs, was £6.0m as against £51.7m in the first half of last year.  The underlying tax rate in each year was 30%.
 
The minority interest share reversed from a charge of £4.2m in the prior year first half to a credit of £2.9m in 2003/04.  This primarily reflects the change in the holding in Jobete and also the decline in profits in TOEMI.
 
In recognition of the solid results in a demanding market place, the Board declared an interim dividend of 2.0p per share, in line with the interim dividend last year. 
 
Cash flow and net borrowings
 
The net cash flow from operating activities improved from an outflow of £147.0m last year to an inflow of £45.0m this year.
 
After net interest payments of £57.8m, tax payments of £14.5m, dividend payments to shareholders and minorities of £18.6m, payments in respect of acquisitions of £82.2m and net income from property sales less capital spend of £17.0m, the net debt movement increased by £111.1m.  After currency exchange gains the increase in net debt in comparison with 31 March 2003 was £87.0m.  However, in comparison with 30 September 2002, net debt has fallen by £137.7m from £1,084.5m to £946.8m.
 
Treasury
 
On 2 and 3 October 2003, the Group completed a reorganisation of its borrowings with the objective of lengthening the maturity dates, thereby strengthening
the base on which to build the underlying business, as well as diversifying the lender base and the currencies of borrowing.  Two capital market issues were successfully completed; a high yield offering of €425m 8.625% Senior Notes maturing in 2013 and an offering of US$243.3m Guaranteed Convertible Bonds maturing in 2010.  In parallel, certain of the existing Senior Notes were prepaid and the existing revolving credit bank facilities cancelled and new revolving credit bank facilities agreed.
 

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