Universal Music Group NV (OTCPK:UMGNF) Q2 2022 Earnings Conference Call July 27, 2022 12:15 PM ET
Company Participants
Lucian Grainge – Chairman & CEO
Boyd Muir – EVP, CFO & President of Operations
Michael Nash – EVP, Digital Strategy
Conference Call Participants
Omar Sheikh – Morgan Stanley
Lisa Yang – Goldman Sachs Group
William Packer – BNP Paribas Exane
Adrien de Saint Hilaire – Bank of America Merrill Lynch
Michael Morris – Guggenheim Securities
Richard Eary – UBS
Operator
Good evening, and welcome to Universal Music Group’s Second Quarter and First Half Earnings Call for the period ended June 30, 2022. 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; and Boyd Muir, Executive Vice President, CFO and President of Operations. They will be joined during Q&A by Michael Nash, UMG’s Executive Vice President, Digital Strategy. [Operator Instructions].
Please 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 2021 Annual Report, which is available on its 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 months period ended June 30, 2022, on the Investor Relations page of the UMG’s website.
Thank you. Sir Lucian, you may begin your conference.
Lucian Grainge
Hello, and thank you for joining us as we report the results for the first half, including another successful quarter as well for Universal Music Group.
As we stated in today’s press release, our strategy is progressing as planned. UMG reported 25% revenue growth and achieved 17% constant currency revenue growth in the quarter ending June 30. That significant growth is attributable to strong performance from our increasingly well-diversified set of revenue streams.
For the half year ending June 30, our constant currency revenue growth also stood at 17%. In addition, we grew adjusted EBITDA for the half year by 11%, with growth in both revenue and EBITDA coming from all segments of our business.
UMG’s overall performance is fueled by the successful partnerships we’ve formed with our artists, both new and established in markets and regions around the world. I could spend the next hour or two telling you about all the remarkable and deeply satisfying recent successes by our artists. But instead, I’ll describe just a handful of them, ones that are emblematic of our ability to deliver global success and underscore the fact that our artist partnerships take many different forms.
We’ve continued to build a profitable services and resources so that we can partner with artists at any stage of their careers and provide them with whatever services they may need. Beyond that, we’ve built a global infrastructure that includes teams in film, in TV, brand partnerships, merchandise, D2C, e-commerce and estate management to further extend an artist’s brand so that their music lives on for decades, continually attracting new audiences and new generations of fans.
When we think about artist investment, we don’t simply think about it in terms of cash to sign, the artists or the expense related to promoting an album. It’s about building an organization with best-in-class resources to manage the entire artist brand for the long term. That’s meaningful investment and commitment, and that’s UMG.
Let me provide four examples from the quarter that exemplify our ability to garner global success that leverages our entire organization for artists at every stage of their careers. Last month in the U.S., Drake’s Honestly, Nevermind became his 11th #1 album and the track Jimmy Cooks became his 11th #1 single. Drake is now the only fifth artist in history to have had more than 10 #1 albums and the only artist ever to have simultaneously had top Billboard Album Singles and Artist Charts to 16 weeks. This album propelled Drake pass 160 billion global career streams, solidifying his stature as the most streamed artist in the world.
The next example is about what the Korean band, BTS achieved through our multifaceted partnership with HYBE. On June 10, HYBE, in partnership with Ingrooves Geffen released the band’s new compilation album, Proof, which debuted #1 in a dozen countries, including Japan and the U.S., where it became BTS’ sixth #1 album.
The third example is that of the three-time Grammy-winning Olivia Rodrigo. Her debut album, Sour, is the 21st century’s longest-running debut album in the top 10 on Billboard’s Top 200 charts.
My last example is Frank Zappa, a widely prolific artist who was well ahead of his time. As we announced in the quarter, in 2021, UMG acquired a broad array of his intellectual property rights, including the vast archive of his released as well as unreleased recordings. His publishing catalog of iconic songs, countless films and videos in his vault as well as rights to his name and likeness. Starting even before the acquisition, we’ve revitalized the Frank Zappa catalog through a broad approach of vinyl reissues, archival releases and streaming initiatives. In fact, every year has seen a double-digit growth in streams of his music. We recently made a large portion of his legacy available in high-res audio for downloads and streaming and also provided the soundtrack to Alex Winter’s acclaimed 2020 documentary, Zappa. Exhilarated by the acquisition, our plans will see that this work remains alive and available for many decades to come through new archival projects, feature films, interactive experiences, merchandise, NFTs and other next-generation Web3 projects.
In addition, a number of our other recent catalog acquisitions include existing film and TV projects. Our Neil Diamond deal, for example, includes 5 existing long-form films. These films, along with our ability to execute new audiovisual projects, are critical components of value creation. They fit perfectly within our strategy to help fans engage and spend more time with our artists.
It’s important to remember that nearly 50% of time spent consuming media in the U.S. is on long-form audio visual content. Not long ago, our participation in this space was limited to granting synchronization licenses of our music for use by third parties. Now we have the in-house expertise and global resources to generate substantial value from these acquisitions beyond recorded music and publishing. We have greatly expanded our reach, fashioning stories ourselves. We create the intellectual property that celebrates our artists and their music. The very music that makes those stories come alive.
We’ll announce specific projects related to some of our acquisitions at a later date. But when you look at a small sampling of our recently completed film projects, you can get a sense of some of the opportunities that we feel lie ahead.
Take The Rolling Stones, for example. Celebrating the legendary band’s 60th anniversary, UMG’s Mercury Studios produced a four-part series of films entitled My Life as a Rolling Stone, with each part focusing on a different member of the band. The series aired on the BBC earlier this month and will premier in the U.S. on Epix in August.
This week, Netflix premiered Not Just a Girl, a career-spanning documentary about Shania Twain, with whom we’ve had a nearly 30-year relationship, which was also produced by Mercury Studios. In addition to the documentary, UMG released a compilation album also entitled Not Just a Girl, which includes a new bonus title track alongside some of Shania’s biggest global hits. Incidentally, we also look forward to more new music from Shania very soon.
Well, take The Bee Gees, the Emmy award-winning documentary from UMG’s Polygram Entertainment, entitled The Bee Gees: How Can You Mend a Broken Heart, that’s available on HBO Max and complete access to decades of the band’s archives, all of the recorded music in the documentaries with UMG’s capital record, and all of the publishing rights sits within our Publishing division, UMBG. And there are many more examples of recent successful documentaries from the Beastie Boys to The Go-Go’s, the Velvet Underground, just to name a few.
Let me leave you with this statistic, however. On average, in newly-released music-based film producers cumulatively over the 3 years following the film’s release, a 94% catalog streaming uplift. Not bad for an ancillary benefit.
So when you look at all these artist examples, there’s more going on here than the phenomenal first week sales and record chart statistics. Each of these success stories reflects UMG’s ability to help an artist generate and sustain fan engagement, not only over the initial run of an individual song or an album, we help sustain that fan engagement over the course of an artist’s career and beyond. Because building artists’ careers and keeping them relevant and thriving over the years is what we do at UMG.
As streaming has developed, it’s become clearer than ever that driving truly meaningful fan engagement is not based on simply employing complex algorithms or flooding services with overwhelming quantities of low-quality content. No. What brings fans to platforms all around the world is great music created by great artists. It’s that simple as well as that hard. Identifying, developing and supporting the artists who can bring fans to platforms, can drive deep engagement and can move culture globally is at the heart of what we do. The unprecedented worldwide success of our artists is proof of that.
All this applies not only to the major DSPs, it’s also critical when it comes to social media. As you know, there’s never been a place in our strategy for being passive, just sitting back and reaping the benefits of trends in the digital and social space. Rather, we pride ourselves on being catalysts, intelligently driving innovation and adoption of new business models, and that’s certainly been true in the ad-supported space, a material and growing segment of our business.
Our efforts there provide another revenue by which our artists grow their careers creatively and commercially. And in the process, we help grow the entire commercial ecosystem for music to the benefit of majors, indies and everyone else who seeks to make a career in music.
Advertisers place a premium on reaching audiences with authentic, high-quality and culturally-relevant content. That is exactly why we continue to see robust and substantial growth in our ad-supported revenue. And that growth is particularly apparent in social media and online video, where advertising is key to the business model of large global platforms. High-quality content and our high-quality content is the glue.
To enhance and optimize our opportunities in the advertising market, we’ve designed our ad-supported and social media relationships in two ways. On the one hand, by working closely with those platforms to drive audience engagement and on the other, by building in-house capabilities to create unique offerings that drive revenue for ourselves, our artists, and our brand partners.
Let me take you through a couple of these — two of these approaches. A good example of working with a platform is our relationship with Meta. More than 4 years ago, by forming our industry-first partnership with them, we opened the social media space to music. Before we took that giant step, the industry had generated almost no revenue from social media whatsoever. Because of our groundbreaking partnership, Meta now plays a crucial role in connecting our artists with their fans around the world and has become one of our top 10 revenue-generating digital platform partners.
Given our history together, it gives me great pleasure today to announce that in the second quarter, we completed a new agreement with Meta that expands revenue sharing and enhances Meta communities engagement with our catalog. From the forging of our pioneering deal, we’ve been proud to partner with Meta and help propel their journey to advance the interests of the creative community.
As for the second approach, our UMG for Brands business has been the industry leader in forming direct relationships with brand partners. Some of UMGB’s clients include Coca-Cola, Samsung, Intel, Pokemon, Lenovo and Hertz amongst many others. To further expand our brand partnership strategy, we recently launched the UMusic Media Network, a comprehensive media and data service designed to connect brands and partners with exclusive media from UMG and our artists. The UMusic Media Networks allows brand partners exclusive access to proprietary data and insights as well as premium UMG content such as official music videos, songs and lyric videos, original behind the scenes and lifestyle content and artist vlogs from such UMG-owned businesses as Rebel Labs, Mercury Studios and of course, Polygram Entertainment.
Perhaps you’re not surprised to hear that Comscore places UMG as #1 in music. What may surprise you is that UMG ranks as #2 in entertainment overall in U.S. digital reach. So our vast catalog of tens of thousands of hours of video content, which has generated more than 4 trillion minutes of cumulative watch time on YouTube alone, provides a powerful offering that enables brand partners not only to select the content they seek in ways they could never have imagined before but also to know that they are choosing from the most reliable source when it comes to reaching an audience.
I hope I’ve given you a clear snapshot of why we are justifiably content about the path ahead. As we think and plan for the long term, we continue to build out its careers, expand opportunities and forms of content for fans to enjoy what our artists create, drive culture globally and generate the best commercial and creative results for our artists, all whilst building the greatest long-term value for artists, our partners, of course, shareholders. Everything we do, it’s in our blood, is for the long term as we have demonstrated over time.
Thank you, and I’d like to now hand over to Boyd to talk us through the financial results in more detail. So thank you, Boyd. Over to you.
Boyd Muir
Thank you, Lucian. In the second quarter, we’ve continued with what has been a very solid start to the year for UMG. All of the — just to point out here, all of the growth figures I’ll discuss today will be in constant currency.
So you can see here, UMG’s revenue for the quarter of $2.5 billion grew 17% and adjusted EBITDA of €507 million grew just over 8%. Similar to Q1, this revenue growth came from all areas of the business as we continue to effectively monetize a growing number of differing revenue opportunities. It is this broad-based growth profile is what actually supports our confidence in the sustainability of our momentum.
While adjusted EBITDA margin of 20% was lower when compared to 21.2% in the prior year quarter, there were a couple of items impacting that comparison. First, as has been previously disclosed by Vivendi when they reported the second quarter of 2021, this quarter, Q2, benefited from a onetime — excuse me, not this quarter, Q2 2021 benefited from a onetime catch-up payment from a digital partner amounting to €41 million in subscription revenue and €26 million in EBITDA. And second, as we discussed last quarter, we had a change in our revenue recognition accounting policy from a cash receipt or notification basis to an accrual basis, which mostly impacts Music Publishing.
Due to the mix of publishing revenues, the accrual is at a lower margin than our blended Music Publishing margin. This accrual amounts to €98 million in revenue and €17 million in EBITDA in Q2. Excluding both of these items, UMG’s adjusted EBITDA margin only declined 0.2 percentage points year-over-year. The remainder of the lower adjusted EBITDA margin was driven by revenue mix as revenues were more heavily weighted towards merchandising, which is a significantly lower margin than the rest of our business.
For the first half of the year, revenue also grew 17% and adjusted EBITDA grew 11%. Adjusted EBITDA margin contracted 1.2 percentage points year-over-year to 20.3%. However, in addition to the digital partner catch-up and the accounting policy change I just mentioned, you will recall that on our last results call, we disclosed that in the prior year, Q1 2021, it benefited from the exceptional recovery of an advanced provision and release of historical royalties, which had a positive €20 million EBITDA impact. Excluding these items, adjusted EBITDA margin in the first half of 2022 was down 0.4 percentage points, also driven by the mix shift towards merchandising.
Now let me touch on the results from each of our business segments. Recorded Music. Recorded Music revenue grew 9% for the quarter and 10% for the first half. This revenue growth drove Recorded Music EBITDA up 7% in the first half and Recorded Music EBITDA margin to 23.1%. Again, excluding the digital partner catch-up and the exceptional recovery of advanced provisions and royalty release in the prior year, EBITDA margin grew 0.4 percentage points in the first half.
Looking further at Recorded Music revenue for the quarter, the sources of growth are well diversified. Excluding the digital partner catch-up payment in 2021, subscription revenue grew 12.1% in Q2. Ad-supported streaming revenue grew 16% in the second quarter. And as Lucian talked about earlier, we continue to be encouraged by the trajectory of that business, with technology developments enabling us to monetize in ways previously not possible.
The social and video segments of the ad market have continued to perform well. We are monitoring this performance closely but have not yet seen a negative change in trends related to the softness in the economy or the overall advertising market.
Physical revenue also showed another quarter of strong growth, increasing by 17% in the second quarter, mainly driven by strong sales from King & Prince in Japan and from BTS globally.
License and other revenue also grew, up 6% in the quarter, driven by improvements in synchronization revenue. As you can see on this slide, for the half year, Recorded Music growth was well distributed globally, with all major regions seeing growth. And with 27%, Latin America had the highest rate of growth. As you can see, major sellers this half year were also well diversified geographically, with BTS and King & Prince and Olivia Rodrigo being among the best sellers this quarter and year-to-date. German band, Rammstein, and Japanese band, INI, also made their top seller list for the quarter.
Now turning to Music Publishing. In Music Publishing, revenue grew 51% in the second quarter and 42% in the first half of 2022. As I mentioned earlier, part of the growth was due to a change in our revenue recognition accounting policy from cash receipts in notification basis to an accrual basis. This has changed the timing of revenue recognition across the quarters.
When we spoke last quarter, we expected the accounting change to be largely neutral for the year, and therefore, we did not provide the precise breakout of the impact. Now although we expect it to be some reversal in the second half of the year, we believe that there is likely to be a positive impact for the full year, which is why we are now giving you more precise figures so that you can have better visibility to the underlying trends.
Excluding the €98 million accrual in Q2, Music Publishing revenue still grew by almost 20%, very strong indeed. For the first half of the year, the revenue benefit from the accrual was €144 million and the EBITDA benefit was €34 million. Excluding this accrual, Music Publishing revenue grew 18% in the first half year and EBITDA grew 16.1%, and the margin was 23.5%. We continue to see a mid-teens growth rate as more indicative of the underlying trends that we are seeing in our Music Publishing business.
Turning now to Merchandising. Merchandising revenue grew 66% in the quarter and 68% in the first half of 2022, largely due to the recovery in touring revenue. Merchandising EBITDA for the quarter grew to €14 million, up from 0 in the first half of 2021 when we had higher timing-related artist costs and there was no touring revenue. However, as we’ve discussed in the past, touring is a 8% to 10% gross margin business; retail, about 15% to 18%; and direct-to-consumer is closer to 25%. Therefore, the growth in merchandising revenue fueled by touring, although profitable, is not accretive to the overall margin profile of UMG.
As we continue to focus on expanding our direct-to-consumer initiatives and growing our digital goods business, we will improve the margin profile in our merch business. It remains strategically important for us to be in this business as it connects artists with their fans. And it is this connectivity that we’re looking forward to increasing in the coming years.
Now let me take you through the rest of the income statement. Net profit for the first half of 2022 amounted to €241 million compared to €452 million in 2021, resulting in earnings per share of €0.13 compared to €0.25 in half 1 of 2021. The decline in net profit was due to the variance in the revaluation of our investments in listed companies. That was a net expense in 2022 of €565 million compared to a net expense in 2021 of €170 million.
Adjusted net profit, which adjusts for the revaluation of these investments amongst some other items, amounted to €763 million in 2022 compared to €578 million in 2021, resulting in adjusted earnings per share of €0.42 compared to €0.32 last year. The increase in adjusted net profit was driven by the growth in EBITDA as well as a decline in income tax expense and a small decline in interest expense, which were both driven by a €100 million settlement of 2 tax litigations finalized in the first half of 2022. As a result of the increase in adjusted net profit, we will pay an interim dividend of €435 million or €0.24 per share, an increase of 20% over the €0.20 declared in 2021.
I’d like to now turn to cash flow. Our net cash from operating activities for the first half of 2022 was €474 million compared to €352 million last year. This included net royalty advance payments of €223 million, up €93 million from the first half last year due to an extension of a superstar artist, recorded music merchandise and film and TV rights. Additionally, as you can see here, we spent €264 million on catalog acquisitions. The most significant of which, by far, was our previously announced acquisition of the songwriting of Sting. This leaves us with free cash flow of €104 million in the first half, down from €280 million in 2021.
You’ll note that our interest expense was 0 in the half. This was, as I mentioned before, part of the tax litigation I mentioned. We received €11 million of interest income on that settlement.
Now turning to the balance sheet. It’s been a busy quarter for us. We recently concluded our process with the rating agencies, receiving a BBB rating from S&P and a Baa1 rating from Moody’s. We then issued our first bonds as a stand-alone public company, with a strongly oversubscribed offering of €500 million of 5-year notes at 3% and €500 million of 10-year notes at 3.75%.
On July 1, we used the net proceeds of these offerings to repay our existing €1 billion floating rate term loan. The new debt structure will extend our maturity profile and lock us into fixed interest rates for the future. While we realized the company could handle more leverage, we like the flexibility that we currently have within this investment-grade rating recently secured.
So thank you very much. Lucian, Michael Nash and I will now take your questions. So operator, perhaps you could open the line for Q&A.
Question-and-Answer Session
Operator
[Operator Instructions]. And our first question today comes from Omar Sheikh of Morgan Stanley.
Omar Sheikh
I’ve got three questions, if I could. Maybe starting with the Meta enhanced deal that you just announced with Meta. Could you maybe just tell us when that kicked in? Was that one of the drivers of the good growth that you showed in streaming revenues in Q2? Or if not, when does it kick in? And what impact do you expect it to have in the second half?
And then associated with that, I know that there are other agreements that you’re looking to sign, there’s some renewals going on in the digital platform side as well. Could you just maybe update us on where you are with those and whether you anticipate any new deals being signed in the second half? That’s the first question.
Secondly, on cash content spend, you said just under €490 million in the first half. Could you just confirm that you still anticipate spending less on advances and catalogs in cash in full year than you did last year?
And then finally, I just want to just touch on the sensitivity that you think your revenues might have in the event that we go into an economic slowdown across your footprint. So how resilient do you expect your revenue streams to be? If you could just talk in general about that. And are there any measures that you’re taking on the cost side in terms of hiring freezes or lower sort of project spend that you could talk about, again for the second half?
Lucian Grainge
Let me start on the broader market conditions. Music has been proven to be extremely resilient in economic downturns. I’ve been through about 4 of them in terms of global headwinds on the macroeconomic side. And that excludes the piracy and file-sharing crisis. This team that we have here have managed those headwinds several times in the past. Music is a low-cost form of entertainment with what we consider incredible consumer value and we are monetizing content from more sources than ever before.
Shopkeeping is in our blood. Our regional executives, our managing directors, the multitude of P&Ls that we have in the bulk of our businesses are constantly monitoring both our fixed and variable costs. You will have seen that we showed that and demonstrated that through the pandemic in terms of the variable costs that have been removed. And we constantly, because of our experience and the headwinds that we’ve faced over the last 15 to 20, 30 years, it’s — as I said, it’s something that we do and something that we’re very conscious of. But overall, music has been resilient.
And I think that’s broadly in terms of the macro side, we’re very sensitive to it. You may have something to add on in terms of Meta, when it kicks in and so on?
Boyd Muir
Mike should probably go first with Meta and then maybe I can come back to the content spend.
Michael Nash
Yes. So to the question of the time frame for the signing of the deal, as Lucian mentioned, the Meta deal was signed in the second quarter. And in terms of impacts associated with that deal, let me just say that the renewal significantly enhances and expands our relationship with Meta, builds on our industry-first partnership. As highlighted earlier, it extends our partnership with Meta on their product road map, a number of exciting products that they have brought to market over the past several years. And we’re very happy in the renewal with Meta, the ways that it deepens our partnership, new opportunities around revenue sharing.
With respect to other renewals, we can’t really comment on any negotiations in progress. So we’ll be ready to announce deals as we sign them, but we’re not really in a position where we can forecast deal renewals. I hope that gives you enough to work with in terms of the Meta deal and the core question there on timing.
Boyd Muir
Okay. And then just dealing with the cash spend. Advances are really how we would describe our net content spend, which is a figure of €223 million in the first half of the year. We think it’s actually very weighted towards the first half of the year, and we actually don’t see the same level of activity in the second half. So please don’t assume there’ll be another €223 million net content spend in the second half of the year.
Now with regard to catalog acquisition, I mean, we have seen and we are likely to continue to see IP assets coming up for sale. But we’re very, very selective in what we look at. We’re only interested in the best of the best. We’re only interested in those assets where we can control. And what I mean by that is that we are actually able to increase the monetization of those assets. I think we’re smart and strategic in how we approach them.
So being predictive about what will happen in the second half of the year is not actually really possible or predicting what’s going to happen in the future is not possible. We’ll look at what becomes available. And we have to actually secure returns that are comfortably in excess of our cost of capital. So there’s a lot of determining factors and whether we will acquire future — in the future catalog assets. So I’m sorry, I won’t be able to help you predict what is coming. We will continue to be opportunistic, but we have very strict criteria, which we apply in our decision-making as to whether to invest or to withdraw.
Lucian Grainge
I’d also like to add to that, that we’ve been investing and acquiring intellectual property, both Music Publishing and Recorded for decades in both bull markets and bear markets. We’ve been doing — we did — we bought EMI at the bottom, we bought BMG quite early in some of the industry difficulties. And in the same way that we bought individual artists and individual catalog.
We’re opportunists as we’ve consistently said and when great IP, great products come to us at a price which we believe gives us a good return, a long-term return and adds to the inherent value of our company, then we’re extremely keen to look at them. But we don’t know what’s for sale tomorrow or not.
Operator
[Operator Instructions]. And our next question comes from Lisa Yang of Goldman Sachs.
Lisa Yang
Actually, my question — the first question is for Boyd. I think you mentioned on your last call that you’re expecting margin to grow this year. And I’m wondering, obviously, given the development we’ve seen in Q2 and the revenue mix and the part of the publishing accounting change, whether you think that will still be the case for this year? I think that will imply at least 100 basis points of improvement in H2 to get there. So any color on that would be great.
And I think the second question is on the newer deals that you have announced. In general, like could you just maybe share how do you think about the opportunity and time frame to move towards a revenue share model, especially with the newer platforms? And in general, I think how substantial is that revenue uplift compared to the fixed tenants that you may be currently getting? That’s the second question.
Boyd Muir
Lisa, let me deal with margins first, I think Michael will tackle your second question.
What I’d like to point out is it’s clear for everyone to see that our revenues are actually growing faster than anticipated. And despite the resurgence in physical products, our Recorded Music EBITDA margins are expanding. However, the majority of UMG’s higher-than-anticipated revenue growth is coming from publishing and merchandising, which have lower margins than our Recorded Music business. The revenues from these businesses do bring incremental profits but they’re actually not accretive to UMG’s total margin.
So the way I’m looking at it is if growth from publishing and merchandising business has continue to outpace Recorded Music, then we will see improved profitability in absolute terms for sure. But total UMG margins will remain fairly flat. But that’s really the difference between revenues growing at 17% with a skew towards merchandising and publishing. That is really causing — it’s a mix effect that’s causing the dilution in margin.
Lucian Grainge
And where we have an opportunity, a business opportunity, commercial opportunity to acquire or to invest something where we know we can — it can add to our bottom line and we can make a profit, then we will. All deals, all projects, all opportunities comes in different sizes across the entire portfolio of our business. And we are not looking to do anything that we don’t make profit on.
Michael Nash
And then, Lisa, with respect to your question on the new deal and revenue sharing, let me approach that a couple of different ways.
First of all, in the slide that Lucian presented in helping to express the breadth and scope of our relationship with Meta, you saw listed a number of products and formats. And those are all things that we monetize with Meta.
In terms of revenue sharing and the different modes of economic participation in the growth of these platforms and the value that our artists’ content brings to these platforms, we have discussed in the past, generally, that we approach dealmaking from the standpoint of doing deals early with platforms as they are evolving, not only how they present content to consumers, but also how they measure and track and then monetize that content.
In the past, I think that some of the players in this space have taken the position that they wait to get deals done once everything was fully built. And we decided, especially in the social media category a few years ago, that we would partner early, which means we economically participate. And it also means that we have influence over the road maps of these companies so that we’re able to work with them to collaborate and establish a path to develop more productive capacities for these platforms with respect to our content and more opportunities for artists to engage with their fans. So this mixed mode revenue model has been one of the elements that’s enabled us to partner early and to drive revenues in the social media space.
In terms of the announcement that was made by Meta in terms of the creator and revenue sharing, just to amplify some of the things that they said. Our renewal establishes this opportunity for creators to utilize music from our iconic catalog in creator videos. Meta announced earlier this week that this is creator content on longer-form videos over 60 seconds starting out on Facebook in the U.S., and they’ve indicated that they expect to add additional countries in the following weeks and months. And they’ve talked a bit about the focus of this creator content monetization.
I think from our standpoint, this is an exciting opportunity for us to participate in the creator economy and to enable creators to do really creative stuff with our video content. And I think beyond that, the question would really be to Meta about their plans in this area.
Lucian Grainge
But look, our North Star is the best quality content, audio, short form, long form, the best artist, the best music, the best genres. Social media was a category 3 or 4 years ago, as you said, Mike, was almost nonexistent. And that’s in our top 10 category. I must remind you, 11 or 12 years ago, no one had heard of Spotify in the United States. So the concept of ad-funded streaming into a funnel of premium, they’ve now got 188 million subscribers. I’m interested in positioning this company with the — with our best artists and the best teams to make sure that we’re at the vanguard of whatever is next. And by leaning in gives us an opportunity to set deals, to set precedents and to make it quite clear. But if you want the best product, you want the best content, this is the place to come for it.
Operator
And our next question comes from Will Packer of BNP Paribas.
William Packer
Two from me, please. Firstly, Q2 was another healthy quarter of growth but the investor community is definitely concerned with any signs of weakness, particularly in streaming. We had a good update from Spotify today, YouTube was a bit weaker. Could you just update us across your portfolio, what you’re seeing in the quality both in terms of subscription and ad streaming but also the other parts of the portfolio? Is there any incremental change in trends to report?
And then secondly, just a quick one on the catalog deals. Market pricing is coming down in many areas, especially growth assets. Are we starting to see downward pressure on catalog after multiple year? Any color there would be helpful.
Michael Nash
So let me tackle the growth across the portfolio. Why don’t we start off with subscription and the growth that we’re seeing there. I think it’s important to consider the growth that’s occurred and to think about where the opportunity lies going forward. The number of subscribers in our major developed markets grew from about 1 in 5 consumers in 2019 to 1 in 4 last year. That’s great, but it’s also an indication that there’s ample room for continued growth.
We’ve seen, since the onset of the pandemic, a huge inflow of subscribers into premium subscription music services. That’s continued throughout 2021 and into 2022 as our results indicate. Our consumer insights indicate that nearly 60% of subscriptions growth potential over the next few years is still in our top 10 developed markets. And we’ve recently updated that work. So we’re excited about the addressable market growth opportunity in the established developed markets. And then beyond that, there’s a huge opportunity for growth in emerging markets. So we stay confident about the opportunity to see continued growth with respect to subscription.
And then with respect to ad supported, as our reported results indicate, we continue to see strong growth there, strong performance from our very broad partnership portfolio. We have a number of different partners locally, regionally, global platforms. The diversity of our partnership portfolio and the wide range of different business models that we apply with respect to ad-supported puts us in a position where we can remain confident about growth continuing.
Now we’re aware of macroeconomic impacts certainly. And we understand that we have to operate our business mindful of these trends. And so we’re certainly monitoring developments. But as Boyd indicated, we haven’t seen any indication right now that we’re going to see a problem in terms of being able to sustain growth with respect to ad-supported.
So across the streaming partnership portfolios, across the different business lines, with respect to subscription and with respect to ad supported, we see from our performance and from our outlook indications that we should expect continued growth.
Boyd Muir
Okay. And Will, with regard to catalog acquisitions. I mean, I think there’s an inevitability here that interest rates are going to drive down valuations. That said, we’re not really seeing that. Now, we’re continuing to walk away from deals where we actually cannot be justified financially. And I think there’s still an element of their funds available and there’s capital still to deploy. And it’s going to get deployed. So I’m encouraged with what will happen in the medium term, but I think there’s still too much capital available immediately. I don’t know if that answered your question, Will.
Lucian Grainge
Look, we also — we don’t know what the impact of the market is when noncore outside funds actually realize that they haven’t got the skill sets or the ability to exploit it.
Operator
And our next question comes from Adrien de Saint Hilaire of Bank of America.
Adrien de Saint Hilaire
First of all, in Q2, you had another very strong quarter in physical. Streaming was interestingly a bit slower. I think this seems quite specific to UMG versus the broader market and other major labels. So what’s driving this exactly?
And the second question, I just wanted to clarify something. Boyd, I think you said you would not take any additional debt at this point. Does that mean that you’re excluding the possibility of shareholder returns through share buybacks in the second half, for example? Or did I misunderstand this?
Boyd Muir
Do you want me to do the second?
Michael Nash
Yes. And Adrien, if you wouldn’t mind, if we — if I could just get a clarification on the specific point in your first question that you wanted us to address.
Adrien de Saint Hilaire
I’m still here. Sorry, I wasn’t quite sure what you wanted me to clarify, but my question was actually why UMG is doing so well in physical and seems to be lagging a bit behind the market in terms of streaming?
Boyd Muir
Okay. Well, I mean maybe I’ll deal with the physical first of all. I mean, it’s again, this isn’t a passive activity. This is something that we’re driving. We see the super fan is underserved. And really what we’re doing is connecting the fan with the artist through a product and a physical product predominantly. Although increasingly, there may well be digital products. But it’s physical products. So we’re active and we’re pushing that and what may well have been at one point in time, and I think I’ve said it myself many times, that we’re defying gravity. I think that’s moved somewhat now into a very conscious effort to develop products for the super fan. So I think that’s one thing I would say on physical.
Do you want to say something on streaming? I mean the only thing I would say on streaming, I don’t quite see it the same — frankly the same way. Our growth there was a onetime item in Q2, which was a catch-up from a digital partner last year. So excluding that, our growth is just over 12% in the — in Q2 for subscription. And then on streaming, the ad-funded business, our revenues were up 16% at constant currency, which feels strong to me certainly on the advertising funded.
Michael Nash
If I could follow up there. Just in terms of context, we’ve just got quarterly earnings reported by Spotify and for the quarter, on a constant currency basis, their number is within a percentage point or 2 of ours in terms of streaming and in terms of subscription, their constant currency and our constant currency, less onetime items. So I feel like there’s a fair amount of comparability there.
We would never just compare ourselves to one single service on a quarter-by-quarter basis. But certainly, for context here,to try to understand why there would be a sense that we’re underperforming the market, we feel like, in many ways, we’re driving the market in terms of our partnership, making activities as Lucian articulated in his comments. And we feel like our business growth has been very strong.
Boyd Muir
And maybe just the second point regarding our leverage. I mean, we’re comfortable with our under-leveraged balance sheet. We just went through the rating agency process. And we committed there that we would keep our leverage under 2.5x our EBITDA. And at the moment, we are somewhere in the region of, on an annualized basis, 1.2x. So we’ve got quite a lot of headroom between the 1.2 and the 2.5. But we like having that flexibility. We like being comfortably within the range that we committed to the rating agencies.
Now that said, capital allocation, it’s an important consideration for us and for our Board. And it’s a balance between building value in the business and returning value to the shareholders. And we can return value to the shareholders through dividends and potentially share buybacks. We’ve given a significant commitment in terms of dividend. But nevertheless, on share buyback, it is a subject for the Board to consider. And we’re very, very aware of the importance of capital allocation.
Operator
And our next question comes from Michael Morris of Guggenheim Securities.
Michael Morris
I want to ask one follow-up on the Meta partnership and specifically about this music revenue sharing program. I guess is that opportunity to share ad revenue, do you view that as completely incremental to the prior partnership? And also, what’s your comfort level? Or do you have any concern with having Meta creators be able to use your content for their messaging? I appreciate you’re getting paid, but do you have any concern about the message that your content may be tied to or associated with? That’s the first question.
And my second question is around the SoundCloud, what they call their fan-powered royalty model. But I guess, where the royalty payments are divided at the individual subscriber level instead of having them pooled. I’m just curious do you see one of the royalty models as preferable? Would you consider being associated with that model? What are the pros and cons there?
Michael Nash
Thank you for your question. So with respect to the Meta partnership and the revenue sharing, I want to clarify that the announcement that Meta made was specifically about creator videos, that’s a defined category. It’s different from UGC generally. And yes, we regard enabling creators to produce content with some use of music as being largely incremental to the other formats that we currently monetize through our Facebook partnership.
With respect to concerns around the content, I would say, in this respect, creator videos are more like UGC than not, there’s over a decade of history of user-generated content in relationship to music IP, I’m not seeing a new kind of concern that we would have there. I think that this is another form of expression utilizing our content. So I don’t see a specific new concern arising there.
With respect to the question on the user-centric model, the fan-powered model, let me make a couple of comments here. First of all, we definitely support the consideration of new models that have the potential to maximize fairness and transparency and importantly, optimize alignment of interest among stakeholders while promoting the health of the ecosystem. Now that’s a mouthful and a half. But I think you have to look at the totality of considerations.
Let me talk a little bit more about that. Before I get there, just to underscore this, we’re looking for opportunities to optimize models for sustainable, mutually beneficial success, and we follow all the research closely and all the developments in the space really closely. There have been some new studies that have been cited with respect to developments in the user-centric model consideration. And some interesting data has emerged, some good questions have been raised. But I think that the new research is hardly conclusive about the net benefits of changing the revenue allocation model.
It’s clear from the studies that have recently been done, the findings have been announced in a large percentage of artists and important genres of music could be disadvantaged under a user-centric model. Remember, the French study, the Centre national de la musique, issued what was one of the most detailed analysis of user-centric to date last year. And some of that reports, findings reinforced these concerns about whether or not the bulk of artists would benefit materially and also raised concerns about artists and musical genres that could potentially be harmed.
Stepping back in terms of our perspective, there’s no reason to think that efforts to optimize the streaming model should come down to considering just one alternative to the status quo. We think priority for any model adjustments should be placed on growing revenues overall and advancing the interest of all artists, which is looking beyond model changes to pit one group of artists that benefit against another group of artists that lose out. It shouldn’t be a zero-sum situation.
Lucian Grainge
So it’s complicated.
Operator
And our final question today comes from Richard Eary of UBS.
Richard Eary
Can I just ask two quick questions? One on accounting and just one on margins. On the accounting side, Boyd, could you maybe talk through whether there are any CRB impacts in the quarter and whether they will arise as we go through the second half? On FX, can you just talk through — obviously, revenues have benefited from the FX side. Can you talk about the cost side or whether there’s any big headwinds on the cost side from the strength of basically the dollar and whether there’s any one-offs in H2 that we should be aware of just so we understand from a modeling perspective?
The second question is just on margins. If we just focus actually on the individual margins in Recorded Music, Publishing and Merch. I think on Merch, you were pretty clear that hopefully we get a positive mix shift to the shift to D2C, which will increase those margins over time. And we’re seeing a 40 bps increase in Recorded Music and Publishing has been impacted by performance rights. But if we just look at maybe Recorded and Publishing as we go out over the next 2 to 3 years, are you still confident around growing margins at the individual Publishing and Recorded Music line? So even if there is mix issue with one revenue growing faster than the other, we still get margin expansion at the underlying businesses? That would be helpful.
Boyd Muir
I think there was three questions there, Richard, but we’ll try and do them anyway.
So just on accounting. On CRB, I mean, it’s a little bit premature really on CRB. And frankly, I think in the overall scheme of things, there’s not really going to be anything material that financially that arises out of CRB. So I think it’s a little bit out there in terms of timing, but I think overall, it’s not being — it’s not particularly material. And if it is, we’ll clearly communicate what’s important.
On FX, you can see it there. You see the — I mean, I was trying to do everything at constant rates because it really is a pretty significant impact due to the strength of the of the dollar clearly benefits revenues and has the opposite impact on certain of the costs. So we’ll continue to report on a way that gives you visibility in constant currency. I don’t really want to speculate about what might happen with exchange rates in the second half of the year. I think you’re even better equipped to do that than I.
On the margins, I mean, I was trying to articulate today, really at a total UMG level that the Publishing — well, the Merchandises that — Merchandise is the most stark example of it, but it’s also somewhat to do with publishing, is as those businesses are outpacing Recorded Music in terms of growth, they have lower margins. And so it’s accretive in terms of profits, but it’s not accretive in terms of margins to total UMG.
Looking at it on a line-by-line basis — or sorry, no, on a business-by-business basis. We did mention that in the first half of the year, our Recorded Music margins, once you adjusted for those couple of onetime items, did actually expand in the quarter and the half year. So that — I think that’s an important — despite the fact, by the way, that you still have a format issue — not issue, that’s wrong, but a format mix issue in Recorded Music with physical has lower margins than digital. So encouraged by margin expansion in Recorded Music.
And on Music Publishing, there is — overall in Music Publishing, there is a decay in terms of what’s called NPS, but kind of at a gross margin level. But Publishing really does benefit from a lot of operational leverage with relatively fixed overheads. So again, encouraged particularly with this level of growth in Publishing, encouraged that Publishing can expand their net margin being EBITDA expressed as a percentage of sales. And Merchandise is not really that material in totality, but clearly, we have ambition to have a business that’s got a better margin profile than today. And again, that is good to come by us concentrating on connecting the fan with the artists with the product on a D2C basis.
Lucian Grainge
Yes. I think I was going to add to that, specifically as we’re talking about merchandise in terms of revenues and EBITDA margin. It’s strategically something we’ve decided that for the super fan and for our e-commerce business. It’s strategically something that’s simple. And it helps get our physical products on the audio side into different outlets and into different retailers and then into different online digital stores that otherwise, it wouldn’t have gotten into. So I think it needs to be looked in if that’s not in the round.
Operator
Thank you. That is all the questions we have time for today. This now concludes today’s call. Thank you all for joining the Universal Music Group’s quarterly results. You may now disconnect your lines.
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