EMI to reveal 40% profits fall

12 April 2012

MUSIC publisher EMI Group is expected to report a near 40% drop in full year profits on Tuesday, hit by stiff competition from internet piracy and weak record sales.

According to an AFX News poll of five brokers a profit before tax, amortization and exceptional items of £149-£155m for the year to 31 March, 2002 is expected. That compares with a profit of £258m for the same year ago period.

In March EMI said it was on track to deliver a full year profit of £150m. Analysts expect revenue to be down 8% at £2.465bn. At the time Alain Levy, EMI Recorded Music's chairman and chief executive officer, set out a recovery plan for the group's ailing Recorded Music division aimed at reviving its flagging sales and cutting costs.

EMI said it would take out 1,600 jobs from Recorded Music, saving it £98.5m a year at a one-off exceptional cost of £110m. Levy also revealed it would trim 400 pop and rock acts from its 1,600-strong roster.

As expected, the group said it would halve its dividend payment and redirect the cash saved to pay for the shake-up at Recorded Music.

Levy, parachuted in last October to turnaround Recorded Music, said the changes would position the division for 'revenue growth from a much lower cost base'.

'The problem rests in resuscitating the recorded music business,' said Morgan Stanley in a research note. 'We expect EMI to continue to lose market share in a declining market, particularly in the critical US market; global piracy, fragmenting genres and a lacklustre artist roster bode poorly for revenue growth,' said the US broker.

Many analysts argue that EMI's goal to win back market share in the time frame set out in March is too ambitious.

Also, the investment needed to produce revenue growth is likely to offset some of the announced cost savings, say analysts.

EMI also revealed in March an additional exceptional charge of £130m mainly due to the write-down of loss-making ventures and other asset write-offs. This includes a charge of £38m, announced in January, for ending early the group's contract with soloist Mariah Carey. That brings EMI's total exceptional charge for the year to about £240m.

Merrill Lynch, in a research note, lowered its EBITA forecast from Recorded Music partly to reflect the undisclosed pay out to Ken Berry, former head of Recorded Music, who left the group in October last year.

But the broker raised its forecast contribution to profit from HMV, the record and bookshop retailer 43% owned by EMI.

EMI said it would get £142m, excluding an over-allotment option of £40m, from the flotation of HMV last week.

The HMV float improves the strength of EMI's balance sheet.

It should reduce net debt by around 12% to an estimated £980m at the end of next year, said Merrill Lynch.

Investors are likely to focus on the outlook for global recorded music sales against the background of weak industry wide demand.

According to Vivendi Universal first quarter 2002 results global music industry sales were down 8%. There has also been a rise in online piracy, illustrated by the growth in the number of software downloads.

EMI shares traded at 286p, down 7% on the week. The shares reached a 52-week high of 469p in May 2001.

EMI has taken a bashing over the last two years - with the company issuing two profit warnings in six months and two aborted mergers in the last two years.

The shares traded around the £7 mark two years ago.

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