Good evening and welcome to Universal Music Group Second Quarter and First Half Earnings Call for the period ending June 30, 2022. My name is Nadia and I'll be your conference operator today. Your speakers for today's call will be 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. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there'll be a question-and-answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, please press star followed by two.
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 six-month period ending June 30, 2022 on the investor relations page of UMG's website , thank you. Lucian, you may begin your conference.
Hello, 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, 2022. That significant growth is attributable to strong performance from our increasingly well-diversified set of revenue streams. For the half year ending June 30, 2022 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 and scalable 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 and 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 artist 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 number one album and the track Jimmy Cooks became his 11th number one single. Drake is now the only fifth artist in history to have had more than 10 number one albums and the only artist ever to have simultaneously had top Billboard album, singles, and artist charts for 16 weeks.
This album propelled Drake past 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 at number one in 12 countries, including Japan and the U.S., where it became BTS' sixth number one 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 chart. My last example is Frank Zappa, a wildly 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 download and streaming, and also provided the soundtrack to Alex Winter's acclaimed 2020 documentary, Zappa.
Accelerated 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 five 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 audiovisual 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. When you look at a small sampling of our recent 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 premiere in the U.S. on Netflix 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. 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.
Had complete access to decades of the band's archive, all of the recorded music in the documentary is with UMG's Capitol Records and all of the publishing rights sits within our publishing division, UMPG. There are many more examples of recent successful documentaries from the Beastie Boys to The Go-Go's to Velvet Underground just to name a few. Let me leave you with this statistic, however. On average, a newly released music-based film produces, cumulatively, over the three years following the film's release, a 94% catalog streaming uplift. Not bad for an ancillary benefit. 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, w hat 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.
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. 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 two of these approaches.
A good example of working with a platform is our relationship with Meta. More than four 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 community's 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, Pokémon, Lenovo, and Hertz, among many others. To further expand our brand partnership strategy, we recently launched the U Music Media Network, a comprehensive media and data service designed to connect brands and partners with exclusive media from UMG and our artists. The U Music Media Network 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 number one in music.
What may surprise you is that UMG ranks as number 2 in entertainment overall in U.S. digital reach. 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 artists' 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 while building the greatest long-term value for our 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, t hank you. Boyd, over to you.
Thank you Lucian. In the second quarter, we've continued with what has been a very solid start to the year for UMG. 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 EUR 2.5 billion grew 17% and adjusted EBITDA of EUR 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 21.3% in the prior year quarter, there were a couple of items impacting that comparison.
First, as had been previously disclosed by Vivendi when they reported the second quarter of 2021, Q2 2021 benefited from a one-time catch-up payment from a digital partner amounting to EUR 41 million in subscription revenue and EUR 26 million in EBITDA. 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 EUR 98 million in revenue and EUR 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 has 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'll 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 had a positive EUR 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. 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. 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 and 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 there 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're now giving you more precise figures so that you can have better visibility to the underlying trends. Excluding the EUR 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 EUR 144 million and the EBITDA benefit was EUR 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 EUR 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%-10% gross margin business, retail about 15%-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 EUR 241 million compared to EUR 452 million in 2021 resulting in earnings per share of EUR 0.13 compared to EUR 0.25 in half one 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 EUR 565 million compared to a net expense in 2021 of EUR 170 million. Adjusted net profit which adjusts for the revaluation of these investments, among some other items, amounted to EUR 763 million in 2022 compared to EUR 578 million in 2021 resulting in adjusted earnings per share of EUR 0.42 compared to EUR 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 EUR 100 million settlement of two 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 EUR 435 million or EUR 0.24 per share, an increase of 20% over the EUR 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 EUR 474 million compared to EUR 352 million last year. This included net royalty advance payments of EUR 223 million, up EUR 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 EUR 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 EUR 104 million in the first half down from EUR 280 million in 2021. You'll note that our interest expense was zero in the half. This was, as I mentioned before, part of the tax litigation I mentioned. We received EUR 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 BB B rating from S&P and a Baa 1 rating from Moody's. We then issued our first bonds as a standalone public company with a strongly oversubscribed offering of EUR 500 million of five-year notes at 3% and EUR 500 million of 10-year notes at 3.75%. On July 1, we used the net proceeds of these offerings to repay our existing EUR 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 realize the company could handle more leverage, we like the flexibility that we currently have within this investment grade rating recently secured, t hank you very much. Lucian, Michael Nash, and I will now take your questions. Operator, perhaps you could open the line for Q&A.
Thank you. If you would like to ask a question today, please press star followed by the number one on your telephone keypads. If you choose to withdraw your question, please press star followed by two. When preparing to ask your question, please ensure your phone is unmuted locally. Our first question today comes from Omar Sheikh of Morgan Stanley. Omar please go ahead. Your line is open.
Yeah, t hanks very much and good evening everyone. I've got three questions, if I could. Maybe starting with the Meta enhanced deal that you've 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? If not, you know, when does it kick in and what impact do you expect it to have in the second half? Associated with that, I know that there are, you know, other agreements that you're looking to sign. There's some renewals going on on 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.
Second, on cash content spend, you said just under EUR 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? Then finally, I just wanna sort of 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. You know, how resilient do you expect your revenue streams to be? If you could just talk in general about that. 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? Thanks very much.
Let me start with the broader market conditions. Music has been proven to be extremely resilient in economic downturns. I've been through about four of them in terms of global headwinds on a 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're monetizing content from more sources than ever before. Housekeeping 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'll have seen that we showed that and demonstrated that through the pandemic in terms of the variable costs that had been removed. 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. Overall, music has been resilient. I think that's you know, broadly in terms of the macro side, we're very sensitive to it. You may have something to add on in terms of Meta and when it kicks in and so on. Michael should probably go first with Meta and then maybe I can come back to the content spend.
To the question of the timeframe for the signing of the deal as Lucian mentioned the Meta deal was signed in the second quarter. You know, in terms of t he impacts associated, you know, 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 roadmap, a number of exciting, you know, products that they have brought to market over the past several years. You know, we're very happy in the renewal with Meta, the ways that it deepens our partnership, you know, new opportunities around revenue sharing. With respect to other renewals, we can't really comment on any negotiations in progress.
We're, you know, we'll be ready to announce deals as we sign them. 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.
Okay. Just on dealing with the cash, the cash spend. Advances are really how we would describe our net content spend which is a figure of EUR 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. Please don't assume there'll be another EUR 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're likely to continue to see IP assets coming up for sale. You know, 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. You know, being predictive about what will happen the second half of the year is, you know, not actually really possible or predicting what's gonna happen in the future is not possible. We'll look at what becomes available and you know, we have to you know, actually secure returns that are comfortably in excess of our cost of capital. There's a lot of determining factors in whether we will acquire in the future catalog assets.
\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.
I'd also like to add to that we've been investing and acquiring intellectual property both music publishing and recorded for decades in both bull markets and bear markets.
Yeah.
We bought EMI at the bottom.
Yeah.
We bought BMG quite early in some of the industry difficulties. In the same way that we bought individual artists and individual catalogs. We're opportunistic, 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 and a long-term return and adds to the inherent value of our company then we're extremely keen to look at them. We don't know what's for sale tomorrow or not.
Brilliant, t hat's very kind. Thanks all.
Thank you and as a reminder, if you would like to ask a question please, press star followed by one on your telephone keypads. Please note questions will be kept to a limit of two per person. Our next question comes from Lisa Yang of Goldman Sachs. Lisa please go ahead. Your line is open.
Hi. Good evening, t hanks for taking my question. Actually, my first question is for Boyd. I think you mentioned on the last call that you're expecting margin to grow this year. I'm wondering, obviously given the development we've seen in Q2 and the revenue mix and the impact of the publishing accounting change whether you think that would still be the case for this year. I think that would imply at least 100 basis points of improvement in H2 to get there. Any color on that would be great. I think the second question is on the sort of newer deals that you have announced.
In general, like can you just maybe share how do you think about the opportunity and timeframe to move towards a revenue share model especially with the newer platforms? In general, like you know, how substantial is that revenue uplift compared to the fixed payment that you might be currently getting? That's the second question. Thank you very much.
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. You know, 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, I mean they do bring incremental profits but they're actually not accretive to UMG's total margin.
The way I'm looking at it is if growth from publishing and merchandising businesses continue to outpace recorded music, then we will see improved profitability in absolute terms for sure, but total UMG margins will remain fairly flat. That's really the difference between revenues growing at 17% with a skew towards merchandising and publishing that is really causing it. It's a mix effect that's causing the dilution in margin.
When 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—
Yeah.
of our business. We are not looking to do anything that we don't make profit on.
Yeah.
Lisa, with respect to your question on the new deal and revenue sharing, let me approach that a couple different ways. You know, 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 have approached deal making, you know, from the standpoint of doing deals early with platforms as they're 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.
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 roadmaps of these companies so that, you know, we're able to work with them to collaborate and establish a path to develop more, you know, more productive capacities for these platforms with respect to our content and more opportunities for our artists to engage with their fans. You know, this mixed mode revenue model has been, you know, one of the elements that's enabled us to partner early and to drive revenues in the social media space.
You know, 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. They've talked a bit about the focus of this creator content monetization.
I think, you know, 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. You know, I think beyond that, the question would really be to Meta about their plans in this area.
Look, our North Star is the best quality content of audio, short-form, long-form, the best artists, the best music, the best genres. Social media as a category three or four years ago, as you said Mike, was almost nonexistent. Now it'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. 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 our best artists and the best teams to make sure that we're at the vanguard of whatever is next. By leaning in, gives us an opportunity to set deals, to set precedents, and to make it quite clear that if you want the best product, you want the best content, this is the place to come for it.
Great. , thank you very much.
Thank you. Our next question comes from William Packer of BNP Paribas. Will, please go ahead. Your line is open.
Hi to Lucian and Boyd and Michael. Thanks a lot for taking my questions. Two for me, please. Firstly, Q2 was another healthy quarter of growth but the investment community is definitely concerned of any signs of weakness particularly in streaming. We had a good update from Spotify today. YouTube was a bit weaker. Can you just update us across your portfolio, what you're seeing at the coalface, 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? 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 asset multiples yet? Any color there would be helpful, t hank you.
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 one in five consumers in 2019 to one in four last year. That's great but it's also an indication that there's ample room for continued growth. You know, 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. We recently updated that work. You know, we're excited about the addressable market growth opportunity in the established developed markets. Beyond that, there's a huge opportunity for growth in emerging markets. You know, we stay confident about the opportunity to see continued growth with respect to subscription. You know, 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, you know, we're aware of macroeconomic impacts, certainly. You know, we understand, you know, that you know, we have to operate our business mindful of these trends. We're certainly monitoring developments. You know, as Boyd indicated that we haven't seen any indication right now that we're gonna see a problem in terms of being able to sustain growth with respect to ad-supported. Across the streaming partnership portfolios and across the different business lines with respect to subscription and with respect to ad-supported, you know, we see from our performance and from our outlook indications that we should expect continued growth.
Okay. 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. It cannot be justified financially. I think there's still an element of there are funds available and there's capital still to deploy and it's going to get deployed. I'm encouraged with what will happen in the medium term but I think there's still too much capital available immediately. Don't know if that answered your question, Will.
Look, we don't know what the impact of the market is when non-core outside funds actually realize that they haven't got the skill sets or the ability to exploit it.
Thank you. Our next question comes from Adrien de Saint Hilaire of Bank of America. Adrien please go ahead. Your line is open.
Thank you very much, h ope you can hear me okay. 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. What's driving this exactly? 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?
Do you want me to do the second?
Yes. Adrien if you wouldn't mind, if I could just get a clarification on the specific point in your first question that you wanted us to address.
I hope we haven't lost Adrien.
No, I'm still here. Sorry, I wasn't quite sure what you wanted me to clarify but my question was actually why is actually UMG doing so well in physical and seems to be lagging a bit behind the market when it comes to streaming?
Okay. Well, I mean maybe I'll deal with the physical first of all. I mean, it's the, again, you know, this isn't a passive activity. This is, you know, this is something that we're, you know, we're driving. We see the super fan is underserved. Really what we're doing is connecting the fan with the artist through a product and a physical product predominantly although, you know, increasingly there may well be digital products. It's the, you know, it's physical products. We're active and we're pushing that. 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 you know a very conscious effort to develop products you know for the super fan. I think that's one thing I would say on physical. Do you wanna say something on streaming? I mean, the only thing I would say on streaming, I don't quite see it the same way frankly. You know, our growth there was a one-time item in Q2 which was like a catch-up from a digital partner last year. Excluding that, our growth was just over 12% in Q2 for subscription. On streaming, you know, the ad-funded, you know, business, our revenues were up 16% at constant currency which feels, you know, strong to me certainly on the advertising ad-funded.
Yeah. If I could follow up there, just, you know, in terms of context, we just got quarterly earnings reported by Spotify. For the quarter, on a constant currency basis, you know, their number is, you know, within a percentage point or two of ours, you know, in terms of streaming and in terms of subscription, their constant currency and our constant currency, less one-time items. You know, I feel like there's a fair amount of comparability there. We would never just compare ourselves to, you know, one single service on a quarter-by-quarter basis. Searching 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, you know, partnership, you know, making activities as Lucian articulated in his comments. You know, we feel like our business growth has been very strong.
Adrien, I mean just the second point, you know, regarding, you know, our leverage. We're comfortable with our under-leveraged, you know, balance sheet. We just went through the rating agency, you know, process and you know, and we committed there that we would keep our leverage under 2.5x our EBITDA. At the moment, we're somewhere in the region of an annualized basis 1.2x. So we've got quite a lot of headroom between the 1.2x and the 2.5x but we like having that flexibility. We like being, you know, comfortably within the range that we committed to the rating agencies.
Now, that said, you know, capital allocation, you know, it's an important consideration for us and for, you know, for our board. You know, it's a balance between building value in the business and returning value to the shareholders. We can return value to the shareholders through dividends and potentially share buybacks. We've given a significant commitment in terms of dividend. Nevertheless, you know, on share buyback, it is a subject for the board to consider. We're very aware of the importance of capital allocation.
Thank you. Our next question comes from Michael Morris of Guggenheim Securities. Michael please go ahead. Your line is open.
Thanks. Thank you very much, g ood afternoon. I wanna 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, you know, 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? So that's the first question. And my second question is around this SoundCloud, you know, what they call their fan-powered royalty model but you know, I guess where the royalty payments are divided at the individual subscriber level instead of having them pooled.
I'm just curious, you know, do you see one of the royalty models as preferable? Would you consider, you know, being associated with that model? What are the pros and cons there? Thanks.
Thank you for your question. With respect to the Meta partnership and the revenue sharing, I wanna clarify that the announcement that Meta made was specifically about creator videos t hat's a defined category. It's different from UGC generally. 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 that you know, creator videos are, you know, more like UGC than not. You know, 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.
You know, 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.
Well, 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. You know, there have been some new studies that have been cited with respect to developments in the user-centric model consideration. There, you know, 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, you know, the findings have been announced that a large percentage of artists and important genres of music could be disadvantaged under a user-centric model.
You know, remember the French study, the Centre National de la Musique issued what was really the most detailed analysis of user-centric to date last year. Some of that report's 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 interests of all artists. We should look beyond model changes that put one group of artists that benefit against another group of artists that lose out. This shouldn't be a zero-sum situation.
It's complicated.
Yeah.
Thank you. Our final question today comes from Richard Eary of UBS. Richard please go ahead. Your line is open.
Yeah, many thanks. Can I just ask two 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 and whether there's any big headwind 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 as we shift to D2C, which will increase those margins over time? We're seeing a 40 basis points increase in recorded music and publishing that's being impacted by performance rights. If we just look at maybe recorded and publishing as we go out over the next two to three years, are you still confident around growing margins at the individual publishing and recorded music lines? 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.
I think there were three questions there, Richard but we'll try and do them anyway. Just on accounting on CRB, I mean, it's a little bit premature really on CRB. Frankly, you know, I think in the overall scheme of things there's not really going to be anything material that financially arises out of CRB. I think it's a little bit out there in terms of timing but I think overall it's not particularly material. If it is, we'll clearly communicate what's important. You know, on FX, you know, you can see it there. You know, you see the. I mean, I was trying to do everything in constant rates because it really is a pretty significant impact due to the, you know, the strength of the dollar. Clearly benefits revenues and, you know, has the opposite impact on certain of the costs.
We'll continue to report on a way that gives you visibility in constant currency. I don't really wanna 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 margins, I was trying to articulate today really at a total UMG level that the publishing. Well, the merchandise is the.
The merchandise is the most stark example of it but it is also somewhat to do with publishing, as those businesses are outpacing recorded music in terms of growth. They have lower margins, you know, 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 business-by-business basis, you know, we did mention that in the first half of the year, our recorded music margins, once you adjusted for this couple of what time, items did actually expand in the quarter and the half year. I think that's an important. Despite the fact, by the way that you still have a format mix issue in recorded music with physical has lower margins than digital.
Encouraged by margin expansion in recorded music. On music publishing, you know, there is overall in music publishing a decay in terms of what's called NPS but kind of at a gross margin level. Publishing really does benefit from a lot of operational leverage with relatively fixed overheads. Again, you know, encouraged, you know, particularly with this level of growth in publishing, encouraged that publishing can expand their net margin being EBITDA expressed as a percentage of sales. You know, merchandise is not really that material in totality but, you know, clearly, we have ambition to have a business that's got a better margin profile than today. Again, that is going to come by us concentrating on connecting the fan with the artist with the product on a D2C basis.
Yeah. I think that, you know, to add to that specifically as we're talking about merchandise in terms of revenues and EBITDA margin, it's strategically something that we've decided that for the super fan and for our e-commerce business is strategically something that's important.
Yeah.
It helps get our physical products on the audio side into different outlets and into different retailers and into different online digital stores that otherwise it wouldn't have gotten into. I think it needs to be looked in the round.
Thank you. That is all the questions we have time for today. This now concludes today's call. Thank you for joining the Universal Music Group's quarterly results. You may now disconnect your lines.