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CBS Corporation (NYSE:CBS)

Q1 2008 Earnings Call

April 29, 2008 8:30 am ET

Executives

Martin Shea - Executive Vice President, Investor Relations

Sumner M. Redstone - Executive Chairman of the Board of Directors and Founder

Leslie Moonves - President, Chief Executive Officer, Director

Fredric G. Reynolds - Chief Financial Officer, Executive Vice President

Analysts

John Blackledge - J.P. Morgan

Michael Nathanson - Sanford C. Bernstein

Jessica Reif-Cohen - Merrill Lynch

Lucas Binder - UBS

Anthony DiClemente - Lehman Brothers

Marci Ryvicker - Wachovia

Heath Terry - Credit Suisse

Victor Miller - Bear Stearns

Operator

Good day, ladies and gentlemen, and welcome to the CBS Corporation’s first quarter 2008 earnings release conference call. Today’s conference is being recorded and to get us started, I am pleased to turn the call over to Executive Vice President of Investor Relations, Mr. Marty Shea. Please go ahead, sir.

Martin Shea

Good morning, everyone and thank you for taking the time to join us for our first quarter 2008 earnings call. Joining me for today’s discussion are Sumner Redstone, our Executive Chairman; Leslie Moonves, our President and CEO; and Fred Reynolds, Executive Vice President and CFO.

Sumner will have opening remarks and we’ll turn the call over to Les and Fred for strategic and financial issues. We will then open the call up to question.

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 first quarter 2008 results should have been sent to all of you. If you did not receive these results, please contact [Punam Dasai] at 212-975-3667 and she will get it to you.

A webcast of the call, the earnings release, and other information related to the presentation may be found on CBS Corporation’s corporate website at the address cbscorporation.com.

Now I will turn the call over to Sumner.

Sumner M. Redstone

Thanks, Marty and good morning, everyone. I thank you for joining us. When we look at our strong first quarter results, one thing is absolutely clear -- the CBS Corporation is doing a fantastic job operating our core businesses, adjusting our asset portfolio, and capitalizing upon the tremendous opportunities offered by the world of new media. And the results of those efforts are clearly evident, from our leading broadcast network to our television production hit factory, to everything we are doing online. And not to mention outdoors, the CBS Corporation is leveraging its reach and its popularity to move forward and drive results. And of course, our businesses continue to throw up healthy amounts of cash, which enables us to return value to all of you who are shareholders.

I’m as enthusiastic, and I mean it, as I have ever been about what the future holds for this great company. I continue to believe that we have the wherewithal and the will to deliver for our shareholders and I know that the entire CBS Corporation management team is equally committed to our success.

Now, the leader of all this exciting activity is my friend, Les Moonves. Les is as dedicated to winning as he has ever been and I want to make one thing clear -- there is no one, no one that I would rather have at the CBS helm then Les Moonves. So I will now turn it over to you, Les.

Leslie Moonves

Thank you, Sumner for those very nice remarks and good morning and welcome to everybody, and thank you as always for joining us here today. I am very pleased to be here with you to discuss the strong results for the first quarter that demonstrate the strength of the CBS Corporation. It was a very solid quarter and as those of you who follow us closely know, we’ve been turning in these types of performances every single quarter since we launched the new CBS Corporation more than two years ago.

Today I am going to walk you through our results, briefly discuss our asset portfolio, and then address some themes across the corporation, and then turn to Fred Reynolds, our terrific CFO, for further financial remarks.

I’ll start with the highlights of our financial performance. Despite the fact that the Super Bowl and the semi-finals of the Final Four both aired in the first quarter of 2007, both quite large revenue drivers, CBS delivered revenues on par with last year of $3.7 billion. At the same time, first quarter revenues benefited from a new deal that allows us to be the sole international distributor of our terrific CSI franchise. And our revenue performance is all the more satisfying when you consider that the writers’ strike occurred through much of the quarter. At the same time, adjusted OIBDA and operating income were up 10% and 11% respectively. We were able to turn these solid operating results into significant increases at the bottom line. Net earnings were up 14% to $244 million and diluted EPS was up 29% to $0.36 versus $0.28 for the same period last year.

Across the board, our businesses posted operating results that led to very substantial free cash flow of $938 million for the quarter, up 25% versus the prior year period. This is the highest quarterly free cash flow since the separation. Going forward, we are as confident as ever about our ability to produce strong free cash flow. As a result, we are increasing our dividend again today by $0.02 to $0.27 per share. This is the sixth time in nine quarters that we’ve raised the quarterly dividend, bringing it to an annualized $1.08 per share.

In the midst of challenging economic times, this move is a clear signal that we believe in the breadth of our businesses and their ability to perform in any climate now and in the future. CBS pays amongst the highest dividends in the industry and this increase is a strong reminder that we are fully committed to returning value to our shareholders.

As we continue to increase the dividend, we also continue to maintain a very, very strong balance sheet. We have plenty of cash to invest in our businesses and to make smart, opportunistic acquisitions. As you know, we are looking to create and acquire higher growth, higher margin businesses in three key areas. The first area is content, which of course is the core of what we do. The second is interactive and the third is outdoor, particularly digital and international outdoor, both of which continue to grow.

In that regard, last week we announced the $110 million acquisition of IOA, the largest outdoor company in South America. We now have an immediate entry into one of the most dynamic and promising markets for outdoor advertising and in one deal have dramatically expanded our worldwide presence onto a brand new continent. With operations in Argentina, Brazil, Chile, and Uruguay, IOA is the leading outdoor business in South America. We now have a terrific opportunity to leverage our strong position in Mexico and Spain to help IOA grow even further.

IOA is a tremendous addition to our growing portfolio of international outdoor assets, which turned in very strong revenue and profit performances during the quarter and our North American billboard operations remain very solid, achieving solid underlying growth as well. We will continue to look to invest in these highly attractive businesses going forward.

Whether it’s content businesses, interactive companies, or outdoor expansion, we will continue to look for additional opportunities to help us grow our revenues and profits and obtain a very good return on our capital. We clearly have the cash to make the right moves as they come along but I assure you we will continue to be as disciplined as ever as we pursue opportunities for growth.

Now I would like to take a few minutes to address our business portfolio and several key themes that speak to our solid performance in the quarter and some of what we are seeing in Q2 as well. Let’s begin with the television segment, which not only grew its revenues during the quarter but also posted a 13% increase in OIBDA and a 15% increase in operating income. Of course, the engine that drives so much of our success from the station to syndication to DVD sales to online is the CBS Television Network. The key question during the strike was how will CBS rebound when original programming returns to the air? Would the viewers come back and the answer for us is clearly yes.

Most of our scripted shows returned at pre-strike levels, winning their respective time periods. Since mid-March, CBS has five of the top 10 and 11 of the top 20 programs in total viewers and is in a dead heat with Fox. And we have moved up to a competitive second place in 18 to 49 as well.

What is most encouraging is that with each week that originals return to our air, our competitive position is only getting better. We have just begun running at full strength with all shows in originals and it is looking like we will continue to compete for first place throughout the rest of the season.

And in just a couple of weeks, we’ll deliver our up-front presentation to advertisers at Carnegie Hall here in New York City. This year we’ll be presenting a different kind of CBS Corporation with the network as the centerpiece but also with a highly appealing array of additional vehicles through which advertisers can effectively reach their companies. We are truly excited about this year’s show because it clearly showcases the way we are refining our media assets and updating our programming to match the needs of today’s market.

Network pricing in the scatter market continues to be up double-digits and given our solid broad-based schedule and our new shows for the 2008/2009 season, we anticipate a very healthy up-front selling season.

It all starts with the content, of course, and we will be showing brand new shows at our up-front. We are very excited about our development for the fall, which is in full swing. Many of our shows were filmed as presentations rather than full pilots, representing significant savings while still providing the creative content on the screen to make informed decisions regarding the best new series.

Turning to our television stations, political advertising continues to be a terrific story for us. As expected, we were able to achieve a record first quarter in political revenue, with more on the way. Significant dollars have been generated for the Pittsburgh primary at each of our two television stations in Philadelphia and Pittsburgh. We believe political advertising will continue to have a positive impact through the first quarter of this year.

I should note that many observers are thinking that the traditional delineation of red and blue states may not apply in the election this fall. Everything looks like it is still up for grabs this year. If this holds true, then key states where we have our largest stations like New York, California, Illinois, and Texas should see an influx of spending. Political advertising is increasingly playing a factor at CBS Radio as well, where we also had a record first quarter.

Speaking of radio, while the entire industry continues to face challenges, we are starting to see some positive signs of growth for the first time in the past several years. The ratings progress I’ve been highlighting since Dan Mason began making programming changes is beginning to be monetized. No market is better proof of this progress than our most important one here in New York.

Sales are tracking up 15% in New York for the second quarter and up 18% for the month of April. Now clearly this is only pacing information but it is also a good indication that we are beginning to monetize our ratings performance and we are encouraged about where we are headed. Throughout the country, in four of our top five markets in April we are seeing growth in revenue. That is a very, very good sign.

In order to keep the momentum, Dan and his senior team have begun an advertiser road show that started Thursday in Los Angeles. They will be asking advertisers to rethink radio as a truly efficient medium, providing an attractive and cost effective option to advertisers in the current economic environment.

At the heart of the road show is CBS Radio’s new online strategy. In the last few years, annual online revenue has grown from $5 million to $13 million to $30 million in ’07, and this year we project to get that number to well over $50 million in online revenue.

Plus CBS' online reach was more than double during the quarter when we struck a deal with AOL to power their online music service. Combining the online audience of both entities will now give our sales force the ability to sell the largest online radio audience on the Internet, and when you add in the reach and community aspects of Last.fm, which I’ll talk about more in a minute, it grows significantly.

Of course, the progress we are making on new platforms extends beyond radio across the entire company. Turning to interactive operations, there is no better example of how we can use new platforms to grow our business than our recent success with March Madness on demand. I gave you a prelude to this during the last earnings call and the final results once again prove how the Internet is truly additive to our core business. This year we took in approximately $23 million from streaming the tournament online, a number that has grown significantly each of the last several years. And as the revenues climbed online, they increased on air as well. The television sales on both the network and at the stations posted increases, proving once again the value of owning the rights to big ticket items like the Final Four and the NFL.

Plus, Nielsen research shows that 92% of the basketball tournament online viewing was done at work, demonstrating that we are adding a whole new audience to our existing content and making bosses throughout America very angry with us.

Our online entertainment properties are doing a good job complementing our broadcast programming as well. As CBS television ratings have recently increase, cbs.com has become the number one network site in terms of engagement, a key metric for advertisers. We also continue to be very excited about the progress of Last.fm, which has seen its traffic increase more than 100% since we announced the addition of free on-demand streaming early in the first quarter. Going forward as Last.fm expands to reach a mass market, we’ll be exploring ways to expose it to various new audiences across the company. Most recently, Last.fm partnered with CBS Radio’s online audience to help each community gain new audience and achieve significantly greater reach. We are very pleased that Quincy Smith has assembled a team of highly skilled executive from leading tech companies across the industry.

Finally, beyond our advertising base businesses, the CBS Corporation also delivers meaningful financial results from businesses that are not tied to advertising, including program distribution, Showtime, and Simon & Schuster.

Leading the way is our syndication business. As you saw in our release this morning, CBS was up 85% in TV licensing fees for the quarter. Our new CSI deal and the second cycle sale of Everybody Loves Raymond drove today’s results and we have an extremely deep bench that will continue to produce significant revenues for the company going forward. CBS Television distribution consistently has eight of the top 10 syndicated shows on television with the highest first-run programs in the business and a very strong pipeline, including our new entry, The Doctors, which is a spin-off of our Dr. Phil franchise.

And the future of our off-net programming releases is looking very encouraging as well, with titles including Criminal Minds, Everybody Hates Chris, Numbers, and Ghost Whisperers all ready to provide brand new revenue in 2009.

Meanwhile, demand for U.S. programming and our programming in particular continues to be strong around the world. Our international syndication group concluded a number of very healthy programming licensing deals at the MIT conference earlier this month. We saw a particularly strong sales for Showtime’s programming, which provided added revenue streams in the DVD market as well.

Speaking of Showtime, our pay cable operation continues its stunning creative and commercial momentum, winning critical acclaim, Emmys, and most importantly subscribers. Showtime posted the largest subscriber increase on any premium cable service in the fourth quarter of ’07 and that momentum continues in ’08. In fact, Showtime alone has added 1.3 million subscribers in the past 12 months and if you include the entire suite of Showtime network channels, we’ve added 5.7 million.

With the continued success of original programming, like Tudors, Weeds, Dexter, Californication, Showtime is clearly having its best run ever and we see significant further potential for revenue growth.

Last week’s creation of the new joint venture cable channel will make available to us $300 million to invest in programming going forward. This includes original programming, which is the single biggest driver of our success, and of course movies are still important to us as well. The full slate of movies that will now satisfy from our current suppliers will satisfy our programming needs through 2010 and we are continuously in the process of licensing compelling new films at more favorable terms.

Our programming lineup will not miss a single beat. Some of these films will certainly come from our new film division, which continues to strategically ramp up its operations. As previously stated, the plan is to release four to six films a year, produced in the $10 million to $50 million range. With a low overhead and a complementary distribution pipeline at Showtime, international syndication and CBS interactive, we’re excited about owning more forms of content.

In conclusion, I am very pleased indeed with the results we are reporting today and with CBS' prospects going forward. We have once again delivered our promises while positioning the company for future growth and margin expansion. In the face of the current headwinds, we will continue to closely monitor the way in which we operate each of our businesses.

We know how to run our businesses effectively regardless of the economic climate. We believe that in a tight market, advertisers will continue to be drawn to our world-class assets. From television’s mass reach to radio’s targeted cost-effectiveness to outdoor’s increasingly attractive possibilities, we are a must-buy across the board and our ability to server advertisers with each of these media improves every day with the advent of digital technology. The CBS Corporation clearly has the right broad range of assets to produce outstanding free cash flow quarter after quarter, year after year. We will continue to use that cash to grow our businesses, to make opportunistic investments both internally and externally, and return value to our shareholders.

Thank you very much, everyone, for your time today and now I would like to turn the call over to Fred.

Fredric G. Reynolds

Thank you, Leslie and good morning to all of you. As was just discussed, our broad base of media businesses produced solid results in the first quarter of 2008, driving very strong earnings per share and free cash flow growth. Let me now provide you with some financial highlights and additional information on our first quarter performance.

As Leslie said, diluted earnings per share for the first quarter was $0.36, up from $0.28 last year at this time, a 29% increase. Now, on an adjusted basis excluding stock-based compensation expense, a restructuring charge of $45 million, and the after-tax effect of station divestitures last year, earnings per share was up about 23% over the first quarter of 2007. Free cash flow for the first quarter of 2008 was a very strong $938 million, up 25% over last year’s very strong free cash flow.

Free cash flow was driven by higher operating income before depreciation and amortization, plus adding back the non-cash expenses associated with stock-based compensation and restructuring costs of $45 million. These $45 million of restructuring charges, while recognized in the first quarter will not be [spent in] cash until future quarters during 2008.

In addition to higher OIBDA, cash flow from operations was up due to a strong improvement in working capital as a source of cash. The first quarter’s working capital improved by approximately $150 million versus the first quarter of 2007, with about half of that improvement due to timing related to the advanced payments we received on our new home entertainment distribution agreement. The balance of the working capital improvement results from the continued focus on managing our balance sheet, including driving down our trade accounts receivables.

Turning to revenues, first quarter revenues totaled almost $3.7 billion, essentially flat with last year’s first quarter. In last year’s first quarter, as just mentioned, we aired the Super Bowl, the Pro Bowl, and the Final Four basketball game, none of which aired in this year’s first quarter.

While studying the absence of revenues from these big events, we had higher syndicated revenues from the second cycle of Raymond, higher subscriber fee revenues at Showtime and College Sports Television, and higher syndication revenues due to our new agreement to distribute the CSI franchises internationally.

We now recognize international CSI syndication revenues on a gross basis versus net last year when we had a third-party distributor.

Operating income before depreciation and amortization for the first quarter totaled $642 million, up 1% on an as-reported basis over last year’s first quarter. Included in the first quarter’s operating income before depreciation and amortization is stock-based compensation expense of $33 million, which is $12 million higher than last year, and the restructuring expenses at $45 million. Taking these two items into accounted, adjusted OIBDA grew by 9%.

Operating income for the first quarter was also up 1% to $524 million, but then again, excluding stock-based compensation and the restructuring expense, adjusted operating income grew by 11% over 2001’s -- 2007’s first quarter.

Interest expense for the first quarter was $139 million. It was essentially flat to last year’s first quarter; however, interest income of $18 million is down $22 million due to lower cash balances this year versus last year, because as you know we repurchased over $3.4 billion of our stock during 2007.

Our income tax rate for the first quarter 2008 was 37.6%, which was down from last year’s adjusted tax rate of 38.7%. The various tax planning strategies that we have put in place over the last several years have continued to lower our worldwide tax rate.

Finally, net earnings for the first quarter of 2008 were $244 million, up 14% over last year’s first quarter.

Let me now turn briefly to our operating segments. The television segment’s first quarter revenue of $2.6 billion was up slightly at plus 1% over a year ago. However, as we noted earlier, the absence of the Super Bowl, the Pro Bowl, which aired in last year’s first quarter plus the shift of airing the Final Four games to the second quarter this year greatly reduced our revenue growth in 2008’s first quarter. Offsetting the loss of this revenue of these big sports events was the syndication revenues once again from the second cycle of Raymond, the CSI International syndication and distribution revenues, and higher subscriber revenues.

For the first quarter 2008, time period ad sales at the CBS Network, taking into account the absence of the Super Bowl, Pro Bowl, and Final Four games, was down 2% for the first quarter of 2007. A very strong scatter market, which was up double-digit over up-front pricing, could not offset the impact that almost all of our scripted programs during the first quarter 2008 were re-runs due to the now concluded WGA strike. This compares to the first quarter last year when we aired a significantly higher number of original episodes which caused a 2% drop in ad revenue compared to the prior year. And as Leslie just mentioned, we are now back to airing lots of original episodes on the CBS Network.

Turning to the television segment’s OIBDA, for the first quarter it was $449.5 million, up 13% from last year. Included in OIBDA was a restructuring cost of $35 million for personnel reductions, primarily at our TV stations. The increases in OIBDA excluding stock-based compensation expense and restructuring charges was driven by a favorable mix of primetime entertainment shows aired in the first quarter 2008 versus last year’s Super Bowl and Final Four games, which as you know have significant rights fees associated with their broadcast. Television’s OIBDA was also helped by the increase in syndication and distribution revenues versus last year’s first quarter.

Turning to radio, revenues in the first quarter were $364 million, down on an as-reported basis 9% and down 6% on a same-station basis. As Leslie mentioned, we are seeing some very encouraging signs that the changes that we made to a number of our radio station formats, plus the numerous organizational changes are beginning to demonstrate top line growth across a number of our stations in major markets.

While we have always been reluctant to provide sales pace information, since sales pace information can change frequently, and it may differ from the actual results, with April practically completed, sales pace over 60 of our radio stations primarily in the major markets are showing top line growth over April last year. And there are also early signs that this sales growth momentum is continuing into May.

Once again, let me just remind you, sales pace trends can change but we believe we are seeing some very encouraging signs from our major market radio stations.

Radio’s OIBDA for the first quarter of $122 million is down from $164 million last year. The drop in profits is due to lower same-station sales, divested stations, and a $10 million restructuring charge for severance, partially offset by recognizing $10 million in deferred revenue associated with our new Westwood One agreement.

Turning to outdoor, revenues for the first quarter were $497 million, up 7% over the first quarter of last year. North America’s revenues were only up 3% over the first quarter of last year due to the loss of two major shelter contracts in Toronto and San Francisco. The loss of these two contracts lowered our revenue growth rate by two percentage points in the first quarter versus last year.

As the long-time incumbent, we very much valued these contracts. However, the winning bidders in each case more than doubled what we were willing to pay for these contracts and these contracts expired at the end of 2007.

Europe and Asia’s revenue were up 15% over the first quarter last year, with strong revenue growth led by the United Kingdom, coupled with a weak U.S. dollar versus the Euro.

OIBDA for outdoor in the first quarter was $102 million, up slightly over last year’s first quarter. Europe and Asia’s profits, however, soared up 48% over last year’s first quarter while North America’s OIBDA in the first quarter was down 2% due to the loss of the Toronto and San Francisco contracts, along with increased lease costs.

Finally, Simon & Schuster’s revenue and OIBDA were down in the first quarter from last year, due largely to the absence of last year’s blockbuster bestseller, The Secret.

So to wrap up 2008’s first quarter, our balance sheet remains very strong with over $2.3 billion of cash on the balance sheet, and with our debt to EBITDA leverage at 2.1 times, we remain at the conservative end of leverage. Today’s announcement to raise our dividend by $0.02 to $0.27 a quarter signals our continued confidence in the strength of our cash flows. We also, as you noted today in the earnings announcement, reaffirmed our business outlook for 2008, which is for our OIBDA and operating income to grow between 3% and 5% over 2007.

Thank you and we would be pleased to take your questions, so Operator, if you could open the phone lines, that would be terrific.

Question-and-Answer Session

Operator

(Operator Instructions) We’ll go first to John Blackledge at J.P. Morgan.

John Blackledge - J.P. Morgan

Thanks. A couple of questions -- it seems like North America outdoor revenue growth decelerated in the first quarter, even excluding the non-renewals of Toronto and San Francisco. Just wondering what U.S. billboard revenue growth was in the first quarter and what is it pacing in the second quarter, how national revenue growth was in the first and second quarter. And then costs up 9%, rending flattish EBITDA. I’m wondering if this cost growth trend will persist throughout the rest of the year. Thanks.

Fredric G. Reynolds

I’ll take that, John. One, I think the first quarter traditionally is a little bit slower for us on outdoor and we are seeing more momentum in the second quarter. Some of it was timing of when the orders were placed, because they tend to have two or four week orders. I would say it’s down a tick or so from maybe the fourth quarter, which is I think kind of in the 7% range but it is sort of still in the mid-single digit, maybe slightly higher and building. But as you know, lease costs sort of come in the first of the year and they are paid pro rata, so as we start building it will become less of an increase over the year because we have higher revenue growth.

Again, I think these two contracts are really the story, otherwise I think we would have been kind of firmly in the mid-single digit growth rate at outdoor.

John Blackledge - J.P. Morgan

Okay, thanks. If I could ask one more, on the TV station pacings, I was just wondering what they were in the first quarter ex the Super Bowl and ex political and what the stations are pacing in the second quarter. Some operators have reported recently and the trends are pretty poor for them. Just wondering how you guys are doing on that end. Thank you.

Fredric G. Reynolds

Again, I am always reluctant to give pace information because that’s what we don’t like to be because it changes all the time. I’d say the first quarter we had great political, record political, but the underlying business was softer than we would like. It is very difficult to strip out the Final Four, the Super Bowl, and all those different aspects. But I would say that clearly some of the actions that we took early on in the year addresses what we saw as some struggles with the local business, but also some of the headcount reductions were largely due to technological advances that we had.

So clearly we love that it’s a political year. If we are going to have a little bit of a tougher economy, the political is going to help us a lot but it is not as strong as we would have hoped it would have been three or four months ago.

John Blackledge - J.P. Morgan

Thank you.

Operator

Michael Nathanson with Sanford Bernstein.

Michael Nathanson - Sanford C. Bernstein

Thanks. I have a couple for Fred. I am trying to understand the drivers in TV profitability this quarter, so I wanted to know -- you talked about the change in CSI from gross to net basis. Did that materially change the profit impact from CSI this quarter?

Fredric G. Reynolds

Not materially, no. I think the biggest factor in television profitability in the segment was really a little bit of that switch that I was trying to articulate about entertainment program is very -- versus paying lots of rights fees for the Super Bowl and the NCAA last year, I think that was one of the biggest drivers. But the CSI was really mostly grossing up the revenues. There was some impact but not significant over the prior year.

Michael Nathanson - Sanford C. Bernstein

Okay, and then the other thing was you guys mentioned about restructuring charges in radio and TV. How large would the savings be from those changes you are making and when will you see the savings from those changes?

Fredric G. Reynolds

Well, I’d say we will see the savings -- they were all largely headcount related, or personnel related. They will all be in the numbers this year. The first quarter takes the hit but we should be able to have a payback of the $45 million charge by the time the year is over, so we should be seeing kind of north of $45 million in actual reduction and costs by -- as a run-rate, this year.

Michael Nathanson - Sanford C. Bernstein

Okay. Thanks.

Operator

Our next question will come from Jessica Reif-Cohen at Merrill Lynch.

Jessica Reif-Cohen - Merrill Lynch

I have a couple of questions. So just to continue on the thought that Michael had on the cost of severance, is there anything that you guys are thinking of doing more fundamentally to change the cost structure of the business across any of the lines of business?

Leslie Moonves

You know, when we approached the television stations, there was some softness in the market, as Fred referred to, other than the political, which obviously covered a lot of the [spend]. Each one of them was required to take a look at their cost structure, see what they could do about it. Some of it -- a lot of it did involve personnel changes but also some of it affected how we did business. The ability to cut cost in a way that did not affect obviously the news product that we were putting out or the quality of the television that we were putting there.

So each station was assigned a task. They accomplished it in a variety of different ways. A lot of it was due to personnel costs and that was taken care of but a lot of it was done in other ways.

Fredric G. Reynolds

I would just add that a lot of it was driven by technology. We put in a lot of robotics, non-linear editing at the TV stations. You are going to see with the digital rollout at outdoor, there is less need for people who are post hangers, or people who go up and put the paste up on the boards and all that stuff. And so that’s the payback from what we think is some pretty good capital investments and I’d say to Leslie’s point, every change was primarily not in front of the camera. I mean, most of it was in the more technical areas of a TV station and a radio station, and we’ve actually added resources and we’ve not touched the broadcast.

Leslie Moonves

And Jess, one of the things that it’s important to realize is we are aware of what the marketplace is and we adjust our businesses accordingly, and we continue to run our businesses very effectively. So when things become necessary to do, we do them.

Jessica Reif-Cohen - Merrill Lynch

And I have a couple more questions -- what is your view of the potential of a strike by the actors?

Leslie Moonves

Conversations are going on as we speak, or in a couple of hours from now. They are resuming negotiations with the Screen Actors Guild. I think the community realizes that the writer’s strike was not a good thing for a lot of people. The tone of these negotiations seems to be in a much more cordial, positive fashion without reporting anything, because nobody is talking about particulars on the deal. We are optimistic that before this contract runs out, June 30th, that there will be no strike and that everybody will get back to work and that is what we are hoping for.

Jessica Reif-Cohen - Merrill Lynch

And then just a really quick one for Fred -- just two more questions -- the multiple for IOA, what was that?

Fredric G. Reynolds

It was an attractive multiple for us. It’s a nice business. It has enough scale and it was -- you would find the multiple -- I don’t think we’ve disclosed this. It’s a private company but it was a very attractive multiple, kind of a very low double-digit kind of multiple, maybe just high single digits.

Jessica Reif-Cohen - Merrill Lynch

Okay, and then I know Sumner is on the call, I don’t know if he’s willing to take a question but if you are, I was just wondering if you could comment on your view of what is going on in the pay TV market. What are you seeing fundamentally that is changing that is allowing each of your companies to have their own pay TV service?

Sumner M. Redstone

I’ll be glad to answer that, Jessica. As you know, from the very beginning my position was that each of these companies had an obligation to follow their own strategic objectives and to compete. So competition was nothing that I didn’t foresee. As a matter of fact, as you know I believe competition is healthy. It certainly didn’t hurt me.

Now as to what is going on, I think the street to a certain extent and a large part of the press has missed the point. I think that now obviously Les talks to me every day about his strategies and Philippe talks to me every day about his strategies and I supported both.

The fact is that some [inaudible] think there has to be a winner and a loser. The fact of the matter is I think that Les’ strategy, Showtime’s strategy will work for CBS and I think that Philippe’s strategy will work for Viacom. It is not true that success between these two companies is mutually exclusive and I think a lot of people fail to see that. I think you will see the strategy of CBS working and the strategy of Viacom working and that’s what I believe and I think as that develops, as events develop, some in the near-term, you will see [inaudible] of that point of view.

Jessica Reif-Cohen - Merrill Lynch

Thank you.

Operator

Our next question will come from Lucas Binder at UBS.

Lucas Binder - UBS

Thank you. A couple of quick questions for you; one, Fred, Les, obviously you’ve increased the dividend a percent from here. Free cash flow is up materially. Where do you see other uses of cash and how should we look at free cash flow for the rest of the year going forward? Were there any specific benefits that we should realize for the first quarter relative to the rest of the year?

And then a follow-up with regard to the Showtime relationships with Viacom, MGM, and Lionsgate -- what are your opportunities to add content away from your own developed content by 2010, 11, 12, that timeframe?

Leslie Moonves

Okay, Lucas -- number one, since we started out we have said our primary focus is to be a dividend paying company. We’ve increased the dividend as we said six times in 2.5 years. We continue to do that. We have faith in our company. We like returning money to shareholders.

At the same time, when an IOA becomes available, we have the cash and the balance sheet available to jump on it and make a very smart acquisition when it becomes available, and we are in the position to continue doing that and that is part of our strategy. We are looking for opportunities. We’re not going to be stupid about it. We haven’t been stupid about it in anything we’ve acquired. Everything fits with what we do and we will continue to do that.

Regarding question number two, look, Showtime has very solid original programming. The deals we have with the current studios, extend some of them to have their pictures through the end of 2010, so we are very strong. We have already spoken to major suppliers, movie companies, as well as TV companies. There is a large amount of product that is out there, top quality product. We are confident that we can make these deals and that Showtime won’t miss a beat in terms of the product that they are putting on the air and we feel very good about that.

So it’s an exciting time. It gives CBS Films the opportunity to add films to the Showtime lineup, as well as some other companies that are out there.

Lucas Binder - UBS

All right and just on the free cash flow side, if you look at -- the beginning of the year was obviously very strong and it usually is your best quarter during the year. How do you look at the rest of the year? Was anything pushed forward or is it just going to be sort of continuing on from here?

Fredric G. Reynolds

As I articulated, of the working capital improvement of about $150 million, about half of that is timing. It will come back in -- in other words, we’ve got an advanced payment on our DVD home video that will be worked -- we would have earned it over the balance of the year but we got it early in the first quarter. The other half is just again, good old fashioned working the balance sheet. So you are right -- the first quarter is usually the strongest but we expect to have again free cash flow. We are very confident in it but some of it is timing.

Lucas Binder - UBS

Thank you very much.

Operator

Anthony DiClemente at Lehman Brothers, your line is open.

Anthony DiClemente - Lehman Brothers

Good morning. Thanks for taking the questions. Fred, what portion of the incremental -- I get $280 million of license fees at TV was related to Everybody Loves Raymond and how much of it the new self-distribution deal for CSI?

And then Les, you mentioned in your opening comments, I guess you guys are looking at presentations as opposed to pilots. If you could just give us a little bit of background on how much money you save on greenlighting shows when you just look at a presentation as opposed to a pilot.

And then finally, Les, also if you could update us on your thoughts on the potential for acquiring cable TV network assets. People have talked about the weather channel, the scripts networks, the rainbow networks, perhaps as a way for you to achieve proxy value for CBS retransmission consent through higher affiliate fees or carriage for those potential target networks. Thank you.

Leslie Moonves

I’ll go first because it was the last question -- the presentations, basically what we were able to do and obviously we had a shortened season because of the strike in the amount of time we had to do the pilots and get them ready to see what we had, so as a result of that in a number of the cases, and I don’t want to mention how many but it’s over 50% of the pilots that we did cost approximately 50% of what the normal pilot would do. Instead of doing a 10-day shoot or a 12-day shoot, we would generally take half that amount of time and shoot key scenes that would sort of give us an indication of what the show was that we had, by seeing the key relationships that characters have and whether an actor is working and whether the set-up works, you don’t necessarily need to see a full completed pilot until you are ready to put it on the air.

So having done this as long as I have, you are able to see half a pilot and have a general idea of whether you have something worth working on or not. So to say we’ve saved tens of millions of dollars in development cost would be an accurate presumption.

In terms of your last question regarding cable television assets, we like to say, and it’s absolutely true, we look at everything. We look at everything. There are lots of media deals out there. When they become presented, we look at it. We are happy to look at it. We have a terrific team with Fred and Joe [Ainello] that are able to assess the value of certain things and whether they are worthwhile for us to acquire. There is nothing we need to acquire.

CBS can stand alone regarding retrans. Some of the cable operators would rather pay it through some cable channels. Having said that, we’ve approached a number of them and we already have 20 deals in retrans without any cable participation whatsoever, directly paid in cash to CBS. If it should come in another way, we are fine with that as well but at the moment, there’s no plans to announce anything major but we do look at everything.

Fredric G. Reynolds

Anthony, on the question on the increase in the license fees, I’d say the vast majority of it, the vast majority as due to the accounting treatment of the CSI franchise. In other words, showing it gross versus net. While Raymond is very valuable and is very important to us, the vast majority was really the accounting treatment.

Anthony DiClemente - Lehman Brothers

And that’s -- the accounting treatment, Fred, is something that will continue to the order of magnitude that it showed itself in the first quarter, it will continue?

Fredric G. Reynolds

Well, it’s just now we reported there was -- obviously when you become the distributor, we report what was previously on the net basis growth, but no, it won’t be that kind of number going forward. It will just be instead of recording just our profit from the distribution will show both the gross revenue, the participants cost or share of it, and then our net profits. So the net profit sort of stays the same but the revenues get grossed up.

Leslie Moonves

And we will continue to distribute CSI internationally for the rest of time.

Anthony DiClemente - Lehman Brothers

Understood. Thank you so much.

Operator

Next we’ll hear from Marci Ryvicker at Wachovia.

Marci Ryvicker - Wachovia

Thanks. Last quarter you said you weren’t seeing the impact of a recession on your business. It sounds like this may have changed by some of the comments that Fred had made.

And then the second question is in outdoor -- in general, what is the attractiveness of international assets? I know there is top line growth but the margins are typically pretty low. Why not aim to buy domestic outdoor group, like a Lemar, who has significantly higher margins?

Fredric G. Reynolds

One, I’m not sure, Marci, we see a recession because we are still seeing growth and I think to Leslie’s comments at the outset, when advertisers are trying to reach the biggest number of their potential customers or consumers, they are going to the big networks, the network that are going to broadcast broader media plays. So I would say it’s slower. I don’t know -- to me, the word recession means it’s actually declining and I think maybe your comments are around outdoor. I think outdoor will end up being fine. It will show growth. It did show growth in the first quarter domestically. Out international is doing really well and we think the quarter should build but from what we see today, the domestic billboard business should get stronger as a growth rate over the first quarter.

Obviously if something happens in the economy that changes from what is slow growth to something very more severe, than we may have to reassess that but I don’t think we would say that we are seeing a recession. I think we see things slower. As we said, TV stations might be a little bit slower but in the same markets, we just cited a number of really positive signs at radio and outdoor continues to do well also.

Leslie Moonves

And Marci, in terms of the operations of international outdoor, once again the margins are better for billboards and that’s an area we are investing in, obviously by our IOA acquisition. The more we can invest in billboards, there is a much better margin business in that and you will see more increase in that from us in our international acquisitions and -- as opposed to some of the transit contracts which don’t have as attractive a margin.

Marci Ryvicker - Wachovia

So is it safe to say you are not looking to buy domestic, like a Lemar?

Leslie Moonves

We look at everything. There is no announcement coming on Lemar in the near future. That you can be assured of.

Fredric G. Reynolds

Marci, as Leslie’s point is we love the billboard business more so than the street furniture or the transit because the margins in billboards are really attractive. IOA was I think over two-thirds or so of their revenue came from billboards and so -- or something, 80% of profit, so that’s why that was really attractive and there is a huge opportunity in South America. There’s lots of mom-and-pop’s billboard companies out there that we can roll up with this strong platform that we have.

Leslie Moonves

And the rest of the world as well.

Marci Ryvicker - Wachovia

Thank you.

Operator

Heath Terry at Credit Suisse, your line is open, sir.

Heath Terry - Credit Suisse

Thank you. You mentioned that you are targeting $50 million in Internet revenues this year. I am assuming that doesn’t include any acquisitions. Can you give us an idea of what your appetite is --

Leslie Moonves

The $50 million was just radio. It was just radio. Acquisitions, no, there’s no plans for any additional radio acquisition. You know, the combination with AOL Online increased our revenue stream in terms of online advertising and if you see some of the new exciting things our radio group is doing online, such as being able to sit at your desk in New York City and get a radio station in Los Angeles, or being a country fan and being able to punch up the seven country radio stations that we own throughout the country, that’s very exciting. So the amount of revenue increase online for radio is becoming a significant number but I would not foresee any acquisition of an online radio site. You will see more and more also cross-promotion with Last.fm in our radio group, which is the music online service as well.

Heath Terry - Credit Suisse

And is the appetite different in your non-radio online asset areas?

Leslie Moonves

Well, we are always looking for online assets and once again we have stated that content online and outdoor are our main focus for acquisition, so if there was an attractive opportunity that fit with what we do online, we would do it.

Heath Terry - Credit Suisse

You also mentioned that you have new shows ready for the up-front. How would you compare the position that you are in from a content development standpoint this year versus a normal non-strike year?

Leslie Moonves

You know what? I’ve only had the opportunity to see two of our pilots so far, one of which I absolutely adore. I don’t want to oversell but I’m very excited about one.

You know, it is ironic but there are some who think, and I may be one of them, that the forced compressed nature of it may have forced better work or more intense work on the part of people. Obviously casting became a bit more difficult because everybody was running in a very limited period of time.

I would say we probably will have more original product done before the announcement of our schedule than anybody else -- not to say that anybody else won’t be prepared but their pilots are going to come a bit later, so I think we are going to have a more organized idea of what is going to be on in the fall this May than some other people because our pilots are in decent shape and we’ll have a fairly great idea of what to select.

In addition, there remains a great deal of stability in the CBS schedule without looking for a whole slew of new programming.

Heath Terry - Credit Suisse

Thank you.

Martin Shea

We have time for one more question.

Operator

Our next question will come from Victor Miller at Bear Stearns.

Victor Miller - Bear Stearns

Is CBS' appetite for repurchases through -- I mean, I’m just struck by the fact that your debt fell by $873 million in the quarter. You are probably leveraged below two times. If you are unsuccessful in adding M&A, would you return to that given the 6.7 times multiple? And then I have a follow-up.

Fredric G. Reynolds

Victor, as Leslie said we’ve been fairly consistent that we really believe returning cash to shareholders via dividend is the right strategy. Obviously we bought back 3.5 or $3.4 billion of stock last year. We kind of associate that with the windfall from the asset sales of the parks business, radio and TV stations. But we think the commitment to return capital and cash to shareholders is there. We think dividends is the right way of doing it and again, but obviously we will always look at what’s in the best interest of shareholders. We would love to invest, as Leslie said, we would love to invest this cash in growing our digital business faster, both outdoor and interactive, and looking for attractive acquisitions like an IOA or any others that are out there that give a good return to shareholders. Absent that, then hopefully we’ll do the right thing by returning value to the shareholders via dividends or other methods.

Leslie Moonves

Victor, as a final statement, as this is the last question, I think many companies are very envious of our balance sheet. This is a very good time to be sitting in the position that we are, with our ability to increase our dividend and our ability to have cash ready to leap on the right opportunity.

So as I said, we are feeling very good about where we are and a lot of companies would like to be sitting in our position here.

Martin Shea

Thank you very much for joining us and Deborah and I will be around for questions further today.

Leslie Moonves

Thank you.

Operator

Ladies and gentlemen, this does conclude the CBS Corporation first quarter 2008 earnings release conference call. We thank you all for your participation today. You may now disconnect your lines and have a great day.

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