Good day, ladies and gentlemen, and welcome to today's CBS Corporation Second Quarter 2018 Earnings Release Teleconference. Today's call is being recorded. And at this time, I would like to turn the call over to the Executive Vice President of Corporate Finance, Mr. Adam Townsend. Please go ahead.

Good afternoon, everyone, and welcome to our second quarter 2018 earnings call. Joining us for today's remarks are Leslie Moonves, our Chairman and CEO; and Joe Ianniello, our Chief Operating Officer. Following Les and Joe's remarks, we will open the call up to questions. Please note that during today's conference call, results will be discussed on an adjusted basis unless otherwise specified. The second quarter 2018 results are adjusted to exclude restructuring charges and costs related to other corporate matters incurred during the quarter. Reconciliations for non-GAAP financial information related to this call can be found in our earnings release or on our website. Also note that statements on this conference call relating to matters which are not historical facts are forward-looking statements, which involves risks and uncertainties that could cause actual results to differ. Risks and uncertainties are disclosed in CBS Corporation's SEC filings. A webcast of this call and the earnings release related to today's presentation can also be found in the Investor Relations' section of our website at cbscorporation.com. Finally, in light of pending litigation and other matters and on the advice of counsel, the scope of today's call and any questions will be limited to the quarterly results of the company. And with that, I'll turn the call over to Les.

Thank you, Adam. Good afternoon, everyone, and thanks for joining us today. As you can see from our results, CBS turned in another very strong quarter. Revenue was up 6% to $3.5 billion and EPS was up 8% to $1.12, marking our 34th consecutive quarter of EPS growth. Both revenue and EPS were also second quarter records for us, and we remain firmly on track to deliver the kind of full year results we told you we would. Beyond that, we're as confident as ever that the strategy we have in place is setting us up for continued, long-term success. The reason we have such great confidence is because we are constantly successfully staying ahead of the changes taking place across our industry. And as we do, we're taking full advantage of all the ways we could monetize our content across new forms of distribution. In fact, there are few companies as uniquely positioned to profit from the explosion of premium content on new platforms as we are. Over-the-top and direct-to-consumer services are becoming mainstream, and we have our own well-established platforms that are growing right along with consumer demand. Our 2 cornerstone digital distribution services, CBS All Access and Showtime OTT, are surpassing our expectations, and we have some news to share today in that regard. As we have said, our goal was to have 8 million subscribers combined from All Access and Showtime OTT by 2020. I'm pleased to tell you today that we're now on track to hit that number in 2019, a full year ahead of schedule. Based on our growth trajectory and the trends we see ahead, we're announcing a new target. We are now projecting we will have 16 million subscribers from All Access and Showtime OTT by 2022. In other words, we plan…

Thanks, Les, and good afternoon, everyone. As you heard, our investment in our key growth initiatives continues to pay off with record quarterly results. CBS is evolving into a global premium content company with significant direct-to-consumer offerings, and it's all because our company produces the content that audiences have to have and gives it to them in all the ways they want it. As a result of this strategy, we are growing a more diverse mix of stable and predictable revenue than ever before. For the first half of the year, revenue grew 10% with strong increases across all 3 of our key revenue types, affiliate and subscription fees were up [ 16% ], content licensing and distribution was up 10% and advertising was up 5%. So while advertising revenue grew solidly, our nonadvertising revenue is growing even faster and now makes up approximately 60% of our total revenue. At the same time, we've continued to increase our profits. For the first half of the year, EPS was up 18% to $2.47, and we are consistently demonstrating that we can drive EPS growth year in and year out even as we are ramping up our investment in our content and distribution services. Now let me give you some more details about our second quarter results. Revenue for the quarter was up 6% to $3.5 billion. Again, with solid growth from all 3 of our key revenue types. Affiliate and subscription fees were up 17%. Retrans and reverse comp led the way and was up 25% for the quarter. And revenue from skinny bundles and our direct-to-consumer services grew 70%. Content licensing and distribution was up 4%. As you heard, we are creating more content than ever before, both for our own networks and streaming platforms as well as third-party distributors.…

[Operator Instructions] And first, we'll hear from Ben Swinburne with Morgan Stanley.

Les, just on the over-the-top success you guys are talking about, can you give us a sense for where you're seeing the strength, either in terms of channels, CBS and Showtime; or a distribution channel, Amazon, Hulu or direct-to-consumer? Just give us a little bit of flavor about what's driving the upside. And then when you think about programming, historically, you've obviously been limited by your schedule, in an OTT world there is no limit. What's the capacity for CBS and the team that you have to ramp up production meaningfully further than you have so far? I know it's ramped up a lot. But just talk about the ability, the capacity you have in terms of pipeline to sort of take this to a whole new level as you look out over the next couple of years.

Yes, Ben, Amazon has been absolutely amazing in terms of growing our subs. They've been at the top of the list, and we like what they're doing. And we would say we get more with them than any of our other partners, although some of the other ones are more recently in the ballgame. In terms of capacity, we've been faced with actually very good problems because all the Showtime guys come in to see us and David Nevins, all he wants to do is more and more programming, and so do the All Access guys. They're the same way. They're all really hungry to do a lot more. What our capacity is, we haven't determined yet. I think you could see us add 5 shows to each one of them over the next couple of years at least, depending on what the pipeline is. Certainly, they've proven themselves. Showtime's been sort of making a lot of hits. And obviously, All Access is a newer entry into it, but we're really pleased with their hunger to do more. And as we've seen with how the marketplace spikes, more new shows means more subs.

Great. And just a follow-up for Joe. As you look forward to the back half, no Thursday Night Football, can you give us a sense or help us think about the implications for that in terms of margins or how you guys thought about scheduling Thursday Night and competing with Thursday Night Football now on -- obviously on Fox?

Yes, Ben, obviously, margins will go up. Obviously, we won't have the same advertising revenue that Thursday Night Football generates. But I mean, I think, if you look at our Thursday Night lineup, it's strong. We have a comedy block for 2 hours with some -- the greatest shows on television. So we're feeling really good about the real estate and we're using it. And we own most of those franchises. So there will be a long tail to these franchises in years to come.

Next question comes from Jessica Reif with Bank of America Merrill Lynch.

I guess, for Les, it's amazing how much you've diversified CBS' revenue over the last, say, 3 to 5 years. But it seems like advertising will have a big boost from sports gambling, as you mentioned, you're starting to see maybe the beginnings of it. Can you give some color on how you see it rolling out? It sounds like it might be local initially. Will it move nationally? Any comments on the potential size of this market? And then since you brought up Amazon as a seller of Showtime, as they prepare to enter the adverting market and they know who the subs are, do you guys have a point of view yet on where the advertising dollars will come from? Will it come from the digital players? Or do you think it will come from other parts of the advertising ecosystem?

Sports gambling, obviously, we're extremely excited. Yes, I think you're right, it will begin locally, as we've seen, as we mentioned, Philadelphia and then New York, and where it gets legalized in certain places. It's clear. The NBA just announced a deal with MGM which we think is extraordinarily big. And remember when FanDuel and DraftKings were at their height before they were pulled off, they were spending a fortune in advertising. So we think it's a category that has an unbelievable upside. What that is? I don't know. But because of our local marketplace, we're already there. And the good news is, it's also going to help the ratings on all our sports events. So that's going to be a positive for us.

Jessica, would you state your question again for the Amazon, so I make sure I get it.

Right, it's just -- there's been a lot of speculation that Amazon's coming into the ad market and maybe it's just too soon to have any point of view. So knowing that they're a big driver of bundles -- you guys in Showtime, and other companies have mentioned it as well, do you guys -- is there any sense of where their ad dollars, as they go into the market, will come from? Will it come from Facebook, Google? That sort of digital. Or it will come from other parts of the media ecosystem?

No. Look, I think if Amazon coming into the marketplace -- Amazon changes business models, they are tremendous marketers. So you're seeing lots of Facebook ads and other ads on broadcast television. What we bring to the table, Jessica, is obviously reach, right? So when you want to reach 10-plus-million folks on any given hour in primetime during the week, you know where to go. And so that's really the proposition we bring, a stable, loyal audience that we can offer these guys. But again, we welcome all the digital players to spend.

Next from Guggenheim, we have Michael Morris.

A couple of questions. First, as you look at the subscriber growth that you're anticipating now from that period, 2019 to 2022, can you talk a little bit about what inputs it takes to drive the continuation of that growth to get to the 16 million subs? Like should we expect more specific content investment there? Or is there something that you think you're going to leverage that content more and expand the margin? And I guess, secondarily, the question's been out there for a long time, and to date it seems like you've navigated well. But how are you confident that those subscribers aren't actually cannibalizing other parts of your business? What do you think about that? And then I have just one regulatory question.

Yes. Mike, it's Joe. Look, the input -- certainly, we see a 2-pronged approach. We see, obviously, original programming driving the intent to subscribe. And then again, we're going to be smart about how we spread and use the existing programming across our services. So I think you're going to see a ramp up, as Les mentioned, more original series in '19 and '20. And so we're going to be -- you're going to see premium content for that consistent with what we've been doing. As far as the subs count, we haven't seen that, we've seen growth to date. But if that occurs at some point down the future, the price points is why it's important for us. So if somebody kind of breaks the bundle and leaves the big package and wants to just subscribe to All Access, the way we have priced it is we make more money. It's just going to be then the incremental piece as opposed to the entire subscriber. But clearly, we make more money. And so we were very careful in setting the pricing up that if CBS is part of a bigger package, we -- the distributor pays us less for obvious reasons. And so if you come into CBS stand-alone All Access, you pay a premium because you're getting all the content you want, on-demand, with a click of a button, inside and outside the home. And so that's the value proposition we see. We see the consumer feedback we get from all the market data we have, and that's why we made the announcement we did with earnings here today.

And just real quickly on the station side, the UHF discount, is recently restored. Does that impact your coverage? And if so, sort of what's your appetite to get bigger on the station side?

We -- obviously, we have now more headroom to go buy some things and we've always said we like the station business. There are opportunities there to buy some things. We'd like it in the larger markets, markets where we have football games, et cetera, et cetera. So we're always looking, and we like the change in the regulation.

Next question comes from Alexia Quadrani with JPMorgan.

Just 2 questions. The first one, just a follow up on the higher targets for CBS All Access. How much of that new sub growth do you think is going to come from international? And do you have to expand your investment into more local content for some of those markets to drive that growth? And then my second question is just, on the distribution -- the distributor renewals, you mentioned you're about 1/4 the way through. I guess, any color you can give us in terms of how the tone may have changed? It sounds like you've done very well on those negotiations, but has the process or the tone changed at all from the past years?

Alexia, those numbers were purely domestic. International is totally on top of that. As you know, it's just -- it's a fairly new business for us. So with what we've seen the growth in some of the other international companies, we're really excited. So the numbers we gave you, once again, just domestic.

And Alexia, on the distribution renewals, the way I would say it is, I mean, everybody knows what the market rates are already. I think in the early days, and remember, when we started our retrans, it was a 0 -- the industry was 0. There was $0 being generated here. And this year, we'll be over $1.6 billion, well on our way to the $2.5 billion. So I think everybody understands and appreciates what the market value is. So the proof-of-concept was the hardest. And now, each progressive deal gets easier and easier because the marketplace knows everybody else is paying the same rates. And so we've been able to keep that discipline. As Les mentioned, Verizon, Charter and DISH, all that rates consistent with our stated goals, as we said. So we're feeling very good about that marketplace.

Next from Jefferies, we have John Janedis.

Les, you talked about the 24 pilots in development with streaming companies. I assume there's no one-size-fits-all answer, but can you talk about how you're thinking about ownership and rights? Meaning, are you retaining a piece of ownership? And in general, are you retaining global rights given that demand for content that you're seeing, frankly it seems like there could be something like a global shadow syndication pipeline from the streaming production.

Obviously, there are different deals with different services. Netflix, pretty much demands that they keep everything. They keep all the global rights. Obviously, we are more attuned to it as we go forward with our own international offerings is trying to maintain the international rights on a lot of our products. Once again, it really is each -- each field is different. In certain cases, you can get a piece of ownership, in certain places, you can't. It's the same thing with our own channels where we make deals where we own most of the shows but there are other people there. The syndication market, internationally, is becoming a very interesting game to play because we are generating, obviously, billions of dollars in revenue from international syndication. At the same time, we are looking ahead to our own OTT services, where we're going to have to put more and more of our own content and then eventually probably get into local production as well. So it's a brave new world for us, but we're figuring out the puzzle pieces, as we've done before.

Joe, maybe can you talk about the investment in content and digital initiatives in the context of managing profitability and margin? I think you said and suggested that you can invest and remain profitable. So as you look out to that 4-year plan, when do margins start to scale?

Yes. Look, we've got to roll out, John, because we're still investing. So you saw the margin in this quarter basically go back with 1 percentage point. So we are maintaining that margin and we're not -- again, as we said, as we make this incremental investment, we're not going to increase our leverage ratio and subs. So we're going to be very prudent on how to do that. And the P&L will -- the amortization, the P&L, I'm obviously focused on the cash portion of it. But we can fund this incremental growth. But the payback's pretty quick because you see the subs grow rather quickly and that's why we felt confident today that we could take our estimate up, again, a full year from where -- again, where we started with our OTT services, again just a couple of years ago, was 0. And like I said, we're going to be right at approximately $600 million this year. So you can see how fast that -- you can generate hundreds and hundreds of millions of dollars. So we'll manage the margin along the way. But first and foremost, we'll make sure the quality and content remains a very high standard and we don't put too much pressure on the balance sheet.

Next question comes from David Miller with Imperial Capital.

Two questions. One for Les, one for Joe. Les, again, on the issue of sports betting, obviously, just a huge opportunity for you guys in terms of advertising, as you alluded to in your prepared remarks. But my understanding is that it is a state issue, not necessarily a federal issue in terms of the ultimate legality. And since the CBS Network extends into all homes and all states, how do you come up with new programming around sports betting that you can put on the network and not just the stations that happen to be located in states which have legalized gambling? And I realize that's somewhat of a derivative of the question that was already asked. And then, Joe, it looks like on your list of upcoming callable paper, you've got the 2.3% senior unsecureds totaling $600 million, maturing at about a year. Any plans to deal with that before the end of this year or is that more of a 2019 story?

David, as long as sports betting remains local, obviously, it will be better to surround it with sports programming. And we have such a ton of that between the network and our cable network as well as HQ. So that's our plans. To tell you that truth, we're not that far down the line in terms of shoulder programming for sports betting, but we're looking forward to it.

And David, on your refinancing. Look, we're always opportunistic to take advantage of supply and demand and kind of term that out. So that's part of Adam's new expanded responsibility that he will be addressing in the coming months.

Next question is from Laura Martin with Needham & Company.

Okay. So let's go back to this or stay with this issue of OTT. So Joe, for you, I mean, I've been running a long time but I think CBS is building Netflix inside, but it's better because it owns content. My question for you is, how do we capture this value that you're creating because -- are you going to give us more metrics because it sounds like now, you're building value faster given that you've upped the sub number? So are you going to give us more metrics so we can back out the losses, which are now dragging down your valuation? Or can you spin off 10% of it so us stupid analysts can just take the public stock price and get to an adjusted value for CBS? How do we uncover the value? And then, Les, for you, sort of another thing it seems is better than Netflix is you got like 5 properties out there now that all have target demos. So when you think about an enterprise level targeting, is there some way to like look at news versus sports versus All Access versus Showtime on the over-the-top platforms and actually hone out the screen target markets and content that complement one another and actually create more value synergistically because you do have 4 brands in the over-the-top market compared to Netflix, which has a single-muddied brand in the over-the-top market.

Look, Laura, you've sort of hit on our strategy, where most of them are relatively new, HQ is only 6 months old. ET is just coming out in the fall. We're gathering a lot more data from all our services about what our target demos are and our ability, obviously, to do the ones that we're using for advertising to sell them together. And as we said, we're looking to be able to bundle them, all our properties, as one, sell advertising on some and just get subscriptions on the others. So it's really exciting. And I think by what we have done, there are many more of these that we can continue to do.

And Laura, it's Joe. On your -- how do we capture the value. Look, I mean, that's certainly a high-class problem and we're certainly thinking about the best way to do that in our disclosures, the segment reporting, what metrics we can provide in terms of sub count. So I think it's -- certainly, it's starting with sub count. And I think that's why we said, we tried to point you in which -- what direction we're going in. You obviously know the economics because you know the price points of that. And so now, what we're doing is we're just going to be capturing the cost associated with that. So let's continue this -- certainly a conversation in terms of how to do that ahead and certainly, we're going to be mindful and look to ways to unlock the value for investors to get a proper valuation on it. But I think when you step back and you think about CBS and subscribers who are consuming our content, I agree with you that it's very impressive, and we need to do a better job of highlighting that. So we're not an advertising-based company. We are a company that generates content licensing and subscription revenue, first and foremost, and we monetize our content much more broadly. And I think that's a repositioning that we have been underway for quite some time. And now, it's starting to become more and more meaningful.

Our final question will come from Marci Ryvicker with Wells Fargo.

Joe, I have 2 questions for you. So the first, just going back to retransmission consent. When you first gave us the 2020 target, and I think it was initially up $2 billion, you pointed to retrans rates of "under $3 per sub" and then reverse comp rates of "under $2 per sub." We know retrans has gone up. I think you raised that target to $2.5 billion. How should we think about those 2 rates? Is it more like $3.50, $2.50 or something else? And then, secondly, I don't remember if it was you or Les, who talked about political already having doubled from 2014. So do you think that political revenue for all of '18 will double from '14? And can you remind us what you did in 2014, excluding the radio business?

Sure, Marci. On your retrans, the $2.5 billion, again, roughly, it's about $3 per sub and are owned and operated. So again, let's call the United States 90 million homes. We own television stations in 1/3 of it. So let's just call it 30 million, times 3, times 12 months, that gets you just under the $1.1 billion. And then the other 2/3 where we get reverse comp, that's about $2. So 60 million homes, times 12, times 2, is about $1.4-something billion. That's the math of the $2.5 billion. I will tell you, every deal we do with both constituencies are at or above those rates. And as we said, as we -- over the next 2 years, we get to reset about 3/4 of it, about 30% next year in '19 and the remaining in '20. So that's the math. And again, that's why we feel very confident about that. On your second question regarding political, we're not sure if will double for the whole year. What I will tell you is back in 2014, over 50% of the revenue came in the fourth quarter. So it's pretty concentrated. But I will tell you, it's going to be up significantly from 2014. And again, really primarily driven in the month of October. So we see again the TV stations benefiting. And again, the numbers I'm giving you are TV stations only, not -- I certainly excluded radio from all of our results historically. So we're poised to really, again, be beneficiary this back half of the year, particularly in the fourth quarter. And then, again, a whole new advertising category coming into the marketplace in sports betting. So we're feeling pretty good about the local advertising business.

Did you say the 2014 number already?

No, it's -- Marci, it was somewhere between $125 million and $150 million, if I have it off the top of my head, in that range.

Okay. Thank you, Marci. And this concludes today's call. Thank you, everyone, for joining us.

Once again, ladies and gentlemen, that concludes today's conference. Thank you for joining us. You may now disconnect.