EMI tunes up TW overture
Sales surge spikes Brit giant
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As it closes in on a deal to acquire Warner Music Group, the EMI Group produced as robust a batch of six-month financials as investors could have hoped for.
EMI, which also said its negotiations to buy Time Warner's recorded music division were at an advanced stage, managed to notch up market share and profitability gains in the all-important U.S. market.
The market share of EMI Recorded Music rose by one percentage point to 12.9% in the six months to Sept. 30. The unit advanced strongly in North America, traditionally its weakest region, where its share rose from 9.6% to 11%. That helped EMI maintain its music sales at £758.6 million ($1.29 billion).
"We consider our results evidence that we can perform, whatever the market conditions, and are equipped to flourish in the future with or without a deal (for Warner Music Group)," said EMI chairman Eric Nicoli.
"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."
EMI's proposed acquisition of Warner Music Group would take the number of major music distributors down to three after the completion of Sony's deal with BMG. The Japanese-German hookup, assembled in less than two months, beat EMI to the merger table, though both deals face regulatory hurdles.
Speaking with analysts on a Wednesday conference call, execs offered little additional information on the status of their bid to buy WMG, which the Time Warner board is due to deliberate over today, along with a rival offer from Edgar Bronfman Jr.'s private equity-backed team.
Given the inevitable tidal wave of speculation surrounding the Warner deal, Nicoli noted that with its net debt down (and restructured) to a more manageable $1.61 billion, buying WMG was not a necessity. EMI's overall group sales were virtually flat at $1.63 billion. Operating profit grew 0.9% to $135.5 million. But net profit was just $15 million against $235 million vs. the same period last year. Still, the latter figure was boosted by the proceeds of selling the HMV retail chain.
The performance of the recorded music division was driven by continuing strong sales for carryover albums such as Norah Jones (3.1 million sold in the period) and Coldplay (2.2 million), plus new releases from Robbie Williams and Radiohead and breakthroughs by Chingy and Stacie Orrico.
Capitol Records led the charge in North America, with Chingy, Radiohead and the Beach Boys selling well for the label.
The North American market has had some signs of perking up recently, with eight of the last nine weeks showing sales up year to year. Second-quarter declines in North America are estimated at 8.5% compared with a drop of 12.6% in the first quarter.
Europe, by contrast, is still in free fall, with France and Germany each experiencing industry declines of about 20% during the first half of the year.
The biggest disappointment was in Japan, where an unprecedented level of returns from retailers forced EMI to take a $28.7 million exceptional charge. Most analysts are counting on the unusual level of Japanese returns to be a one-time problem for the company.
But gaining market share in a free-falling market isn't enough fully to resolve EMI's long-term strategic issues, or to improve recorded music operating margins above their meager 4%.
Analysts said the industry is facing major deflationary pricing pressures, alongside continued piracy challenges. Music division chairman Alain Levy has worked to cut costs significantly over the last two years, and is looking to $127.54 million in new technology spending to ultimately shave off another $42.51 million a year or so in operating expenses.
EMI's release schedule for 2004 counts 18 major new albums (one more than in 2002-03), including new releases from Norah Jones, Janet Jackson, Kylie Minogue, Utada and Atomic Kitten.
Separately, EMI named John Gildersleeve deputy chairman of the board. Gildersleeve has served as board member of supermarket chain Tesco.
