Paramount Global (PARA) 2008 Q3 法說會逐字稿

Good day, everyone and welcome to the CBS Corporation third-quarter 2008 earnings release teleconference.

Today's call is being recorded.

At this time, I would like to turn the call over to the Executive Vice President of Investor Relations, Mr.

Adam Townsend.

Mr.

Townsend, please go ahead, sir.

Thank you, Yolanda.

Good morning, everyone and thank you for joining us for our third-quarter of 2008 earnings call.

Joining me for today's discussion are Sumner Redstone, our Executive Chairman; Leslie Moonves, President and CEO; and Fred Reynolds, Executive Vice President and CFO.

Sumner will have opening remarks and will turn the call over to Les and Fred, who will discuss the strategic and financial results.

We will then open the call up to questions.

Let me note the statements on this conference call related to matters which are not historical facts are forward-looking statements, which involve risks and uncertainties that could cause actual results to differ.

Risks and uncertainties are disclosed in CBS Corporation's news releases and securities filings.

A summary of CBS Corporation's third-quarter 2008 results should have been sent to all of you.

If you did not receive it, please contact Poonam Desai at 212-975-3667 and she will get it over to you.

A webcast of the call and the earnings release and other information related to the presentation can be found at our website, cbscorporation.com.

And now I will turn the call over to Sumner.

Thank you.

Good morning, everyone.

Thank you for joining us today.

CBS is clearly operating in the middle of one of the most difficult environments in our recent memory.

But one thing that is certain to me is that Leslie and his team are managing our businesses prudently and they are positioning CBS for a very successful future.

At the same time, I am pleased that CBS continues to pay a truly attractive dividend while investing for growth.

Now these are things many companies were not able to do this quarter and accomplishments to be proud of.

CBS continues to be in a strong position and I have no doubt that we will be even stronger on the other side of the challenges we face today.

Now I want to briefly discuss another topic that I am sure is on all of your minds.

As you know, the financial condition of National Amusements -- that is a private company that I control and that holds my controlling interest in CBS and Viacom -- has been much in the news in recent days and understandably, there has been some concern expressed, particularly with respect to any potential impact on CBS and Viacom.

So let me give you the facts.

First, NAI's theater operations are substantial.

We have more than 1500 screens in the United States, Latin America, the United Kingdom and Russia and the company is in the forefront of delivering great entertainment experiences to its audiences.

However, NAI, like a number of companies, are pulled into the wake of unforeseen and unprecedented market activity that caused a precipitous drop in the value of the overall market and of course, in the value of CBS and Viacom shares.

This in turn triggered a covenant issue under NAI's debt agreement.

Second, NAI moved quickly to address the situation.

The company immediately opened up a dialogue with its lenders, which, as you know, led to the highly unusual sale of $233 million of CBS and Viacom non-voting shares.

Obviously, these were extraordinary circumstances, which resulted in NAI having to take action, which is clearly atypical.

Now let me emphasize that this was not something NAI wanted to do nor is it something NAI intends to do again.

Let me make it sure, clear, certain.

NAI has no intention of selling a single share of Viacom or CBS.

Now there may be uncertainties all around us, but one of the things I remain absolutely certain of, whatever actions are required, in no way diminishes my optimism of our CBS and Viacom.

Furthermore, it should be obvious to all of you that the current stock prices of these two great companies does not come close to reflecting their underlying value.

Third, NAI has a top team of professional advisers.

They include Citigroup, Rothschild, Shearman & Sterling.

They are all working with the banks and noteholders to restructure the unsecured debt.

A committee of NAI directors who have no executive role at either CBS or Viacom is overseeing the work of these advisers.

Finally, and most important, notwithstanding speculation in the press and elsewhere, I want all of you to know that NAI is having extremely constructive talks with its lenders and I fully expect that a fair and workable deal for National will be reached in a highly reasonable timeframe.

Now I know that many of you will have questions, but given the sensitive and fluid nature of these discussions, I will have to decline comment for now, for now only, until NAI is in a position to update you on any significant future developments.

So I thank you.

I'm glad I had an opportunity to give you a realistic view of what goes on in the strong National Amusements.

Now let me take you back to the real topic of the day, CBS.

And I will turn you over to my friend, Les Moonves.

Thank you very much, Sumner.

Good morning, everybody and thank you all for joining us today to discuss our third quarter.

Before I walk you through our results, I want to make a few key points that are crucial to understanding our Company and our future.

Clearly, this is a difficult marketplace for all companies in every sector.

The challenge is to recognize the reality of this situation and effectively manage through it and to be ready to thrive when the economy turns, which we are doing.

First, I want to stress that we are committed to paying a healthy dividend to our shareholders.

Our free cash flow remains strong, $1.4 billion for the first nine months of this year.

Going forward, we are confident that our businesses will continue to produce the kind of cash that will enable us to pay our attractive dividend.

Fred will talk some more about this in a minute, but the dividend is front and center in our strategy to return value to our shareholders.

Second, in any economy, producing premium content is at the core of what we do.

The CBS television network, The CW and Showtime are the engines that create our content and they are firing on all cylinders.

These three networks create content for many other parts of the Company from local stations, to domestic and international syndication, to DVD sales, to online streaming and emerging media platforms like iTunes and Mobile.

Creating winning content now is the best way to drive future financial results when the economy improves and we are doing that.

Third, our long-term strategy continues to be the shift from slower growth assets to higher growth ones.

No step has been more significant for us in executing this strategy than our acquisition of CNET Networks, the greatest collection of profitable, premium, online brands in the industry.

It has only been four months since the close, but the integration is well underway and it has gone very smoothly.

As part of the new CBS Interactive, CBS has been cash flow positive from day one and growing.

More about the new CBS Interactive in a minute.

Finally, we can't control the economy, but we can control how we manage through this period.

I assure you that we are doing everything we can to address expenses throughout our entire organization.

As you saw in today's press release, we have taken further costs out of our Radio and Outdoor businesses, part of our ongoing effort begun earlier this year.

We will remain vigilant in evaluating and adjusting our cost base and in taking a very disciplined approach to investment in capital projects.

Turning to the quarter, as you know, we made some announcements earlier this month when the extent of the market conditions became clear.

So what we are reporting today largely represents numbers you are already aware of.

During the third quarter, the Company delivered revenues of $3.4 billion, up 3% from the same quarter last year.

CNET contributed to this as did the domestic cable syndication sale of CSI New York.

But obviously, revenue growth in this economy is quite welcome.

Meanwhile, as we indicated earlier, our OIBDA and operating income were both down due to developments in the economy in the advertising marketplace.

But our Company remained highly profitable this quarter with adjusted OIBDA of $665 million.

All five of our operating segments, including our new Interactive segment, contributed to CBS' profits.

Now let's take a quick look at some of our businesses.

First and foremost, the CBS television network is back in front of all the competition.

For the first time in more than 20 years, we are number one five weeks into the season in every single key category.

This includes household viewers, adults 25 to 54 and yes, adults 18 to 49.

We have six of the top 10, 11 of the top 20 programs, more than all of the other networks combined and we dominate five nights of the week.

Again, more than all of the other networks combined.

In addition to being the number one network, CBS has the number one series in CSI, the number one comedy in Two and a Half Men, the number one new series in the Mentalist, the number one new comedy in Worst Week and continuing the number one newsmagazine in 60 Minutes.

Speaking of news, I am very proud of the work Katie Couric has done this election season.

Her interviews with the candidates have been among the most talked about and widely viewed events in this historic Presidential campaign.

They drove ratings increases for our program and a double-digit surge in visitors to cbsnews.com and all the CBS audience network sites.

Her clips ranked among the most popular online across the entire web on any given day in the weeks that followed the series and we monetized them.

And for my money, Bob Schieffer was by far the best moderator in all the Presidential debates.

I am also happy to report that the rumors of CW's demise were greatly exaggerated.

Since premiering its fall lineup, The CW has improved its overall primetime performance by 20% in its target demo, woman 18 to 34, making it the number one network in that category.

With Gossip Girl, 90210 and America's Next Top Model, The CW has established itself as the premier network for young women.

Showtime is another crucial part of our content engine and is also performing remarkably well.

And unlike CBS and The CW, it is not advertising-dependent, which diversifies our TV segment.

Our subscriber base is at an all-time high and growing every single month.

Third-quarter subs were up 9% or 1.4 million households from the third quarter of '07.

Once again, original programming continues to drive Showtime's results.

During the quarter, the fourth season of Weeds had its highest debut yet.

The show's first week drew three million viewers, up 64% from last year.

Dexter had a strong opening as well and has been renewed for two more seasons.

Add to that Californication, The Tudors and the new Inside the NFL show and you can see why Showtime is stronger than ever and has become the premier premium cable network.

Also in cable, CBS College Sports Networks is gaining subscribers as well.

During the quarter, we signed new deals with Comcast, FiOS and others to add four million subs and we will be at 30 million in total by early 2009.

Turning to syndication, there is a tremendously strong demand for our hit shows domestically and around the globe.

In the US, our cable syndication sales of CSI New York helped increase our TV licensing fees by 40% in the quarter.

And overseas, as cable channels proliferate, our syndication is filling a need for new programming.

We just sold Showtime's Californication internationally for $1 million per episode, the first half-hour show ever to hit that mark.

Meanwhile, 90210 has sold for more than $2 million per episode, making the show highly profitable from its very first episode.

And the CSI franchise considers to be number one around the world.

In the area of retransmission consent, we are being paid for our signal by many smaller operators and have some larger deals currently in negotiation.

We expect to have more progress to report by the end of the year.

In short, while the advertising marketplace is difficult, we are capitalizing on our other growth opportunities at Showtime, syndication and in retrans negotiation with good results.

In our current economy, our local businesses in TV, Radio and Outdoor have been most affected.

We have anticipated the slowdown for some time and have taken proactive measures by reducing capital and operating costs going back to last year.

We will continue to right-size our businesses as we move forward as well.

In regards to Radio, I would like to take a moment to update you on the sale of some of our midsize market stations.

We have received some very attractive bids and are continuing our conversations regarding them.

Current credit conditions make it difficult to predict the timing of these transactions, but we are encouraged by the level of interest in our station.

The good news is that we don't have to sell by any given date.

We will take the time necessary to make the best deal for us and our shareholders.

Standby.

The timing of these sales is less important to us and sticking to our larger ongoing strategy of shedding slower growth assets and investing in higher growth ones.

As I mentioned earlier, our CNET acquisition is at the heart of that long-term growth strategy.

In order to give you greater transparency into this business, we have broken it out as a separate segment beginning this quarter.

Interactive revenues for the third quarter were $141 million, up almost fourfold from a year ago.

On our comparable basis, the CNET Networks delivered quarterly revenues up 8% versus a year ago with display ad revenue up 14%.

Year-to-date, revenues for the entire CBS Interactive segment on a comparable basis are up 10%.

In terms of profits with CNET in the fold, we have swung from a loss of $11 million last year to a profit of $2.5 million.

At the same time, we have also dramatically expanded our platform of premium content and distribution across the Internet, Mobile and other emerging platforms.

To give you an idea of how fast we have built our Internet presence, CBS, two years ago, CBS Interactive ranked 110 in unique visitors, number 40 before CNET, number 8 immediately after the acquisition and we are number 7 today making us number one among our peer companies that own a broadcast network.

While we are looking at CNET, one of the areas where we saw great opportunity was in our ability to cross-sell and to bring existing CBS advertisers into the higher growth online marketplace.

I am very pleased with the progress we have made in a short time, resulting in new dollars in various categories.

We are in the very early days of this segment.

We have already exceeded the high end of our expectations in terms of public company costs with north of $20 million in savings and we still have a long way to go in realizing all of the cost synergies we expect.

The underlying health of this business is very good and that comes through in the growth we are seeing in a very tough economy.

We expect fourth-quarter results of Interactive to have margins much more reflective of the segment's potential and we will continue to focus on expanding the premium content and new distribution platforms that this business provides CBS.

Many of you have suggested that with asset values considerably lower today, there may be some attractive acquisitions available out there.

We will always look for growth opportunities, but right now, our focus is on operating our existing businesses.

From the TV network to the online network, content and distribution are at the core of what we do.

We have long believed and we will continue to believe that if we produce the best premium content and constantly seek out new ways to reach audiences and broaden distribution, we can thrive over the long term.

We are clearly operating in a difficult environment, but there are significant developments in our Company that speak to our ongoing strengths.

As I said, CBS, CW and Showtime are at the top of their game.

Our syndication pipeline is full and demand for the product is high.

Retransmission consent fees will increasingly play a role as a second stream of revenue in our Television segment.

Our expanded Interactive business is the now the leading online performer for premium content distribution and let's not forget that Simon & Schuster revenues and profits are climbing.

Financially, we have a strong balance sheet and solid free cash flow and we are well-equipped to operate in this environment and not lose sight of the bigger picture.

Through it all, we will continue to return value to our shareholders in the form of an attractive dividend.

Those are our highlights and now I will turn the call over to Fred Reynolds for some more remarks on our financial performance.

Fred?

Thank you, Leslie and good morning to all of you.

I would like to first discuss the significant items in the third quarter and then give you some further information on the underlying performance of our businesses.

And finally discuss our balance-of-year expectations.

So let's start with are very healthy free cash flow, which through the third quarter totaled almost $1.4 billion.

During the third quarter, free cash flow was a $38 million use of cash compared to the third quarter of 2007 when free cash flow provided over $265 million in cash.

The drop in free cash flow of $304 million was due to $120 million lower adjusted operating income before depreciation and amortization and higher use of working capital during the third quarter.

Also, higher capital spending of $34 million largely due to higher spending at TV stations to complete replacement station facilities as the old facilities in Chicago and Los Angeles were sold in prior years and capital spending was also higher due to the United Kingdom's rollout of displays in the London Underground.

During the third quarter, $35 million was spent for the London Underground rollout and we expect the London Underground capital spending project will be largely completed in the next 90 days.

On working capital in the third quarter of 2008, we used about $185 million more working capital than the third quarter of 2007.

The biggest portion of this increase was from the growth in our syndication net receivables of about $100 million, which were from revenues we recognized in the third quarter from the off-network syndication of CSI New York, along with a significant increase in receivables from international syndication led by our CSI franchise versus a much lower level of syndication activity in the third quarter of 2007.

As we have discussed in the past, we always highlight quarters which have significant syndication activity as there is a timing difference between when we recognize revenues and when we receive the cash.

The next working capital item has to do largely with the timing of program production spending.

We used about $30 million more working capital in the third quarter 2008 versus last year and this was due to starting the 2008-2009 broadcast season a week later than last year.

The higher working capital spent on these episodes is merely timing and will reverse in the fourth quarter as we air the episodes which were produced in the third quarter and recognize the ad revenues from their broadcast in the fourth quarter.

Turning to capital spending, for the full year 2008, we now expect our capital spending to be slightly below $500 million, which is below our previous guidance of this year's capital spending of $500 million to $550 million.

As we have discussed over the last several quarters, our capital spending in 2007 and 2008 was at an all-time high due to the accelerated spending to build out the London Underground, the timing of building replacement facilities for the TV stations I just mentioned and finally completing the enhancement of our high-definition capabilities at the network and TV stations in anticipation of the country's switch to digital in 2009.

Looking forward to 2009, we expect our capital spending will be much lower with capital spending returning to its historical levels.

For 2009, we expect capital spending will be approximately $350 million for the year.

This is, again, our historical level of annual capital investment, which funds the needs of our base businesses and provides the necessary capital for attractive growth in this business such as expanding our digital boards for Outdoor.

And finally, we do expect to have free cash flow to be positive in the fourth quarter of 2008 and as you know, typically, the fourth quarter is a strong quarter for us.

Turning to the balance sheet, as you will note from today's earnings release, we closed the third quarter with over $550 million of cash on the balance sheet and our balance sheet remains very strong with leverage of 2.3 times operating income before depreciation and amortization and coverage ratio at 5.6 times our interest cost.

Our gross debt of $7 billion has remained unchanged since January 1, 2006.

All of our major initiatives, such as buying back approximately $3.4 billion of our stock, acquiring CNET Networks, was funded from the excess cash received from divesting assets and free cash flow from operations.

Given the uncertainties of the current economic conditions, we will continue to focus on free cash flow by accelerating the conversion of our revenues into cash, lowering capital spending and lowering our cash income taxes as a result of past tax planning strategies.

We can assure all of you maintaining our strong balance sheet is our highest priority, while also ensuring our free cash flow from operations will remain strong.

And as we said at the outset, we are committed to continue to pay our very attractive dividend.

As Leslie mentioned, while we always look at growth opportunities, we believe the businesses we currently have are very attractive.

They can grow and they will weather the current economic storm we are all facing and we believe our businesses will be even stronger once the US economy starts to rebound sometime in 2009.

We are totally focused on operating our existing businesses, generating strong free cash flow, keeping our balance sheet strong and even stronger into the future and returning attractive values to our shareholders.

As we also noted today in today's earnings release, we recorded a non-cash impairment charge.

After this charge, our goodwill and intangible assets will total about $16 billion, down from approximately $28 billion at the end of 2007.

So now let me quickly turn to our business segments and discuss the underlying performance in the third quarter.

First, our largest segment, Television.

Television revenues for the third quarter were almost $2.1 billion, up 2% over the third quarter last year, led by syndications in cable of our CSI New York franchise.

Time period advertising sales at the CBS Network were down 12% for the third quarter versus last year.

The decline in time period ad revenue was caused by over nine hours of primetime preemptions in the third quarter for the two political conventions and one Presidential, debate which was aired in the third quarter.

Also to add to the difficult comparison versus a year ago were primetime coverage of Hurricanes Gustav and Ike and of course, that lowered our overall audience ratings as we concluded the 2007 and 2008 season.

As Leslie noted earlier though, we are in the start of a new broadcast season and CBS Networks is off to a terrific start with strong ratings in all key demographics with our relative ratings strength versus other broadcast networks has grown dramatically in our favor.

The Television segment's operating income before depreciation and amortization for the third quarter totaled $414 million, down from $487 million last year.

The decrease in profits was due to lower time period sales at the network as I just discussed, soft advertising revenues at the local level and also $3 million of higher stock-based compensation expense.

And also, we had the TV station divestitures from the prior year.

Partially offsetting these items were the profits from the CSI New York syndication revenues, which was recognized in the third quarter and strong subscriber growth at Showtime as we continue to benefit from their higher subscription fees.

Turning to Radio.

Radio's revenues at $393 million were down 12% from the third quarter of last year.

Now on a same station basis, we were down about 11%.

Radio's operating income before depreciation and amortization of $139 million was down from last year's $170 million.

Approximately 40% of the decrease in OIBDA or about $12 million is due largely to divestiture of radio stations in the past.

Also, Radio's operating expenses for the third quarter were $23 million lower than a year ago in absolute terms, $23 million lower than a year ago, as we continue to lower operating costs in light of the challenging local markets.

Year-to-date, over 480 headcount have been reduced by Radio with almost 290 of the headcount being reduced in the third quarter as we continue to review opportunities to lower Radio's overhead and backroom costs.

Turning to Outdoor.

For the third quarter, Outdoor had revenues of $549 million, down $3 million or about 1% from the third quarter of last year.

North America's Outdoor revenues were $338 million, down about 4% from the third quarter of '07.

Lost contracts, which we have mentioned in the past, in Toronto and San Francisco accounted for half of the drop in the North American ad revenues versus last year.

Revenues for our Billboard business was down slightly from last year's third quarter.

International Outdoor revenues for the quarter were $211 million, up 5% over 2007's third quarter.

International revenues were led by strong growth in China, driven by the Beijing Olympics and in France and Holland and we had very strong revenue growth from our London Underground digital display business, which saw digital ad revenues up over threefold versus last year's third quarter as advertiser reception to this new digital display continues to be terrific.

Operating profit before depreciation and amortization at Outdoor was $114 million for the quarter, down from $154 million in the third quarter last year.

North America's operating profit before depreciation and amortization of $107 million was $27 million lower than the third quarter of last year with, again, lost contracts in Toronto and San Francisco, which were very profitable and the costs associated with Hurricane Gustav and Ike, particularly in Texas accounting for about a third of the drop in costs.

Severance costs were also higher in the third quarter in North America as they reduced their headcount by over 200 people now with over half the headcount reductions coming in the third quarter.

Higher billboard and display rent fees versus last year accounted for the balance of the decline in North America's profits.

International's operating income before depreciation and amortization for the third quarter was approximately $7 million, down $12 million from a year ago.

Over half the decline in the profits was due to severance and restructuring costs as headcounts were eliminated in Europe during the third quarter as International continued to streamline its country overhead.

So let's wrap up our segment discussion with our newest segment, Interactive, which includes a full quarter results of CNET Networks, which we acquired on June 30 of this year.

Interactive revenues for the third quarter totaled $141 million and as Leslie mentioned, up almost fourfold from a year ago.

On a comparable basis, third-quarter revenues were up 6% with CNET Networks' display ad revenues up 14% over the third quarter of last year.

And as Leslie mentioned, we are very encouraged by how CNET Networks is performing and how quickly the Interactive group and CNET have merged together.

The third quarter is the first full quarter together and we expect the CNET results to continue to be on track with our expectations of adding over two points to our total Company future revenue and profit growth.

Turning to OIBDA.

OIBDA for Interactive in the third quarter totaled $2.5 million versus a loss of $11 million last year.

Again, CNET is only included in the third quarter, not the prior period.

Included in the third quarter were severance costs on the CBS Interactive side as overheads were eliminated as part of the merging of CBS and CNET together.

Now operating income from Interactive includes about $9 million of non-cash expense from the amortization of intangible assets such as trade names and trademarks.

About a third of this amortization is historical from the CBS Interactive group with the balance coming from the allocation of CNET's purchase price between goodwill and intangible assets, which have a determinable life.

Now just a few more comments on the third quarter and then we will wrap it up and get to your questions.

Other items net, as you noticed, is a loss of $41 million, which includes non-cash write-downs of Westwood One and Spanish Broadcasting.

The total non-cash write-downs and other items net was $56 million.

Earnings per share for the quarter came in at $0.43 and finally, as you'll note in the earnings release, we reiterated our full-year business outlook, which we announce several weeks ago.

We will continue to operate our businesses by focusing on driving free cash flow and lowering costs, especially in light of the uncertainty caused by the rapid slowdown in the US economy and its effects on our local businesses.

Given the strength of the CBS Network, which has demonstrated the first five weeks of the season to be the leader in all the key demographics that we just discussed, we can assure you that we are focused on delivering full-year results better than our guidance.

Thank you.

And now if we can have the operator, Yolanda, open the lines for your questions.

(Operator Instructions).

Jessica Reif-Cohen, Merrill Lynch.

Thank you, I have a few questions.

The first is I was just wondering -- can you talk about the tone of the scatter market in the fourth quarter?

And is there any benefit to the ratings growth that you have enjoyed in the new season?

Second, on Showtime, are you scaling back at all on the films or can you just comment on what is going on there?

And then I wanted to ask Sumner, since I know he is on the call, I know you don't want to talk about anything, but if Viacom stock continues to go down, how can we be sure that you won't have to sell?

Jessica, let me answer the first two questions that you talked about.

The scatter market, once again, it is not booming like in past years.

There is some of it.

The good news is, because of the rating situation, we feel like we are going to be the beneficiary of it.

There is some.

As I said, it is not what it has been in previous years.

The great news is, in the upfront, we sold a major -- a large percentage of our inventory, so we had a lot of volume.

The good news, obviously, no make goods for us and whatever scatter is coming in, they are targeting it for CBS and The CW.

Second question, Showtime, as you know, we made to deal with The Weinstein Company.

We will have some movies from CBS film.

Remember, our deals with MGM and Lionsgate continue through the end of this year.

We have all of those movies, including the James Bond movie that is opening this week belongs to us.

There are plenty of movies available.

Once again, our main focus for Showtime and our growth is in original programming.

And you're going to see an increase in original programming and probably somewhat of a decrease in the number of movies that we need to fill out what we are doing.

But there are plenty of available movies and we are going to be fine in our movie production.

Adam?

Yes, Jessica, I would just say, obviously, with respect to the NAI situation, if we can just appreciate the sensitivity of that and we will steer away from that for now if you could.

Jessica, this is Fred.

On the scatter market, right now, we are selling slightly above where we are in the upfront and I think we are getting, to Leslie's point, the credit that we are the place to be if you want to advertise and so far scatter pricing is hanging in there.

Great.

Thanks.

Michael Nathanson, Sanford Bernstein.

Thanks.

I have a couple, but I wanted to see -- is Sumner still available to answer questions, if I could give one?

No, if we could just keep the questions focused here on the business.

Okay, cool.

Fred, I have a question for you and I have a couple more.

I wonder if your dividend strategy is tied to a payout ratio on EPS versus just based on the overall dividend from previous years.

Michael, as we have said in the past, I have always targeted a payout ratio kind of around 50%, but I have used earnings and free cash flow and I think free cash flow is a better measure because now, as you know, earnings has a lot of non-cash items in it like stock-based compensation.

But kind of between the two, we are kind of focusing on a 50% payout ratio, which is kind of where we have been and will be.

We have always said that that is kind of where we feel comfortable.

Particularly in this environment, we are comfortable with that.

Okay.

And let me ask you another one on Outdoor.

For the year, you have seen double-digit cost growth in Outdoor, which is alarming given the rate of decline in revenues.

I wondered why is that?

I know you have had some layoffs and some builds, but why is cost growing so fast and what does it look like on the cost side in '09 for Outdoor?

I think, Michael, the biggest drivers were really the London Underground.

If you look at International, that is where we have had the biggest growth because the new contract, as we said, has higher costs, but there is a little bit of a timing lag between as we roll out the new digital displays, which are some 3000 to 3500, and as we are really encouraged with the kind of revenue we are getting from them, but there has been -- unfortunately, we had to pay the higher fees from the start and that is why we accelerated spending.

Domestically, we are seeing -- we have lost a lot of contracts because we won't bid higher such as San Francisco and Toronto where we did what we thought, at the income, would be a fair deal and someone bid higher, so we are trying to manage those costs.

Absent the sort of billboard lease costs or kind of London Underground franchise costs, the rest of the costs are down and they will continue to be managed down.

Now in the quarter, we did have about -- a lot of severance costs in there, probably some $10 million of severance costs and we did have Hurricane Gustav and Ike knock a few boards down.

So that was another several million dollars that hopefully isn't recurring.

Michael, just to underline what Fred was saying, when you do a deal like the London Underground and it is a long-term deal, obviously, the beginning of the deal is more capital-intensive.

That will slow down as the revenues increase as the installations are completed there.

So that is why it may look somewhat deceiving right now.

Okay.

And the last one would be on the network, which you said was down 12, I have covered the Company for a while, I've covered media for a while, minus 12 is not a normal number.

So if you could sit there and say, look, if you looked at apples-to-apples, take away your primetime conventions, your primetime debates, could you give us a better sense of what you think the true organic change was in the quarter for network?

Yes, it was probably similar, Michael, to the previous quarters.

It is probably down in the mid single digits, low -- kind of low to mid single digits if you strip out all the kind of one-time things.

As you know, the third quarter is the lowest ebbing quarter.

Obviously, going against a year ago, but we had -- because of the strike, there was probably fewer originals that were being repeated for the first time.

Some of them had been repeated for the third time, but I would say we looked at kind of mid single digits to lower than that.

And it was up against the Olympics.

So by definition, the ratings are going to be lower in the third quarter.

The good news is we are going to be up in the fourth quarter.

Thank you.

Doug Mitchelson, Deutsche Bank.

Great, thanks.

Can you guys give us a sense of how sold out the CBS Network is at this point for the fourth quarter?

How much visibility do you have, Fred, when you say that you might be able to beat sort of the guidance you gave a couple of weeks ago?

And Les, if there any kind of call you can give us by ad categories or what you are hearing sort of directly from advertisers, that would be interesting because obviously people are still concerned that National might fall off a cliff here.

And then -- sorry -- last question.

I'll throw three in there.

Fred, do you have a sense of what percentage of Outdoor revenue is now from transit or municipal contracts?

Thanks.

The first question, Doug?

I'm sorry.

You asked so many.

The first question, can you give us a sense of how much visibility you have on (inaudible)?

Oh, okay.

At the upfront, we sold probably in the high 70s and cancellations were rather minimal, sort of normal amounts.

So we probably have the usual amount of scatter left, somewhere a little over 20%.

As Fred said there, the numbers are up slightly in terms of ad -- in terms of scanner pricing to the upfront and as I said, it is all coming in to us.

We are, by far, outperforming our peers.

So the scatter revenue -- we are confident that we will get taken care of.

In terms of the advertising categories, we have not seen a great slowdown in national advertising.

Well, obviously, we have been affected by local, our major categories are still hanging in there quite a bit.

As each year gets, and this is not very different, certain categories are up, certain categories are down, but we are not seeing the effect nationally that we are locally and we do not have that fear of that falling off the cliff.

And then, Doug, on the Outdoor again, largely, I would say kind of -- I don't have the precise numbers -- probably in the 65% to 70% of our revenues from Outdoor in North America come from billboards.

And that is growing as we bid out some of these other contracts.

So that is, as you know, the high-margin business and that is where the bulk of our revenue is, at least two-thirds of our revenues.

If you don't mind me following on, Les, when you are talking about national categories, sort of some up, some down, but mostly hanging in there, are you worried that structurally the auto category is just going to be quite a bit lighter in the future with what is going on in Detroit?

You know, look, the auto category obviously has hurt our local television stations quite a bit, and that is reflective in some of the numbers that we see.

I can't imagine the auto category getting much worse than it is right now.

You know, I really can't.

Again, Doug, this is Fred.

You have got to remember that the world is now foreign manufacturers too, like Toyota, Honda, BMW, Mercedes.

They are actually picking up spending because they are gaining market share.

So again, I don't think we can be myopic and just look at Detroit.

I know we love Detroit.

We wanted to do well, but I can tell you today our biggest advertiser is probably Toyota today than it is General Motors.

Thank you.

Michael Morris, UBS.

Thank you.

Just going into the categories again a little bit on the local side, though, we are very aware that autos are weak and it seems like we are pretty far into that cycle.

But trying to get a feel for where we are in the cycle for other important categories, retail; any other color that you can provide on where you think we are in that cycle on the local side.

And then secondly on the cost side, it looks like costs of television were still up pretty healthy in the third quarter, about 7%.

Can you talk about what drove those costs up in particular, given that revenue was up much less than that?

And also how should we think about variability in that cost going forward?

How much opportunity is there to control costs in the Television segment?

Thank you.

Michael, this is Fred.

I will take the last one first because it is pretty easy.

The reason the costs are up is really the syndication costs related to CSI New York.

Any time we have a syndication in a quarter, you get a ballooning of revenues, you get a nice big chunk of profits, but you also have the costs associated with it because it is not as high a margin as our ad revenue business, which is largely an 85% margin business on the increment.

So that is it.

If you look at our programming costs, they are down in absolute terms at the network.

Our programming costs at the TV stations in the segment are down.

The only blip in the quarter had to do with the CSI syndication.

So that will be an anomaly that is only in this quarter.

Back to the other categories, auto is down at Radio and TV, but interestingly enough auto is flat to slightly up at Outdoor.

And in Outdoor, auto is only about 8% of their category.

Retail, it depends on the region.

We are in the biggest markets, and like California, a very important market, they had a retail like Mervyn's go into Chapter 11 and into liquidation.

But Kohl's came along and has heavy up-spending and guess what, they are spending more on our stations than Mervyn's ever did.

So you have got the haves and the have-nots, the Wal-Marts of the world, the Target's of the world, the regional strong chains are spending more to gain marketshare as they see some vulnerable competitors.

So I would say retailing is sort of mixed, but I would say generally we are doing okay in that category.

Telecom continues to be strong.

Believe it or not, the theatrical entertainment is doing well.

I would say financial services, it is actually starting to pick up a bit because people are just changing their messages and of course, we expect to have a big boom on that as there are a lot of name changes, as some of you well know.

We think the Wachovias of the world will be changing their names and maybe the Countrywide and others will be changing names as we go forward and that is always the local assets that will drive that.

So again, kind of mixed.

Auto is down in most of our businesses and we expect it though to come back again.

We think it is at the bottom.

And just back on the costs, if I were to take out the syndication costs for -- where is the underlying growth trend?

Are you saying it's still kind of low single digits and how much could we take out of that underlying, the core expense growth going forward?

In the Television segment, you will see absolute cost growth zero to slightly negative in '09 as it was in '08 versus '07 and actually '07 was down versus '06.

We have had three years of lower costs.

The only time it balloons is -- and next year, just to let you know, we can have four major syndication items coming out, so in those quarters they hit, those costs will go up.

But, again, so will the profits because they are very profitable undertakings.

But our underlying business at the television network, the television stations, Showtime, costs are flat to down.

Great, thank you.

Doug Creutz, Cowen & Co.

Hi, yes, could you talk about the current funding status of your pension plan and whether you think there is going to be any need for a capital injection to that given the current status of the markets?

Thanks.

Okay, Doug, this is Fred.

As you know, if you followed us for awhile, we have put in, in '06 and '07, we pre-funded over $400 million in the pension plan.

So our pension plan is still underfunded in the qualified plan and at the end of last year, 2007, the qualified plan was a little under $350 million of underfunding.

Now, we have got over $3.4 billion of assets in the pension plan.

About 70% plus is in fixed income because, as you know, the plan comes from a historical, from Westinghouse and other things where there is a lot of retirees.

So those are largely -- 80% plus in those plans are in fixed income, so we don't have the vagaries of the equity market.

Clearly, we watch this closely.

I guess we look at the end of the year to see how we are doing.

I guess at any one point in time, I think through about two days ago, year-to-date, our pension assets were down 11%.

Again, I am not as worried about that from a mark-to-market because, again, a lot of that is fixed income, which is just a mark-to-market.

We have AA or AAA rated credits.

None of the financial services businesses were part of our business.

They were less than 1% of the assets in our pension plan.

So we had no real defaults, no real write-downs.

It is just the mark-to-market.

So we'll see how the market rebounds.

We didn't redo it for yesterday's jump or two days ago jump, but, obviously, it is something that we look at all the time.

I have been managing this for 15 years and I feel we are in really good shape and we have been funding and ahead of when we needed to, but we measure at the end of the year.

Great, thank you.

Mark Wienkes, Goldman Sachs.

Great, thank you.

I was wondering does your strong ratings performance at CBS and combined with the softer economy allow you some leverage in managing the programming and talent costs at the network?

I guess how much flexibility do you think the studios will have in '09 on that front?

And then second, could you just update us on your expectations for political revenue?

How did it come in in 3Q and what do you expect for 4Q?

Mark, in terms of the talent costs, obviously, we have done a terrific job I think of managing our costs, managing our talent where nothing is out of hand.

We are not in danger of losing anybody.

Our ratings are terrific and we don't expect our costs to go up at all in terms of programming or talent costs and we have been managing it.

Political remains very strong.

We expect overall -- and Fred you can break out the quarter -- but overall to be somewhere in the neighborhood of $180 million.

Obviously, we benefited from last night with -- I won't get into the specifics, but the Obama purchase of a half hour did a very good job for us economically.

And I don't know how it is broken out by quarter.

Yes, Mark, Leslie is right on.

On a gross basis, we are around $180 million.

The third quarter came in around about -- which isn't as big because it only starts at Labor Day on.

It is really October and the first four days of November, but the third quarter was kind of about -- it looks like about $90 million and we will book in the 35 days from October 1 until the fourth probably another $80 million or so.

That is kind of where we will be for the year.

So again, that is on a gross basis.

Great, okay.

Thank you.

Marci Ryvicker, Wachovia.

Thanks.

I have a couple of questions.

We have heard chatter that some network advertisers have talked about pulling as much as 50% of their upfront commitments in '09.

And I just wanted to know what you were hearing from your advertisers regarding '09.

And secondly, Fred can you give us the impact of foreign exchange on the International Outdoor revenue and expenses?

Marci, whoever you heard that from about network advertising, we haven't heard anything remotely like that at all.

As a matter of fact, cancellations from their upfront purchases have been minimal.

Actually above -- I would say they are probably as good if not better than the last couple of years and every indication we have is that they want the upfront.

They are excited about '09 and it should all break.

So that is something -- look, I spend a lot of nights up thinking about a lot of things.

That is certainly not one of them.

Fred, why don't you --

Yes, Marci, on foreign exchange, it was very minimal in the third quarter.

Our effect on cost was about $1.7 million and it was -- that increased our cost, but, as you know, the dollar strengthened against most currency and it was minimal on revenue.

So the net effect on OIBDA was less than $2 million.

So pretty minor.

Thank you.

Jason Bazinet, Citi.

Thanks.

The effective tax rate, after you go through all the adjustments in your reconciliation table for the quarter, I think was just a touch above 30%.

I was wondering if you could give us sort of any color on what tax rate you see either in the fourth quarter or for '09 based on your initiatives.

Jason, it is hard for me to predict the '09 at this point.

I think, as we gave sort of guidance, I think we will kind of be in the 30 -- year-to-date, we are at kind of 35% and my guess is that versus last year's 35.8%.

I think that is kind of where we will be, in the 35% sort of as a go-forward.

The only problem I have with the fourth quarter is we've got to look at the mix between International, which has a very, very low tax rate and I don't have that visibility now.

But I think 35% is kind of a good rate, but, again, I really don't have a crystal ball on '09.

Thank you very much.

Yolanda, why don't we just take one more, please.

Anthony DiClemente, Barclays Capital.

Hello, can you hear me?

Yes, we can.

Sorry.

One for Les and Fred and then one for Les.

Just back to this local versus national theme, it does seem that national, rather than getting dragged down in sympathy with the local weakness on the economy, is actually widening its gap in outperformance over and above local.

So I guess if you could remind us just of the top two or three reasons for that disparity in this recession, that would be really helpful because I guess there is two schools going forward, that disparity could continue to widen or they can kind of mean revert back to local versus national performing more in sympathy with each other.

And then one final question for Les, I understand it is very difficult for you to comment on the specific negotiations you are having with the larger MSOs, but is there anything you can give us in terms of color on your expectations for retransmission consent fees or at least help us with the timing of when you will have something to report on that front.

Thank you.

Let me deal with the second question first, Anthony and then Fred and I will both discuss the first question.

In terms of the MSOs, I don't want to go into detail.

We are, obviously, having ongoing discussions.

They have been going on quite a while.

Most of them are fairly positive.

I think we're very encouraged by the recent Lind Time Warner deal that was made.

Once again, an acknowledgment by one of the largest MSOs that it is important to pay that, so there are very fruitful discussions going on.

I think you should hear more by the end of the year on some of these and we hope to have some of them concluded by then.

In terms of the local versus national, number one, I don't necessarily -- I am not one of the subscribers to that the gap necessarily will widen.

I think national advertising on a network level, certainly, once again, underlines the importance of network.

It is the big tent advertising that advertisers realize they cannot do without.

The Olympics did very well.

Our shows are doing very well, extremely well in the beginning.

There is no place else you can reach 25 million people at a pop and local is subject to much more competition between cable and certainly, the Internet, which we are now benefiting on and that is, certainly, one of the reasons.

Yes, I agree with Leslie.

I just think that right now advertisers have pulled a bit back in their total spending and they go where they get the biggest pop for their dollar and that is the broadcast network and that is CBS.

I do think that is going to continue in the short term, but I think, again, every competitor, every company has local strength and weaknesses and that is where local has unbelievable value.

You see that with political.

It is another endorsement of why local works.

Yes, the network, for the first time in a long time, got some political, but --

That's unusual.

It is very unusual and it hasn't happened in 30 years or whatever it was.

But local works really well and I don't think I would kind of -- I think this is a short-term reaction to advertisers saying I want to cut some spending, but I want to drive marketshare.

I'll use the network and CBS Network is getting the benefit of that, but they will be back in local.

I firmly believe that with Outdoor, Radio and TV, they will be back.

The only way to win is market by market, corner by corner and that is where people advertise.

Great.

Thanks, guys.

Thank you, all.

Thank you very much.

We will be around the rest of the day to answer any questions.

Thank you, gentlemen.

That does conclude today's conference.

We would like to thank you all for your participation and have a wonderful day.