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Executives

Adam Townsend – Executive Vice President of Investor Relations

Sumner Redstone - Executive Chairman

Leslie Moonves - President and Chief Executive Officer

Fred Reynolds – Executive Vice President and Chief Financial Officer

Analysts

Jessica Reif-Cohen - Merrill Lynch

Michael Nathanson - Sanford Bernstein

Doug Mitchelson - Deutsche Bank

Michael Morris – UBS

Doug Creutz – Cowen & Co.

Mark Wienkes - Goldman Sachs

Marci Ryvicker - Wachovia Securities

Jason Bazinet – Citigroup

Anthony DeClemente – Barclays Capital

CBS Corporation (CBS) Q3 2008 Earnings Call October 30, 2008 8:30 AM ET

Operator

Good morning and welcome to the CBS Corporation’s third quarter 2008 earnings release teleconference. Today’s conference 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.

Adam Townsend

Thank you. Good morning everyone and thank you joining us for our third quarter 2008 earnings call. Joining me for today's discussion are Sumner Redstone, our Executive Chairman; Leslie Moonves, President and CEO and Fred Reynolds our Executive Vice President and CFO. Sumner will have opening remarks and we 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 that statements on this conference call relating 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 security filings. A summary of CBS Corporation's third quarter 2008 results should have been sent to all of you. If you did not receive the results, please contact Poonam Desai at 212-975-3367 and she will get it to you.

A web cast of the call and the earnings release and any other information related to the presentation can be found on our website at www.cbscorporation.com.

Now I'll turn the call over to Sumner.

Sumner Redstone

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. One thing that is certain to me is that Leslie and his team are managing our businesses prudently and 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 the 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 some facts.

First, NAI’s theater operations are substantial. We have more than 1,500 screens in the United States, Latin America, the United Kingdom and in Russia. The company is in the forefront of delivering great entertainment experiences to its audiences. However, NAI like a number of companies was 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 this situation. The company immediately opened up a dialogue with its lenders which as you now 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 this was not something NAI wanted to do nor is it something that NAI intends to do again. Let me make it 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 were required in no way diminishes my optimism of 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 advisors. They include Citigroup, Rothschild, Chairman and Sterling. They are all working with the banks and note holders 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 advisors.

Finally, and most importantly 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 time frame.

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.

Leslie Moonves

Thank you 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 the situation and effectively manage through it and 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 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. What we are presenting here 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. 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 and 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 is CBS television network is back in front of all the competition. For the first time in more than 20 years we are number one in five weeks into the season in every single category. This includes households, viewers, adults 25-54 and yes adults 18-49. We have six of the top ten, eleven of the top twenty programs, more than the other networks combined and we dominate five nights of the week, again more than 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 news series in the Mentalist, the number one new comedy in The Worst Week and continuing the number one news magazine 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 the most talked about and widely viewed events in this historic presidential campaign. They drove ratings increases for her program and a double digit surge in visitors to CBSNews.com and all the CBS audience network sites. Her clips ranked among those most popular online across the entire web on any given day in the weeks that followed the series and we monetized them. For my money, Bob Schieffer was by far the best moderator in all of the presidential debates.

I am also happy to report that the rumors of CW’s demise were greatly exaggerated. Since premiering it’s fall line up, the CW has improved its overall prime time performance by 20% in its target demo women 18-34, 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. Unlike CBS and the CW it is not advertising dependent, which diversifies our TV segment. Our subscribed 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 2007. Once again, original programming continues to drive Showtime’s results. During the quarter the fourth season of Weeds had its highest debut yet. The shows first week to 3 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 Network is gaining subscribers as well. During the quarter we signed new deals with Comcast, Bios and others to add 4 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 U.S. our cable syndication sales of CSI: New York helped increased our TV licensing fees by 40% in the quarter. 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 $2 million per episode making the show highly profitable from its very first episode. The CSI franchise is considered to be number one around the world.

In the area of retransmission consent we are being paid for our signal by many small 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 negotiations with good results. In our current economy our local businesses in TV, radio and outdoor have been most affected. We have anticipated this slow down 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 mid-size 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 stations. The good news is 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. Stand by.

The timing of these sales is less important to us than sticking to our larger ongoing strategy of shedding slow-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 four-fold from a year ago. On a 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 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 interactive two years ago ranked 110 in unique visitors. Number 40 before CNET. Number eight immediately after the acquisition and we are number seven 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 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 the short-term 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 segments 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 out there available. We will always look for growth opportunities but right now our focus in on operating our existing businesses. From the TV network to the online network content 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 segments. Our expanded interactive business is now the leading online performer for premium content distribution. 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’ll turn it over to Fred Reynolds for some more remarks on our financial performance.

Fred Reynolds

Thank you Leslie and good morning to all of you. I’d 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 our very healthy free cash flow which through the third quarter totaled nearly $1.4 billion. During the third quarter free cash flow was a $38 million use of cash compared to the third quarter 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 roll out of displays in the London Underground.

During the third quarter $35 million was spent for the London Underground roll out 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 2007. The biggest portion of this increase was from the growth in our syndication net receivables of about $100 million, which were 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 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 see 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 expense 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 $500-550 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 to 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 billboards for outdoor.

Finally, we do expect to have free cash flow to be positive in the fourth quarter in 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. 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 costs. 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 the CNET network 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 the result of past tax planning strategies. We can assure all of you maintaining our strong balance sheet is our highest priority while also assuring our free cash flow from operations will remain strong. 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 facing and we believe our businesses will be even stronger once the U.S. economy starts to rebound some time 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 value to our shareholders.

As we also noted in today’s earnings release we recorded 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 syndication to cable of our CSI: New York franchise. Time period advertising sales of the CBS network were down 12% for the third quarter versus last year. The decline in time period ad revenues was caused by over 9 hours of prime time 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 prime time coverage of hurricanes Gustav and Ike and of course that lowered our overall audience ratings as we concluded the 2007/2008 season.

As Leslie noted earlier, 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 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 a soft advertising revenues at the local level and also $3 million of higher stock based compensation expense. Also, we had the TV station divestitures from the prior year.

Partially offsetting these items were the profits from the CSI syndication revenues which is 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 of $393 million were down 12% from the third quarter 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 OBITDA 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 on absolute terms. $23 million lower than a year ago as we continued to lower operating costs in light of the challenging local markets. Year-to-date over 480 headcount had 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 back room costs.

Turning to outdoor, the third quarter outdoor had revenues of $549 million, down $3 million or about 1% from the third quarter last year. North America’s outdoor revenues were $338 million, down about 4% from the third quarter of 2007. Lost contracts which we have mentioned in the past in Toronto and San Francisco accounted for half of the drop in North American ad revenues versus last year. Revenues for our billboard business were down slightly from last year’s third quarter.

International outdoor revenues for the third 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. We had very strong revenue growth from our London Underground digital display business which saw digital ad revenues up over three-fold versus last year’s third quarter as advertiser accepting to this new display continues to be terrific.

Operating profit before depreciation and amortization in outdoor was $114 million in the quarter down from $154 million in the third quarter last year. North America’s operating profits before depreciation and amortization of $107 million was $27 million lower than the third quarter last year with again loss contracts in Toronto and San Francisco which were very profitable and the costs associated with hurricanes Gustav and Ike particularly in Texas accounting for about 1/3 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 occurring in the third quarter, higher billboard and display rent fees versus last year accounted for the balance of the decline in North America’s profit.

International operating income before depreciation and amortization was approximately $7 million, down $12 million from a year ago. Over half of the decline in 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 overheads.

So let’s wrap up our segment discussion with our newest segment, interactive, which includes a full quarter results on CNET networks which we acquired on June 30 of this year. Interactive revenues for the third quarter totaled $141 million and as Leslie mentioned that is up almost four-fold 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. 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 expectation of adding over two points to our total company future revenue and profit growth.

Turning to OBITDA, OBITDA 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 in prior periods. 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.

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 1/3 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.

Just a few more comments on the third quarter and then we will wrap up and get to your questions. Other items net as you notice there 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.

Finally, as you will note in the earnings release we reiterated our full-year business outlook which we announced 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 slow down in the U.S. economy and its effect on our local businesses. Given the strength of the CBS network which has demonstrated in the first five weeks of the season to be the leader in all the key demographics as we just discussed, we can assure you that we are focused on delivering full-year results better than our guidance.

Thank you. Now if we can have the operator open the lines for your questions.

Question-and-answer Session

Operator

(Operator Instructions) The first question comes from Jessica Reif-Cohen - Merrill Lynch.

Jessica Reif-Cohen - Merrill Lynch

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 you have enjoyed in the new season? Second, on Showtime are you scaling back at all on the films or can you comment on what is going on there? 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 you won’t have to sell?

Leslie Moonves

Let me answer the first two questions that you talked about. The scatter market once again 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, but as I said it is not what it has been in previous years. The great news is in the up front we sold a major large percentage of our inventory so we had a lot of volume. The good news is obviously no make-good’s for us. With the scatters coming in they are targeting for CBS and the CW.

Showtime, as you know we made a 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. You will 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. There are plenty of available movies and we are going to be fine in our movie production.

Adam?

Adam Townsend

With respect to the NAI situation if you can just appreciate the sensitivity of that and we will steer away from that for now if we can.

Fred Reynolds

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

Operator

The next question comes from Michael Nathanson - Sanford Bernstein.

Michael Nathanson - Sanford Bernstein

Is Sumner still available to answer questions if you get one?

Andrew Townsend

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

Michael Nathanson - Sanford Bernstein

Fred, a question for you. I wonder if your dividend strategy is [higher pair] ratio on EPS versus based on the overall dividend for previous years.

Fred Reynolds

As we have said in the past I have always targeted a pay out ratio of around 50%. I view sort of earnings and free cash flow and I think free cash flow is a better measure because as you know now earnings has a lot of non-cash items in it like stock based compensation. Between the two we are focusing on kind of a 50% pay out ratio which is kind of where we have been and will be. We have always said that is kind of where we feel comfortable particularly in this environment. We feel comfortable with that.

Michael Nathanson - Sanford Bernstein

On outdoor, for the year you have seen double digit cost growth in outdoor which is alarming given the rate of declining revenues. I wonder why is that. I know you had some layoffs and some builds but why is cost growing so fast and what does it look like on the cost side of 2009 for outdoor?

Fred Reynolds

I think the biggest drivers were really the London Underground if you look at international. That’s where we have had the biggest growth and these new contracts, as we said, has higher cost and there is a little bit of a timing lag between as we roll out the digital displays which are some 3,000 or 3,500 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 where we saw accelerated spending.

Domestically we have lost a lot of contracts because we won’t bid higher such as San Francisco and Toronto where we bid as the incumbent 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 London Underground franchise costs, the rest of the costs are down and they will continue to be managed down. In the quarter we did have a lot of severance costs in there, probably some $10 million in severance costs and we did have hurricane Gustav and Ike knock a few boards down so that was another several million dollars that is hopefully won’t be recurring.

Leslie Moonves

Just to underline what Fred was saying when you do a deal like the London Underground 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.

Michael Nathanson - Sanford Bernstein

On the network, which you said was down 12; I have covered the company for awhile. My estimate 12 is not a normal number. So if you look apples-to-apples and take away your prime time conventions and prime time debates can you give us a better sense of what you think the true organic change was for network?

Fred Reynolds

It was probably similar to the previous quarters. It was probably down mid to low single digits if you strip out all the one-time things. As you know the third quarter is the lowest ebbing quarter. Obviously going into 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 might be repeated for the third time. I would say we looked at kind of mid single digits to lower than that.

Fred Reynolds

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.

Operator

The next question comes from Doug Mitchelson - Deutsche Bank.

Doug Mitchelson - Deutsche Bank

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 few weeks ago? Is there any kind of color you can give us by ad categories or what you are hearing directly from advertisers that would be interesting because obviously people are still concerned that national might fall off a cliff here? Fred, do you have a sense for what percentage outdoor revenue was down for transit or municipal contracts?

Leslie Moonves

At the up front, we sold probably in the high 70’s and cancellations were rather minimal, sort of a normal amount so we probably have the usual amount of scatter left, somewhere a little over 20%. As Fred said the numbers are up slightly in terms of scatter pricing to the up front 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 we will get taken care of.

In terms of the advertising categories we have not seen a great slow down in national advertising. While 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 and certain categories are down but we are not seeing the effect nationally we are locally and we do not have that fear of that falling off the cliff.

Fred Reynolds

On the outdoor, largely…I don’t have the precise numbers, probably 65-70% of our revenues from outdoor in North America come from billboards and that is growing as we get out some of these other contracts. That, as you know, is a high margin business and where the bulk of our revenues, at least 2/3 of our revenues, is.

Doug Mitchelson - Deutsche Bank

When you are talking about national categories with some ups and some downs but mostly hanging in there, are you worried that structurally the auto category is just going to be quite a bit lighter from this point on in Detroit?

Leslie Moonves

The auto category obviously has hurt our local television stations quite a bit and that is reflected in some of the numbers that we see. I can’t imagine the auto category getting much worse than it is right now. I really can’t.

Fred Reynolds

You have 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. Again, I don’t think we can be myopic and just look at Detroit. We love Detroit and we want it to do well but I can tell you today our biggest advertiser is probably Toyota today than it is General Motors.

Operator

The next question comes from Michael Morris – UBS.

Michael Morris – UBS

Just going into the categories again a little bit on the local side. We are very aware that autos are weak and it seems like we are pretty far into that cycle. I’m trying to get a feel for where we are in the segment for other important categories, retail…any other color you can provide on where you think we are in that cycle on the local side. 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? Also, how should we think about variability and ad costs going forward? How much opportunity is there to control costs in the television segment?

Fred Reynolds

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’s 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 interesting auto is flat to slightly up at outdoor and auto is only about 8% in their category. Retail it depends on the region. Now we are in the biggest markets and like California is a very important market. They had retail like Mervyn’s go into chapter 11 and liquidation but Kohl’s came along and has heavy enough spending and guess what, spending more on our stations than Mervyn’s ever did. You have the have’s and the have not’s. The Wal-Mart’s of the world, the Target’s of the world, the regional strong chains are spending more to gain market share as they see some vulnerable competitors. I would say retail 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. Financial services 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 will be a lot of name changes as some of you well know. We think the Wachovia’s of the world will be changing their names and the Countrywide’s and others will be changing names as we go forward and that is always the local assets that will drive that.

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.

Michael Morris – UBS

Back on the cost side, if I were to take out the syndication costs where is the underlying growth trend? Is it still kind of low single digits? How much could we take out of that underlying core expense growth going forward?

Fred Reynolds

In the television segment you will see absolute costs grow zero to slightly negative in 2009 as it was in 2008 versus 2007 and actually 2007 was down versus 2006. We have had three years of lower costs. The only time it balloons and next year just to let you know we are going to have four major syndication items coming out so those quarters they hit those will go up but again so will the profits because they are very profitable undertakings. Our underlying business at the television network is television stations, Showtime costs are flat to down.

Operator

The next question comes from Doug Creutz – Cowen & Co.

Doug Creutz – Cowen & Co.

Could you talk about the current funding 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?

Fred Reynolds

As you know if you follow us for awhile we have put in 2006 and 2007 we pre-funded over $400 million in the pension plan so our pension plan is still under funded in the qualified plan and at the end of last year, 2007, the qualified plan was a little under $350 million of under-funding. Now we have got over $3.4 billion of assets in the pension plan. About 70+% is in fixed income because as you know the plan comes from a historical from Westinghouse and other things because there are a lot of retirees, so those are largely 80+% in those plans 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’m not as worried about that from a mark to market because again a lot of that is fixed income which is a mark to market. We have AA or AAA rated credits. None of the financial services business were part of our business. They were less than 2% of the assets in our pension plan so we had no real defaults. No real write downs. It is just 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. Obviously it is something we look at all the time. I have been managing this for 15 years and I feel we are in really good shape and the funding ahead of when we needed to but we measure at the end of the year.

Operator

The next question comes from Mark Wienkes - Goldman Sachs.

Mark Wienkes - Goldman Sachs

Does your strong ratings performance at CBS and combined with the softer economy allow you to leverage in managing the programming talent costs at the network? How much flexibility do you think the studios will have in 2009 on that front? Secondly, can you just update us for your expectations for political revenue? How is it coming in Q3 and what do you expect for Q4?

Leslie Moonves

In terms of the talent costs obviously we have done a terrific job I think of managing our costs and 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 it will 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 ½ hour did a very good job for us economically and I don’t know how it is broken out by quarter.

Fred Reynolds

Leslie is right on. On a gross basis we are around $180 million. The third quarter came in around, which isn’t as big because it only starts at Labor Day on. It is really October and the first four days of November. The third quarter was kind of about $90 million and we will book in the 35 days from October 1 until November 4 probably another $80 million or so. That is kind of where we will be for the year. Again that is on a gross basis.

Operator

The next question comes from Marci Ryvicker - Wachovia Securities.

Marci Ryvicker - Wachovia Securities

We have heard chatter that some network advertisers have talked about pulling as much as 50% of their up front commitments in 2009. I just wanted to know what you are hearing from your advertisers regarding 2009. Secondly, can you give us the impact of foreign exchange on the international outdoor revenue and expenses?

Leslie Moonves

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 up front purchases have been minimal. Actually above and I would say as good if not better than the last couple of years and every indication we have is they won’t be up front. They are excited about 2009 and it should all break. That is not something…I spent a lot of nights up thinking about a lot of things. That is certainly not one of them.

Fred Reynolds

On the foreign exchange it was very minimal in the third quarter on FX. Cost was about $1.7 million and that increased our cost but as you know the dollar strengthened against many currencies and it was minimal on revenue. So the net effect on OBITDA was less than $2 million. Pretty minor.

Operator

The next question comes from Jason Bazinet – Citigroup.

Jason Bazinet – Citigroup

The effective tax rate after you feel 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 any color on what tax rate you see in the fourth quarter or for 2009 based on your initiatives?

Fred Reynolds

It is hard for me to predict 2009 at this point. I think as we gave sort of guidance I think we will kind of be in the year-to-date 35% versus last year’s 35.8% and I think that is kind of where we will be, in the 35% go forward. The only problem I have in the fourth quarter is we have to look at the mix between international which has a very low tax rate and I don’t have that visibility now. I think 35% is kind of a good rate but again I really don’t have a crystal ball on 2009.

Operator

The next question comes from Anthony DeClemente – Barclays Capital.

Anthony DeClemente – Barclays Capital

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 that performance over and above local. If you could remind us of the top two or three reasons for that disparity in this recession that would be really helpful. I guess there are two schools going forward; that disparity could continue to widen or they can kind of revert back to local versus national performing more in sympathy with each other. Then one final question, I understand it is very difficult for you to comment on specific negotiations you are having with the larger MSO’s 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?

Leslie Moonves

Let me deal with the second question first. Then Fred and I will both discuss the first question. In terms of the MSO’s I don’t want to go into details. We are obviously having ongoing discussions. They have been going on quite a while. Most of them are fairly positive. I think we were very encouraged by the recent [Lind] Time Warner deal that was made. Once again an acknowledgement by one of the largest MSO’s 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 subscribe to the gap necessarily will widen. I think national advertising on a network level certainly underlines the importance of network. It is the big tenth 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 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.

Fred Reynolds

I agree with Leslie. I just think that right now advertisers have pulled back on their total spending and they go where they are going to get their 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. Again, every competitor and every company has their strengths 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 it is very unusual and it hasn’t happened in 30 years or whatever it is. Local works very well. I think this is a short-term reaction to advertisers saying I want to cut some spending but I want to drive market share. I will use the network and CBS network is getting the benefit of that but they will be back in local. I firmly believe with outdoor, radio and TV they will be back. That is the only way to win. Market by market, corner by corner and that is where people advertise.

Thank you very much. We’ll be around the rest of the day to answer any questions.

Operator

That does conclude today’s conference. We’d like to thank you all for your participation and have a wonderful day.

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Source: CBS Corporation Q3 2008 Earnings Call Transcript
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