EMI Group reports strong growth in full year profits, with EMI Music and EMI Music Publishing both outperforming the global recorded music industry

• Strong performance, delivering improvement across key financial measures including a 12.9% increase in underlying profit before tax (PBT)
• Group revenues increased by 3.9% on a reported basis and by 2.1% at constant currency, with both EMI Music and EMI Music Publishing outperforming the global recorded music industry
• Creative excellence across both divisions with releases from:
  • Coldplay, Dem Franchize Boyz, Gorillaz, Korn, Raphael, RBD, KT Tunstall, Keith Urban, Robbie Williams in EMI Music
  • Arctic Monkeys, Black Eyed Peas, James Blunt, Kelly Clarkson, Daddy Yankee, Dem Franchize Boyz, Eminem, Gorillaz, Kanye West in EMI Music Publishing
• Group digital sales increased to £112.1m from £46.9m. Momentum remained strong during the fourth quarter, with group digital sales more than doubling to £41.2m
• Group operating margin increased by almost a full percentage point to 12.0% from 11.2%. This improvement was driven by higher revenues, a greater proportion of revenues from digital, and the delivery of previously announced cost savings
• Underlying profit before tax increased by 12.9% to £159.3m from £141.1m
• Underlying diluted earnings per share increased by 19.8% to 15.7p from 13.1p
• The full year dividend is maintained at 8.0p per share

Financial Summary

                                                           Year Ended                Year Ended                    Change
                                                                               31 March 2006           31 March 2005
                                                                               £m                              £m
Total Group revenue                                              2,079.9                        2,001.2                            3.9%
Total EBITDA(i)                                                     275.8                           250.2                               10.2%
Total Group profit from operations (EBITA)(ii)        250.5                          225.1                               11.3%
Underlying PBT(iii)                                                159.3                           141.1                               12.9%
Total Profit before taxation                                    118.1                           98.8                                 19.5%
Underlying diluted earnings per share(iv)               15.7p                          13.1p                                19.8%
Basic earnings per share                                         10.9p                          9.6p                                 13.5%
Dividend per share                                                  8.0p                            8.0p                                     -
Return on sales(v)                                                   12.0%                         11.2%                                   -
Interest cover(vi)                                                      3.0x                            2.9x                                      -

(i) EBITDA is Group profit from operations before depreciation, operating exceptional items and amortisation.
(ii) Group profit from operations (EBITA) is before operating exceptional items and amortisation.
(iii) Underlying PBT is before exceptional items and amortisation.
(iv) Underlying diluted earnings per share is before exceptional items and amortisation.
(v) Return on sales is defined as Group profit from operations before operating exceptional items and amortisation, as a percentage of
Group revenue.
(vi) Interest cover is defined as the number of times EBITDA is greater than Group underlying net finance charges.

Exceptional items include operating exceptional items and financial exceptional items. Operating exceptional items include impairment of goodwill and intangible assets, gains (losses) on disposal of property, plant and equipment and re-measurement of listed investments. Finance exceptional items include re-measurement of financial assets and liabilities to be included within finance charges and exceptional refinancing costs.

Eric Nicoli, Chairman of EMI Group, said, “EMI Group has delivered an excellent performance across all areas for the financial year ended 31 March.

“EMI Music has significantly outperformed the industry, gaining market share in almost all territories including the US.  This strong performance demonstrates creative excellence across the spectrum of our artist roster with success from major global superstars such as Coldplay, Gorillaz, Keith Urban and Robbie Williams, as well as strong performances from new and developing artists such as Dem Franchize Boyz, Radja, Corinne Bailey Rae, Raphael, RBD and KT Tunstall. EMI Music is benefiting from its global reach as it maximises revenue opportunities on both a local and worldwide basis.

“EMI Music Publishing had another very strong year, reporting growth in both revenues and profits. This performance reflects a continuation of the division’s successful and proven strategy of signing and investing in the best songwriting talent in the industry and maximising all potential revenue opportunities.

“Digital revenues continue to grow at a very rapid pace in both divisions as we aggressively pursue new digital uses and demand for our exclusive music content.  In 2005, Coldplay’s latest album release, X&Y, was not only the industry’s biggest selling album globally but also the largest selling digital album release in the US.

“Looking to the current financial year, EMI is in a very strong position to capitalise on the market’s evolution led by the growing demand for digital music. We have exciting release schedules planned for both divisions with new music expected from a diverse range of artists. From EMI Music we expect releases from Tiziano Ferro, Janet Jackson, Norah Jones, Joss Stone, The Beatles, KT Tunstall, Keith Urban, Hikaru Utada and Robbie Williams amongst others. From EMI Music Publishing we expect to benefit from a range of releases, including those from Audioslave, Diddy, Embrace, Goo Goo Dolls, Jewel, Pharrell Williams, Scissor Sisters and The Zutons. Moreover, our recently announced restructuring plans are aimed at further optimising our business structures and ensuring that we remain flexible and innovative, best positioning us for the many opportunities that lie ahead.’’ 

Enquiries

EMI Group plc
Amanda Conroy     Corporate Communications     +44 20 7795 7529
Claudia Palmer       Investor Relations                    +44 20 7795 7635
Susie Bell                Investor Relations                    +44 20 7795 7971
Sonia Shah             Investor Relations                     +44 20 7795 7625

Brunswick Group LLP
Patrick Handley                                                        +44 20 7404 5959

A live webcast of EMI’s presentation to investors and analysts will take place at 9.30 am (UK time) today, 23 May, and can be accessed via the Company’s web site, www.emigroup.com.  An archive will be available for viewing shortly thereafter.

Interviews with Eric Nicoli, Chairman EMI Group, Martin Stewart, Group Chief Financial Officer, Alain Levy, Chairman & CEO EMI Music and Roger Faxon, President & co-CEO EMI Music Publishing in video, audio and text are available on www.emigroup.com and www.cantos.com.

EMI Group performance review

Recorded music industry
Our two divisions continue to operate in a marketplace that is undergoing significant change, primarily driven by the rapid development of digital music.The industry’s digital sales more than doubled in value over the year, with both mobile and fixed line platforms enjoying rapid growth. This strong digital growth significantly mitigated the 5.3% decline in physical sales, resulting in an overall industry decline of 0.9% for the period. 

The digital environment is proving to be extremely dynamic with new entrants, new services and new devices and functionality appearing all the time. Globally, according to IFPI statistics for 2005, there were 335 legal digital music services, up from 50 just two years previously. In this past year alone, we have seen the first legal peer to peer agreement signed, iTunes expand to over 20 countries, the launch of portable subscription services, such as Napster To Go and Yahoo Music Unlimited, and the introduction of a la carte music video services. Consumers are now able to access up to 2m tracks and 165,000 albums in a legitimate digital environment.

The industry has also continued to make progress in combating both physical and digital piracy. Notable legal victories against illegal peer to peer sites Grokster (US), KaZaa (Australia), Kuro (Taiwan) and Soribada (South Korea) have improved the business landscape for legitimate music sales.

EMI Music
EMI Music's strong performance for the year demonstrates both its creative excellence as well as its position at the forefront of the rapidly evolving digital landscape. The division's revenues increased by 1.9% at constant currency, significantly outperforming the global recorded music industry. Within this EMI Music’s digital revenues grew to £92.4m, increasing by 169% at constant currency. 

Operating profit (EBITA) grew by 15.6% to £145.1m, resulting in a substantial improvement in the operating margin to 8.7%. This improved profitability was driven by the flow through of profits from the growth in revenues, an increased proportion of revenues from digital sales and delivery of the remaining £15m of cost savings announced in March 2004.

EMI Music’s distinctive approach to the development of its roster focuses on making consistent investments in artists with long-term career potential and is designed to maximise both local and global sales. This has shown clear results in the year, with the division’s sales coming from a broad range of artists including releases from established superstars Coldplay, Gorillaz, the Rolling Stones, Keith Urban and Robbie Williams, breaking acts Corinne Bailey Rae, Dem Franchize Boyz and KT Tunstall, and local artists RBD (EMI Mexico), Radja (EMI Indonesia) and Raphael (EMI France). 

EMI Music is focused on creating the most attractive music content for consumers and making it available where they want it, when they want it and in the format they want it. In this way, we aim to maximise demand for our artists' works and, importantly, our financial return. The creation of new products, formats, distribution channels and partnerships is now a routine part of our business and our energies are focussed on harnessing these new possibilities to capture all available revenue streams. Over the year we secured over 220 new partnerships, further strengthening our digital footprint across both online and mobile platforms, bringing our total digital partnerships to almost 400 and making our music now available in 56 countries. EMI Music has reached pioneering digital deals around the world, for example, in Europe with GNAB for peer to peer services, in China with Sohu for digital music and in the US with Sprint for over the air mobile downloads.

In addition to establishing the right relationships on the right terms, we are at the forefront of the industry in exploiting the new product, format and windowing possibilities that digital enables. For example, our innovative approach to content bundling and windowing meant that Coldplay’s X&Y was the first-ever album available on iTunes as a pre-order and US downloads included video interviews, a digital booklet and two bonus tracks. In fact, X&Y went on to become the best-selling full digital album download on iTunes, as well as the highest-selling album, worldwide, in 2005. This initiative gives just a flavour of the way that EMI Music is actively exploiting the new opportunities that digital brings.

EMI Music geographic review

North America
During the year, the North American market declined by 1.5%, with strong growth in digital sales substantially offsetting declines in physical sales.

Against this backdrop, our North American business showed strong sales growth, gaining significant market share. Releases from Keith Urban, Dierks Bentley, Trace Adkins, and Korn, in combination with the effective marketing and promotion of international releases from Coldplay, Gorillaz and the Rolling Stones, drove this performance. Virgin’s Dem Franchize Boyz was established as one of the most exciting new urban bands in the US, with the release of their debut album On Top of Our Game. So far, sales of ring tunes of tracks from this album have topped 2m, fuelling purchases of the album itself which has been certified as a gold release in the US.

EMI Music’s digital sales in North America almost tripled over the year. Our revenues from mobile products grew at the fastest rate, increasing by a factor of over 9 times, as the likes of Verizon and Sprint launched new mobile music services. Online downloads continued to represent the largest digital segment, accounting for almost 70% of our digital sales in the region. The proliferation of new digital products and services continues at a fast pace with, for example, iTunes introducing online music video downloads during the year. EMI Music has consistently been an innovator of new products and services, most recently becoming the first major music company to trial advertiser-funded music video content for consumers’ mobiles.

We continue to focus on further strengthening our US business and during the year appointed Jason Flom as Chairman and CEO of Virgin Records. Jason has 26 years of experience in the music industry and, as founder of Lava Records, he discovered, signed and developed multi platinum selling artists such as Kid Rock, matchbox twenty and The Corrs. With his exceptional A&R and business leadership skills, we believe that Jason is well placed to improve further upon Virgin’s performance to date.

UK & Ireland
In the UK market, physical sales declined by an estimated 4.9%, with digital sales increasing by 170% to give a total industry decline of 3.0% over the financial year. Weakness in compilation sales, particularly over the key Christmas period, accounted for the decline in industry sales.

The strength and depth of our UK artist roster was again demonstrated this year, with our business delivering an increase in revenues and gaining significant market share in the UK and Ireland. New album releases from international superstars delivered strong performances. Coldplay’s X&Y sold almost 10m units across both physical and digital formats and was the biggest-selling album across the global industry in 2005. Albums from Gorillaz and Robbie Williams sold in excess of 5m units each worldwide. A number  of new UK artists also broke through to success during the year, including KT Tunstall, Corinne Bailey Rae and The Magic Numbers. KT Tunstall’s debut album Eye to the Telescope met with critical and commercial success, earning her the title of ‘Best British Female Solo Artist’ at the industry’s Brit Awards and selling 2.6m units during the financial year alone. Corinne Bailey Rae’s self-titled debut album was released in February and entered the UK album chart at number 1.

Our digital sales in the UK grew by 170% over the year with fixed-line downloads tripling over the period. In exploring the new opportunities which digital delivery brings for capturing new revenue streams, EMI Music announced a unique 18-month partnership between T-Mobile and Robbie Williams. T-Mobile was able to offer their consumers exclusive content as well as making certain content available to them earlier than its general release. For EMI, the partnership proved to be an effective and innovative platform from which to launch the album.

Continental Europe
Market conditions in Continental Europe were mixed over the year, with total industry sales declining by 3.7%. Trends varied across the region, with France, Spain and Italy showing an improving environment versus the prior year. Germany remained a challenging market. The industry’s digital sales virtually tripled in value over the year.

EMI Music had another highly successful year, gaining significant market share across the region with particularly strong performances from EMI Music France, Spain and Germany. These share gains came from a broad range of established and new artists including Raphael, Souchon, Diam’s, Camille, Wir Sind Helden, Bebe and Amaral, in combination with effective marketing and promotion of our international repertoire.
 
We have seen enormous growth in our digital revenues in Continental Europe during the year, with sales increasing by 245%. Mobile revenues represent a larger portion of digital sales in Continental Europe compared to the US and the UK but fixed-line sales still account for the majority of digital sales in Europe. We are at the forefront of digital development in the region and continue to be innovative in the digital products, formats and services that we create. For example, for the launch of Placebo’s album Meds, we partnered with SFR to offer consumers a series of ‘mobisodes’ along with standard product offerings such as ring tunes and over the air tracks. The mobisode was specifically designed for use on a mobile and the content was targeted to the profile of a Placebo fan. The campaign generated huge interest and Meds entered the French album chart at number 1. The album has sold almost 1m units worldwide since its March release.

Japan
The Japanese market recovered during the financial year and, taking physical and digital together, grew by an estimated 6%.

While we saw success from artists such as Tokyo Jihen, Noriyuki Makihara, Tomoyasu Hotei, Coldplay and the Rolling Stones, our Japanese business lost market share in the year reflecting a lack of local releases. In April 2006, we announced a major restructuring of this business to improve the efficiency of our operations, to reinvest a proportion of these savings in the key areas of A&R and marketing, and to introduce a new multi-label organisational structure. We believe that these initiatives will create a company which is better positioned to increase revenues and profits in the coming years. In conjunction with this restructuring, we recently announced our plans to enter into a sale and leaseback of our two Tokyo freehold properties, with a substantial cash inflow expected from the transaction. We sold our former manufacturing plant in Japan to a consortium led by Memory-Tech Corporation on 26 December 2005.

EMI’s digital sales showed strong growth, rising by 130%. Mobile products continue to be the most popular platform in Japan and have again shown robust growth, almost doubling in value. August’s launch of iTunes has helped to fuel growth in the online sector and we have been extremely active in promoting our content on this platform, with our online digital sales increasing by a factor of over six times during the year.

South East Asia
The major markets in South East Asia experienced a significant decline in physical sales as physical and digital piracy continued to take their toll. Rapid digital revenue growth across the industry partly mitigated this impact, to bring the overall market decline to 3.7%.   

Despite major releases from Indonesia’s Radja, whose album Langkah Baru sold over 1m units in the financial year, as well as releases from S.H.E., Ada Band and The Flowers, EMI Music lost market share across the region. We saw strong growth in digital revenues across all platforms, with mobile comprising the largest portion of our digital sales.

Australasia
Market conditions in Australasia worsened towards the end of the financial year, with an overall industry decline of 6%. EMI Music gained market share versus the prior period, driven by releases from local superstar Missy Higgins as well as international releases from Coldplay, Korn and Ben Harper.

Latin America
The industry’s sales in Latin America enjoyed good growth, rising by 6.1% over the year. Argentina and Colombia saw the strongest growth rates across the region.

Our Latin American business had a very strong year, showing robust revenue and profit growth. EMI gained market share in every Latin American territory, with the largest out-performance in Brazil. Local superstars RBD had a terrific year, with total sales of over 3m units across four album releases. Releases from local artists Marissa Monte, Quintanilla III, Intocable and Thalia, as well as releases from international artists Coldplay and Robbie Williams, drove sales in the region. In July 2005, we announced a major new joint venture with Grupo Televisa S.A., the largest media company in the Spanish-speaking world, to develop and exploit new Latin music both in Latin America and the US.

EMI Classics
EMI Classics had a strong year and grew its global share with particular successes in Continental Europe and Japan. Notable achievements were the success in Japan and many other countries of Best Classics 100, and the release of Mozart's 100 which reached a number 5 position in the French pop chart. Such recordings illustrate the considerable value of EMI's extensive classical catalogue.

One of EMI Classics most important releases during the year was the critically acclaimed studio recording of Wagner's Tristan and Isolde with Placido Domingo and Nina Stemme, the distinguished Swedish soprano who has recently signed to the label.

Virgin Classics also had a good year producing some excellent new recordings, particularly with the world renowned coloratura soprano, Nathalie Dessay, and the young Mexican tenor, Rolando Villazon.

Note: All industry and share data are EMI internal estimates based on official data received from the global recording industry association, the IFPI. EMI measures its revenues for market share purposes following the guidelines used by the IFPI to ensure comparability with the market data.

EMI Music Publishing
EMI Music Publishing delivered another strong performance for the financial year ended 31 March 2006. Reported revenues were £419.6m, an increase of 2.6% at constant currency. This reflects strength across the business, with almost all regions and revenue types delivering underlying revenue growth. Of particular note, mechanical revenues grew by 3.2% at constant currency, the first growth in this revenue type for four years. Operating profit increased by £5.8m to £105.4m with operating margin improving to 25.1%. These results reflect a continuation of EMI Music Publishing’s successful and proven strategy of signing the best songwriting talent in the industry and maximising all potential revenue opportunities, both existing and new.

A broad range of songs, songwriters and products underpinned this performance, reflecting the quality and depth of the catalogue and the innovative ways in which we are monetising it. Notable successes during the period included songs by Arctic Monkeys, Black Eyed Peas, Natasha Bedingfield, James Blunt, Kelly Clarkson, Daddy Yankee, Jermaine Dupri, Eminem, Enya, Gorillaz, Jay-Z, Alicia Keys, Daniel Powter, Eros Ramazzotti, Kanye West and Pharrell Williams.
 
Digital revenues continued to grow strongly, increasing by 46% at constant currency on the prior year, to £19.7m. Revenues from digital music are currently classified amongst the various revenue categories – mechanical, performance, synchronisation and other uses – based on the varying status of income collection for these new uses in different countries.

Growth in digital revenues in music publishing continues to lag the recorded music industry, reflecting an under-developed infrastructure for the tracking and collection of digital royalties and a lack of agreements on digital royalty rates for certain products in some regions. EMI Music Publishing is at the forefront of the industry’s effort to ensure that the right structures and rates are in place to identify and collect fully all past and future digital revenues. In a ground-breaking move, EMI Music Publishing signed a heads of agreement in January 2006 that represents the first steps towards a pan-European one-stop shop for the licensing of online rights. EMI will work with the UK’s MCPS-PRS Alliance and Germany’s GEMA to license the rights of EMI’s English language songs across Europe for online and mobile usage.

The use of songs in mobile phone products remains the most significant early digital revenue contributor for EMI Music Publishing and continues to enjoy very strong growth. For the revenue from mobile products, we have seen the percentage contribution from ring tunes increase significantly during the year whilst the contribution from ring tones has decreased, a trend we would expect to see as the marketplace becomes more developed. Revenues from digital downloads and other newer products, such as video downloads, have also grown strongly yet remain relatively small. Recently, EMI Music Publishing announced an agreement with the global internet communications company Skype. The deal, which was the first of its kind, opens up an important new channel for the delivery of music in the ever-expanding digital arena. It enables the licensing of song copyrights from our catalogue for downloading, subscription and ring tunes across Skype’s online retail store on a worldwide basis.

Mechanical revenue
Our mechanical revenues, which are derived from the sale of recorded music, reported growth for the first time in four years, increasing by 3.2% at constant currency despite the global recorded music market continuing to show year-on-year declines during the same period. Mechanical revenues now represent 45% of total divisional sales on a constant currency basis. On a regional basis, our mechanical revenues were particularly strong in the US, reflecting income tracking initiatives that have been taken to ensure collections are maximised.

Performance revenue
Performance revenues, earned when a song is performed live on stage, played in a bar or other public venue or broadcast on the radio or television, grew by 3.4% at constant currency for the year and now represent 27% of divisional revenues on a constant currency basis. Key drivers of growth in this business are the chart success of songs from our roster of active songwriters and the proliferation of new media channels, especially across Europe. On a regional basis, performance income was particularly strong in the UK, reflecting the faster flow of royalties from the PRS, in the US, with a general increase in income from ASCAP and BMI, in Spain, where we saw favourable TV income, and in Germany, where a new tariff and income type for discos was introduced.

Synchronisation revenue
Synchronisation revenue, which is generated by the use of songs in audiovisual works such as advertisements, television programmes, films, computer games and in mobile phones, increased by 5.4% at constant currency, representing more than eleven years of consecutive growth and now contributes 17% to divisional revenues. From the high level achieved in 2004/05, EMI Music Publishing was able to drive meaningful growth in synchronisation by gaining greater penetration in commercials and video, particularly in the US. Significant licences were issued worldwide for a number of major advertising campaigns, including Coca Cola, the Automobile Association, Fuji, Fiat and American Express as well as for TV programmes such as American Idol, Supernanny, Gilmore Girls, Nip/Tuck, Crossing Jordan, Scrubs and Lost.

Other revenue
Other revenue typically represents about 10% of revenues, although the absolute amount can vary significantly from year to year. An important driver of the growth in other revenue in recent years has been revenue gained from stepped up efforts in enforcing proper use of our copyrights. By their nature, these revenues tend to be irregular and unpredictable, accounting for the overall decline on a constant currency basis in this revenue category. Excluding these items, the underlying growth in other revenue was strong at over 20%, largely driven by increased background library income.

EMI Group future outlook

The recorded music market is undergoing significant change as it becomes increasingly digitised. At this early stage, it is impossible to predict accurately how the market will evolve. However, our analysis, based on recent industry trends, EMI’s performance to date and proprietary econometric research, leads us to believe that the global recorded music industry will return to growth in due course driven by consumer demand for digital music products of all types. In this context, we anticipate declining physical sales and have structured our business accordingly. Given the current growth rate of digital music and our future expectations based on this analysis, we continue to believe that digital music sales could represent up to 25% of total global music sales by 2010.

We will continue to invest significantly in A&R, marketing, and in our systems' infrastructure so that we remain positioned at the forefront of the industry in capitalising on the exciting opportunities arising from the market’s evolution.

In April 2006, we announced a series of restructuring initiatives aimed at further strengthening our business. These initiatives will involve most regions and will be focused on improving and re-aligning resources to ensure the organisation remains flexible and progressive. A particular area of focus is EMI Music’s Japanese business where new skills and a new organisational structure will be introduced to enable the re-allocation of resources into the key areas of A&R and marketing whilst maintaining an aggressive approach to digital business development. These initiatives together are expected to generate £30m of annualised cost savings. We expect that not less than £10m of these savings will be achieved in the financial year ending in March 2007, with the full run rate achieved by the end of the following financial year. In conjunction with these restructuring initiatives, EMI Music plans to enter into sale and leaseback arrangements for its two Tokyo properties and the Capitol Tower in the US. The lease costs that will be incurred as a result of these agreements have already been taken into account in our planned delivery of a net £30m of annualised cost savings.

In the current financial year, EMI Music is planning releases from Chingy, Tiziano Ferro, Janet Jackson, Norah Jones, Stacie Orrico, RBD, Renaud, Joss Stone, KT Tunstall, Keith Urban, Hikaru Utada and Robbie Williams. EMI Music Publishing expects to benefit from releases from artists including Audioslave, Embrace, Goo Goo Dolls, Jewel, Diddy, Pharrell Williams, Pink, Scissor Sisters, The Zutons and Tool.

On 3 May 2006, we announced that on 1 May 2006 the Group made an approach to Warner Music Group Corp (Warner Music) in connection with a proposed offer by EMI to acquire all of the outstanding shares of Warner Music for US$28.50 per share, in a combination of cash and EMI shares. Subsequently, Warner Music informed us that it did not wish to enter into discussions regarding our proposal. We continue to believe that an acquisition of Warner Music by EMI would be very attractive to both sets of shareholders but we will only pursue a transaction that delivers enhanced value and earnings accretion to our shareholders.

EMI Group financial review

Revenue
Reported Group revenue increased by 3.9% or £78.7m to £2,079.9m. The improvement, excluding the impact of currency movements, was 2.1% or £41.5m. The favourable exchange movement was largely driven by a decline in the weighted average rate of the US Dollar against Sterling from $1.85 last year to $1.78 in 2005/06.

At constant currency, revenue in EMI Music grew by 1.9%, with notable increases in North America, UK and Ireland and Latin America.

At constant currency, revenue in EMI Music Publishing was up on the prior year in all major territories, apart from Italy and France, and by 2.6% at a divisional level. The increase in revenue was driven by strong growth in mechanical, performance and synchronisation revenues.

Group digital revenue increased to £112.1m, up 135% from the prior year at constant currency. Digital revenue represented 5.4% of total Group revenue for the year.

Costs
During the course of the year, costs in both divisions were tightly controlled. The underlying gross margin, after distribution costs, improved from 36.4% to 37.2%.

Royalty and copyright costs, manufacturing and distribution costs, together with marketing and promotion costs have increased modestly in total in absolute terms in the year, reflecting the increase in revenue. However, these costs in aggregate have declined as a percentage of total revenue from the prior year. During the year, we delivered the remaining £15m of cost savings from our restructuring initiatives announced in March 2004, taking the total annualised savings from this programme to £50m. These savings were largely reflected in reduced manufacturing and distribution costs and overheads. Group corporate costs were lower in comparison to the prior year in spite of increased legal, regulatory and consultancy costs.

Profit from operations
Group profit from operations (EBITA) increased by £25.4m or 11.3% from £225.1m to £250.5m. Excluding exchange, the increase in EBITA was £21.6m or 9.6%. Group operating margin increased from 11.2% to 12.0%.

EMI Music delivered EBITA of £145.1m, an improvement of £18.1m or 14.4% at constant currency on the prior year. This increase in EBITA was largely driven by particularly good performances in Continental Europe, UK and Ireland, and Latin America. Operating margin improved from 7.8% to 8.7%.

EMI Music Publishing generated EBITA of £105.4m, a growth of 3.5% at constant currency on the prior year. Operating margin improved from 24.9% to 25.1%, reflecting improved net publisher’s share and continued strong overhead control.

The Group’s share of profit in its associated company investments reduced from £1.1m in 2004/05 to £1.0m in 2005/06. Consequently, the underlying profit from operations for the Group increased from £226.2m in the prior year to £251.5m this year.

Underlying Group finance charges rose by £7.1m to £92.2m. The largest items contributing to this increase were the interest rate rises in both Europe and the US, two of our major funding territories, a lower gain from the amortisation of the 2003 swap unwind and higher average net borrowings over the year, offset only partly by savings from the refinancing of our revolving credit facility completed earlier in the year.

Underlying profit before tax increased by 12.9% from £141.1m to £159.3m, reflecting both the increase in revenue and the continued tight cost control.

The underlying Group tax rate was 17.6% against 22.3% in the prior year. The reduced rate reflected a movement in profitability towards countries where there were brought-forward tax losses available for offset. The rate has been further reduced due to the settlement of prior liabilities at a lower amount than expected.

As a result of the above, the Group’s underlying profit after taxation increased from £109.6m to £131.2m, an increase of 19.7%.

Underlying basic earnings per share were 16.2p, an increase of 2.8p from the prior year. Underlying diluted earnings per share, the calculation of which includes the impact of the potential conversion of convertible bonds (and related bond interest) together with the possible exercise of dilutive share options, increased from 13.1p to 15.7p.

Other items affecting earnings
Exceptional items and amortisation comprise operating exceptional costs, finance exceptional costs and amortisation of music copyrights and intangibles.

The Group is reporting operating exceptional income of £4.0m compared with costs of £17.5m in the prior year. Operating exceptional income is net of property impairment charges of £1.1m in the UK in 2005/06 (2004/05: £18.5m charge in Japan). The remaining operating exceptional income of £5.1m includes gains on property disposals, the gain on disposal of our manufacturing operation in Japan and fair value adjustments to listed investments. The prior-year charge included income of £1.0m in respect of the same components.

The Group is reporting finance exceptional net income relating to remeasurements and refinancing costs of £4.7m compared to net income of £23.2m last year. This primarily relates to the gain on revaluation to fair value of the convertible bond derivative of £4.1m (2004/05: £31.2m gain), the gain on revaluation of the Eurobond embedded call feature of £8.2m (2004/5 £0.2m loss) and the foreign exchange loss on Euro borrowings of £4.1m (2004/05: £9.5m loss). The finance exceptional net income for 2005/06 includes exceptional refinancing costs of £5.2m in connection with the refinancing programme carried out in July 2005 (2004/05: £nil).

Amortisation of music copyrights and other intangibles and impairment of goodwill amounted to £49.9m in comparison with £48.0m last year.

The minority interest cost has increased from a credit of £0.5m in the previous year to a charge of £3.9m this year. This is largely the consequence of increased profitability and the absence of a property impairment charge in our Music business in Japan in which there is a 45% minority.

Profit attributable to members of the Company was £86.1m in comparison with an attributable profit last year of £75.4m.

The Board is recommending a final dividend of 6.0p per share, maintaining a full-year dividend of 8.0p per share and reflecting our strong performance for the year and our continued confidence in the outlook for the business.

Reported results
Total Group profit from operations (including share of associates) was £205.6m in comparison with £160.7m last year. This increase was entirely due to improved trading and reduced property impairment charges.

Total profit before taxation was £118.1m as against £98.8m in the prior year. This increase reflected the improvement in Group profit from operations, partly offset by the reduction in finance exceptional net income.

Cash flow and net borrowings
Improvement in cash conversion and overall cash management remains a key area of focus for the Group. The net cash inflow from operating activities was £188.3m, a small reduction from last year’s inflow of £189.0m.

After the net cash inflow from operating activities, we had cash outflows of £2.6m for investment activity and £246.9m for financing activity including £61.2m for dividends. Taking into account the loss on exchange of foreign currency denominated borrowings of £42.8m, year-end net debt has increased by £22.0m from £857.5m to £879.5m.

The net cash inflow from operations after investing activities has approximated the operating result of both divisions in recent years.