Paramount Global
Q4 2006 Earnings Call Transcript

Published: 27 Feb 2007

[Operator:]

Good day, everyone, and welcome to the CBS Corporation fourth quarter 2006 earnings release teleconference. Today's call is being recorded. At this time I would like to turn the call over to the Executive Vice President of Investor Relations, Mr. Marty Shea.

[Marty Shea:]

Good morning, everyone. Thank you for taking the time to join us for our fourth quarter and full year 2006 earnings call. Joining me for today's call are Sumner Redstone, our Chairman; Leslie Moonves, President and CEO; and Fred Reynolds, our Executive Vice President and CFO. Sumner will have some opening remarks and will then turn the call over to Les and Fred for strategic and financial issues. We will then open up the call 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 fourth quarter and full year 2006 results should have been sent to all of you. If you did not receive the results, please contact Punam Visay at 975-3667 and she will get it to you. A webcast of the call, the earnings release and any other information related to the presentation can be found on CBS Corporation's corporate website at the address CBSCorporation.com. Now I'll turn the call over to Sumner.

[Sumner Redstone:]

Thanks, Marty. Good morning, everyone. I really thank you for being with us today. When we look at our terrific fourth quarter and full year 2006 results, one thing is very clear

[Les Moonves:]

Thank you very much, Sumner, and good morning to everyone. It's good to be here with you, as always. This time last year we told you all the things we were planning to grow and strengthen the CBS Corporation. Well, we've gotten a lot done and we're just getting started. Today the CBS Corporation has a successful profitable platform to build upon. We've got a proven ability to generate cash and the discipline and vision to leverage that cash effectively for the long-term benefit of our shareholders. Nowhere is this more evident than in our fourth quarter and full year 2006 results. By now you've probably seen our press release. As you can tell, the fourth quarter was a terrific cap on a great first year. Strong fourth quarter operating results in television, outdoor and publishing helped us surpass our key financial targets for 2006. In terms of profits, we adjusted fourth quarter results to provide a meaningful comparison with the previous year. Last year we had a $9.5 billion impairment charge in the fourth quarter; we took that out. We've also adjusted for tax benefits and stock-based compensation. Even with all that adjustment, operating income was up 14% to $759 million. Net earnings from continuing operations were up 44% to $464 million. Adjusted fourth quarter EPS from continuing operations was up 43% to $0.60 per diluted share; clearly, way above expectations. This is all on top of a 2% revenue increase for the quarter which shows we continue to have great success leveraging top line growth. For the full year 2006, also adjusted, EPS from continuing operations was up 19% to $1.85 and free cash flow was up 8% to $1.6 billion. These kind of results have been achieved by running our core businesses at the forefront of their respective industries. But there is so much opportunity out there to position these businesses for even better growth and in order to do that we are pursuing a three pillar strategy

[Fred Reynolds:]

Thank you, Leslie and good morning to all of you. As Leslie just discussed our fourth quarter and full year 2006 highlights, let me add some additional information on our fourth quarter operating performance, cash flow and balance sheet. Then I'll brief you on our $1.5 billion share buyback plan and finally provide you with some comments on our expectations for 2007. Revenues for the fourth quarter of 2006 totaled $3.9 billion. That was up 2% over the fourth quarter of last year. Now as we have mentioned in previous quarters, two items reduced our reported revenue growth when compared to 2005

[Operator:]

(Operator Instructions) Your first question comes from Victor Miller - Bear Stearns.

[Victor Miller:]

Fred, I have a question for you and one for Leslie. In terms of the 39 radio stations and nine TV stations at UPN, the net political dollars that you had last year versus what you anticipate this year, syndication revenues you talked about, can you give us a sense when you wrap that all together, Fred, what does that mean in terms of the revenue drag potentially for this year versus last year and in the sense of the EBITDA associated with that bucket of pieces? Leslie, in terms of the radio business you have been able to sell your radio stations at about a 14.1X multiple overall. I'm wondering two things philosophically. One, is there any more to do in terms of paring back that portfolio? Secondly, if you look at a lot of the radio growth that Clear Channel just reported, one could argue that it comes from Premier, which is its network business. As you know, Citadel is now buying ABC's network business along with its station so there's, again, an integrated radio network presence. There are two of those in the marketplace, Westwood is kind of a separate entity and you own an 18% stake in it. Does it make any sense to have in your case those two together? Thanks.

[Les Moonves:]

In terms of paring it down, right now we're pretty satisfied. We did an analysis at the beginning of the year of what we felt were the smaller markets least likely to grow stations. When you're able to get the multiples that we got, we did that. It's not to say that we won't look at it and potentially pare down further, but at the moment we're pretty happy with the hand that we're dealt. We do have a relationship obviously with Westwood One where we own a decent percentage of the company. There are no plans right now to bring that in-house. One could argue about the value of the networks. We still think Westwood is a very valuable asset, but we have no plans to bring it in-house and combines it with our radio stations.

[Fred Reynolds:]

Victor, on the radio stations, their sales for '06 were about $125 million,$130 million. I give you a little bit of a range because some of them when into an LMA in the fourth quarter. But their run rate for that probably is about $125 million. The nine TV stations are probably around $75 million to $80 million in revenue. So that's what will come out and as we've committed before, we'll do the reports on a same-station basis so you can see the comparability, but that is going to be a drag. Finally, I think your question was about political. Clearly '06 was a great political year, it set all records. As Leslie alluded to, every year, even on odd years we have political but nowhere at the level that you have an election year. The question is will some of the '08 political dollars come into this year? That is hard to tell at this point. But political was very strong in '06. Obviously we had the Super Bowl this year, so on a revenue standpoint the revenue won't change that much except the profitability is clearly different from selling a normal ad versus a sports ad.

[Les Moonves:]

Clearly the political race is heating up a lot faster than everybody thought it would. I think there's more attention, considering that we are almost two years away from the next election the fireworks that are out there bodes well for us. Obviously a lot of people are raising a lot of money and so I think it bodes well. I think, as Fred said, there's a real possibility there could be more leakage from '08 into '07 of political dollars.

[Operator:]

Your next question comes from Jessica Reif-Cohen – Merrill Lynch.

[Jessica Reif-Cohen:]

Les, as you reshape your assets over the next three to five years, how different will the revenue and cash flow mix be? Do you need to make acquisitions? Where do you stop with the dispositions? Could you just give us a little guidance on how much you plan on spending for digital boards in outdoor in '07 and '08?

[Les Moonves:]

Jessica, the first question is a tough one. Obviously we are investing in a rather small way in a variety of new media assets. We do believe in their long-term growth and that that's where a lot of our revenue is going to come from in the future. It's really hard to assess where that is. As it stands now we still believe in the blocking and tackling of our basic assets which are television, radio and outdoor and they're still great businesses. There will be obviously revenue and profit migrating into new media assets and we intend to be there in quite a large way. We didn't have any great intention to sell our television stations, these nine stations, but at the multiples that we were offered they were very, very high prices and we had to look at that. The same thing with our radio stations. On one hand people say, gee, radio is slowing down. At these multiples it certainly doesn't look that way. So we're pretty pleased with the way we ended up and we would always listen to a reasonable offer.

[Fred Reynolds:]

Jessica, on the outdoor, one of the big jumps in the fourth quarter of '06 was in outdoor, about $29 million to $30 million. Most of that was with the London Underground and a lot of that is digital. We were looking to expand our capital spending in '07 in outdoor by about $40 million to $50 million, and I would say a good share of that, the lion's share of that, is probably for digital outdoor in the UK. Just to give you a perspective on where we are. At the end of '07 we expect to have in the U.S. about 300 digital boards installed. That is up from about 160 where we are now. In Europe because of the London Underground, we are going to have thousands of boards, but they're going to be more the display boards. We could end '07 with about 3,000 display boards with the lion's share in the London Underground. So I think you can kind of plan on $30 million to $40 million a year in the expansion of our boards. Most of it will be in the digital area.

[Operator:]

Your next question comes from Lucas Binder - UBS Investments.

[Lucas Binder:]

On retransmission, obviously it is good direction, the announcement last week with regard to the nine cable companies, MSOs. What is the timeline for the next step and what can we look out for as far as additional negotiations ahead of the big MSOs in 2009? Fred, you mentioned on a gross basis you are about 2.2X leverage. Do you see opportunity to increase that, and potentially following on how the share buyback goes you'll look to do additional buybacks in the future?

[Les Moonves:]

On the retrans, obviously we are extremely pleased by the nine MSOs that have jumped on board. You're going to see more and more of these smaller operators and some of the not so small operators coming around. And as I said, there's a shift, there's a new paradigm. As I've said before, MSOs are already paying for networks. You can disguise it under other things as everybody has done. I've said this before, if you're paying $3 for ESPN, you're really paying $2.50 for ESPN and $0.50 for ABC. We are now a stand-alone. We see more and more of the MSOs getting on board. As you noticed, these nine MSO deals were done without a whole a lot of noise. There weren't big newspaper ads, there weren't big fights, there wasn't anything pulled off the air. So I think the MSOs are realizing that it's better to get along than to fight. Yes, the big ones are up in '09 and '10, but you'll see us do a number of deals before then.

[Fred Reynolds:]

The leverage ratio, as we said before, is really at the low end of what we targeted. We have some debt maturities that come due in '07, about $700 million in May, we plan to extend those out with ten and 30-year money depending on how the market looks. So there's no desire to reduce our debt or leverage. Listen, we think paying dividends and increasing it is the best way. If you look at where we are, we'll spend about $675 million on dividend payouts at the $0.22 a quarter. That's before the share buyback. So we buyback 47 million shares so that drops to maybe $640 million. That's a very significant call on cash. As you know, it's far greater than our interest cost. So I think we have to weigh that. I think the inclination of Sumner and Leslie and myself is that dividends would be the preferred method. But hopefully we've proven to you that when we have a windfall on some of these asset sales that we're going to return to shareholders if we can't redeploy it effectively at greater than our cost of capital in our existing business. That is our goal thought, we would love to keep redeploying this cash in our businesses and accelerate both the revenue, profit and returns growth. But absent that we'll return it to you. The preference really is dividends because we think it is a little bit stickier, if I could use that term.

[Operator:]

Your next question comes from Kathy Styponias - Prudential.

[Kathy Styponias:]

Les, I was wondering if you can reconcile for us in light of your retransmission consent deal, your decision to sell TV stations albeit in smaller markets, in light of the fact that it's at the TV station level that you're actually capturing the cash for retrans consent, why are you selling stations and what should we expect from you with respect to further TV station sales? Fred, I was wondering if you can give us any sort of color on what the value that you're extracting for retransmission consent for the CBS signal? Thanks.

[Les Moonves:]

Kathy, in terms of that, obviously we weighed that. These are really small market stations that we sold. We weren't going out there looking for them, but when you get the opportunity to sell them at those phenomenal multiples, you figure in what retrans potentially could be and the economics still made much, much better sense to do a sale. Having said that, there would be little chance that any major station would be sold because the future is extremely bright for what they will get per sub. So we factored that in and it all worked out in our favor. I'm not going to let Fred tell you what we're getting per sub.

[Fred Reynolds:]

Kathy, obviously Leslie has stated that the value of our content and I guess you can be assured that we're going to be fairly compensated for that in these deals. I would echo what Leslie says about these businesses. When you get a 15X after-tax multiple, Kathy, as you know, on businesses like Austin we could have baked in almost ESPN kind of retrans and not gotten those multiples.

[Operator:]

Your next question comes from John Klim - Credit Suisse.

[John Klim:]

Have you seen any material impact or could you talk about any impact on the ratings of the shows that you've highlighted on YouTube? Could you update us on how you feel about further developing your relationship with YouTube or its parent company, Google? Thanks.

[Les Moonves:]

Sure. Our deal with YouTube where we supply certain entertainment news and sports content is primarily promotional at this point in time. Certainly with the entertainment stuff we have seen certain cause and effect from some of our research. It's rather early to say, but in terms of the number of hits that our promos get on YouTube, arguably our content is promoted so heavily because of the number of people. In addition, it's bringing in a younger demographic. We think it is fairly significant. It's hard to do an absolute cause and effect, but we know it absolutely is helping. We are looking at every single outlet there is for our content. We are talking to everybody. As you've seen, we've done deals with just about everybody and it's something that all the companies are looking at and how do we maximize our content in the future either through advertising sales or through promotion.

[Operator:]

Your next question comes from Doug Mitchelson - Deutsche Bank.

[Doug Mitchelson:]

Les, one of your most under-monetized assets when you look across your company remains your TV library, maybe even current TV production. So cable operators are sitting there with plenty of servers at their head ends, waiting for the green light to offer as much TV content and demand as you will give them. What's holding you back right now from offering more or all of your content on demand? I know that you're doing some, but it's tiny relative to the totality of your TV library and current production. Maybe along a similar vein, what happened in the Google negotiations that made you uncomfortable that you didn't want to give them broad distribution of your TV content at this time? Was it monetization, was it rights? What was it?

[Les Moonves:]

No, it's a very valid point. Our TV library is unbelievably valuable and it is relatively undermined. We have not put a lot of properties out there. The main reason -- this sort of ties into your second question -- is we want to get paid appropriately for it. We will eventually have our library out there, it will be on demand either through advertising, subscription or pay per view, some way shape or form, we just value it very highly and very dearly. We obviously get paid through syndication and DVDs. It is inevitable that our library is going to be out on the Internet and downloaded and we will be making deals for this content. The good news for us as we go forward is, you're right, it is undermined and there's a great future ahead with this library and with our current production. So look for more things in the fairly near future.

[Doug Mitchelson:]

I'm not sure if there's a specific answer you can give, but as you think about the things that are holding you back right now, is it the size of Google's audience, is it the cable operators, are they not able to monetize through advertising the content to the level you'd like to see? What's stopping it from happening?

[Les Moonves:]

In general terms without getting into the specifics, we want to make sure that, look, there is a cause and effect. Obviously putting it out there, we want our content and I genuinely believe everybody is going to be able to get our content whenever they want it, wherever they want it, it's just getting the right price at the right time for it. There are a lot of factors that weigh in. Obviously we have an important DVD library that might be affected, we have the syndication thing that might be affected and that will all be well and good and we think that the Internet will be additive to that, it's just that we just have to be appropriately paid for it. We discuss this all the time and it's one of the things that we deal with greatly but we have to get the right deal.

[Operator:]

Your next question comes from Anthony Diclemente - Lehman Brothers.

[Anthony Diclemente:]

Fred, if you take the free cash flow that you reported in this release for '06 and you add back the $250 million in pension contribution, which I think most people would agree is discretionary, you get to about $2.40 a share of free cash flow. My question is, as we move forward into '07 you're looking for comparable EBITDA. Is there any reason that the free cash flow number shouldn't move in somewhat lockstep with EBITDA? Is there any change in working capital or change in CapEx that's dramatic that we should know about? Is there any chance that the retransmission deals that you have in place with the larger cable operators, that being Comcast and Time Warner Cable, are renegotiated prior to the '08/'09 time period when those contracts are up? Given the shift that you discuss in the balance is there any chance that you would preempt the existing time horizon on those existing contracts? Thank you.

[Fred Reynolds:]

As you know, we don't forecast or give guidance on cash flow. But let me give you a couple comments because I think it might be helpful. In '06 we spent a little under $400 million, $394 million in capital spending. Our expectations, which you'll see in our K that gets filed probably tomorrow or the next day, we are going to give a range of estimates of $450 million to $475 million in capital spending. I personally think we'll be at the low end of that at the $450 million. So we are going to step up capital spending again. The lion's share of it is going to go into outdoor, so that is going to be a change. The one thing I think, as we noted I think it was in the second and third quarter, that we had the settlement of a number of previous audits of taxes with the IRS from 2000 to 2003. We also had a fairly large overpayment in 2005 that we applied to 2006. So our cash taxes will go up. Everything else you say, working capital probably will be the same; we won't use a lot of working capital. As you know, with only one major syndication versus four that we will have no use of net assets, you guys call it working capital, it's really changed to net assets because the receivable won't get ballooned as much.

[Anthony Diclemente:]

And then presumably your interest expense comes down I would think?

[Fred Reynolds:]

Sure, interest on $1.5 billion, we earn a measly 5.25% on that. So on $1.5 billion that's going to come down by $75 million or so. Again, I don't want to give a forecast. I would point out that capital spending will go up, everything else should stay the same except cash taxes will go up in '07 because we won't enjoy the roughly $150 million overpayment that we got to enjoy in '06.

[Les Moonves:]

Anthony, on your second question, certainly it's possible that we would enter into early discussions with these people. Our relationships with Comcast are terrific. We do a lot of business with them. We have a VOD deal with them and we talk to them all the time. The same thing with Time Warner obviously. We have a lot of business with Time Warner, we co-own the CW with them, they have a lot of programming on CBS so we are open to dialogue, Showtime is negotiating with them all the time as is CSTV. We are certainly open and willing to talk with them at any point in time. I guess it's very possible that negotiations could begin much earlier than when the contracts are up.

[Operator:]

Your next question comes from Kit Spring - Stifel.

[Kit Spring:]

A number of your affiliates are being successful with retrans fees. Do you expect to change the relationships with your affiliate so that you garner some of those economics? I think that's been changing over the past five or ten years. Do you see affiliate comp turning to reverse comp and how big of an opportunity is that?

[Les Moonves:]

You know, Kit, our relationship with our affiliates has evolved over a period of time. When I first got here we were paying out hundreds of millions of dollars which is virtually down to zero right now. There are a lot of deals that we do with them. Our relationships with our affiliates are great. They like the idea getting paid for retrans as do we. So it's an ongoing dialogue in terms of the content we supply them as well as our relationship with them. So without getting specific it will be an ongoing dialogue and, once again, it continues to evolve.

[Operator:]

Your next question comes from David Miller - Sanders Morris Harris.

[David Miller:]

Outdoor revenue growth plus 10%, that's obviously model growth in the quarter generally comparable to your competitors. I would think, however, that that would be leverageable into at least mid-teens to high teens EBITDA growth. You came in with plus 13% growth. It looks like you got hit by foreign exchange a little bit. Was there something else going on in the quarter expense wise that you could flesh out for us? Also, at your analyst day about a year ago today or a year ago this week or so you had mentioned that the publishing business was also non-core to operations, very similar to the Paramount Parks. What is the status of the sale of that asset? Thanks very much.

[Les Moonves:]

David, thank you. I'll deal with the publishing question and I'll flip it to Fred to give you the color on the outdoor business. In terms of publishing, yes, I mean arguably Simon & Schuster is not a core business; however, they are showing a tremendous ability to generate terrific revenues and profits and we love having them with us. We think it's a great asset. As I said, they not only had their best year last year creatively, but financially they're doing far better than people expected. So we love having it and we find no need to sell it, it's going to be a part of our businesses for a long time to come.

[Fred Reynolds:]

On outdoor, a couple things in the fourth quarter. Again, I would cite that in U.S. the billboard business was up 12%, and some of it had to do with the revenue growth. As you may know, some of the contracts that were sort of marginal for us we're no longer participating in, which plays into what we booked as far as expenses in the fourth quarter. We did have severance costs to lay off 110 people that related to the New York MTA and also the New York street furniture businesses that we no longer have. Again, those were marginal at best contracts for us, so the revenue will come down in all of '07, but the profits will not be that affected. But we did recognize the exit cost to get out of that including, again, layoffs of 110 people. We did renew the New York subway and we did renew the London Underground, both of which had significant increases in fees in the fourth quarter because both of those new contracts started in the fourth quarter. What I would tell you, there's a little bit of a lag. Obviously the municipalities want their fees early. They have with the increased license fees came increased availability of inventory, a lot of it, as we discussed earlier on the call, going to digital. So we're building out, we're adding the new display, that's why we're spending more on capital there, but the revenue, we haven't monetized all the displays yet. I would expect to '07 us being able to hike off and more than offset the increase in the transit franchise fees or license fees in the New York subway and London Underground. We had some other renewals, but I think those are the big items that sort of were a drag on the fourth quarter and why I've said I think we can go 2X revenues up at 1% in the U.S. and profits should be up 2%. Those were the drags that pulled us down, but again, I think almost all of them are just transitional and that we will have more inventory to sell even though the franchise fee went up.

[Operator:]

Your final question comes from Benjamin Swinburne - Morgan Stanley.

[Benjamin Swinburne:]

Let me ask you a question on the DVR side. Can you give us an update on your thoughts on Live Plus, what the ad buyers are saying along those lines and any expectation for monetization of recorded viewing in 2007 in your guidance?

[Les Moonves:]

Yes, the advertisers got away with just getting Live last May. That won't happen this year. Number one, there are much more sophisticated ways of measurement through the commercial ratings, more Live Plus Same Day, Live Plus Three. It's now going to become a significant number and we need to get paid for that, we will get paid for that. I think all the networks feel like that is a necessity and that it's going to happen which bodes very well for this upfront period. So we're very excited about it.

[Marty Shea:]

Thank you, everyone for joining us. I will be available for the rest of the day. Have a great day.