Good day, everyone, and welcome to the ViacomCBS Second Quarter 2020 Earnings Conference Call. Today's call is being recorded. At this time, I'd like to turn the call over to Executive Vice President of Investor Relations, Mr. Anthony DiClemente. Please go ahead, sir.

Good morning, everyone. Thank you for taking the time to join us for our second quarter 2020 earnings call. Joining me for today's discussion are Bob Bakish, our President and CEO; and Chris Spade, our CFO. Please note that in addition to our earnings release, we have trending schedules containing supplemental information available on our website. We also have a slide presentation for you to follow along with our remarks. I want to refer you to the second slide in the presentation and remind you that certain statements made on this call are forward-looking statements that involve risks and uncertainties. These risks and uncertainties are discussed in more detail in our filings with the SEC. Today's remarks will focus on adjusted results. Reconciliations for non-GAAP financial information discussed on this call can be found in our earnings release or on our website. With that, I will turn the call over to Bob.

Good morning, everyone, and thank you for joining us today. I'm pleased to report that ViacomCBS' second quarter delivered a continuation of, and in many respects an acceleration of, the 3 key themes we outlined on our Q1 call. First, despite headwinds from COVID-19, ViacomCBS delivered another solid quarter with sequential improvement in key earnings and cash flow metrics and clear operational momentum. Second, we continue to proactively manage through the pandemic, taking significant steps to strengthen our business, preserve the value of our assets, increase our financial flexibility and further reduce costs. And third, we continue to focus on and deliver on value creation, unlocking the power of ViacomCBS and, specifically, our synergistic combination of studios, networks and streaming. In the quarter, we continued to integrate the company and increased our projection for cost savings, both in year and overall. We made significant progress in distribution, and we rapidly accelerated our streaming business. Here, we achieved record users in revenue in free and pay, all while simultaneously making material progress towards the relaunch of our diversified super service. So there's a lot to talk about. Let me start with an overview of the financials and some key operating highlights from the quarter. Financially, ViacomCBS posted the combined company's second consecutive quarter of sequential improvement in operating income, adjusted OIBDA, adjusted diluted earnings per share and adjusted free cash flow, this on both an absolute dollar and rate of change basis. While advertising revenue declined 27% in the quarter, overwhelmingly due to COVID, we continue to expect Q2 to be the bottom in terms of year-over-year decline. To that end, we've seen sequential improvement month-over-month since April, June was strong, and we're encouraged by what we're seeing so far in Q3. We believe this reflects not only economic optimism for…

Thank you, Bob, and good morning, everyone. It has been an amazing journey to be with ViacomCBS, and I do believe the best is yet to come for our united company based upon the strong performance momentum taking hold. As you can see in our results for the second quarter, COVID-19 did have an anticipated negative impact to our top line revenue performance. However, in preparing for this downturn in early March, we quickly pivoted to more disciplined expense management for Q2 and 2020 to ensure we maximize our financial performance in light of the lower top line trends. We delivered solid results in the second quarter of 2020. Adjusted OIBDA, adjusted EPS and adjusted free cash flow all improved sequentially for the second quarter in a row, evidence of ViacomCBS' ability to manage through COVID-19 and demonstrating the power of our united company. Today, I will first take you through our second quarter results in more detail. Then I will update you on the actions we have taken to strengthen our liquidity and financial flexibility. And finally, I will provide you with some insights for the remainder of the year. Let's start with our financial performance in the quarter. As a result of COVID-19 and our ongoing restructuring plans, we have made several adjustments to our results. These adjustments include $121 million in programming charges associated with the abandonment of incomplete programs resulting from COVID-related production shutdown and $134 million in restructuring charges related to our synergy initiatives. In light of the ongoing COVID pandemic, we achieved solid results in Q2 2020. Total company revenue was $6.28 billion, down 12% year-over-year. Adjusted OIBDA was $1.69 billion, up 8% year-over-year, and adjusted EPS was $1.25. Adjusted free cash flow was a strong $892 million in the quarter, which excludes $178…

[Operator Instructions]. Our first question comes from the line of Alexia Quadrani with JPMorgan.

My first question -- or my main question is on the advertising. If you could give us a bit more detail about how it progressed through the second quarter with respect to your platforms, really looking from your linear cable networks all the way to AVOD, how it differed, I guess, throughout the second quarter on those platforms. But I think you said June was better, but I'm curious if you have any early thoughts on July, if that improvement continued. And then my follow-up is just on Paramount, just really regarding the shortening window, theatrical windows, and the agreement that we saw between AMC and Universal. Are you looking to reach sort of similar agreements for Paramount?

Sure. Alexia, nice to hear your voice. So on advertising, let me reiterate that we believe Q2 is the bottom, and we expect to see continued sequential improvement in the rate of change in Q3 and again in Q4. With that, let me say a couple things to add some additional color. First, our total company advertising, obviously down in the quarter, and that was, as you heard, overwhelmingly and not surprisingly due to COVID. Beyond COVID, there is some lack of comparability to prior year, and that specifically is because we had the NCAA championship and Final Four game in 2019, but Turner would have had that this year. So that's worth about 400 basis points if you're doing math. Second, and really more to your question, the quarter turned out better than we thought early. And that was because we did see sequential improvement in each month of the quarter and simultaneously because scatter pricing held strong, 25%, really greater than that versus the upfront. The softness we did see is very concentrated in terms of categories. But at the same time, we saw some early signs of strength from some others, notably pharma, insurance and financial. And to the other specific question you asked, segments have been impacted differently. So broadcast in the mix is relatively strong. Cable's seen more relative softness. But in the cable side, we did take the opportunity to produce ad loads to improve the experience. Local has also been tough, but things are getting better. In particular, auto's coming back in Q3 as factories have reopened, and we continue to look forward to political being a significant driver in the second half. Digital also was impacted, but high-quality digital remains super strong. In fact, Pluto TV quickly returned to pre-pandemic growth rates…

Our next question comes from the line of Michael Morris with Guggenheim Securities.

I have one on streaming and then one on margins and costs. First, on streaming, streaming TV, connected TV, advertising clearly have strong secular growth. You're investing into it with All Access and Pluto. But it's also a pretty complicated and fragmented market for advertisers. So Bob, I'd love to hear your thoughts on how you see that developing, how products like EyeQ gives CBS an advantage -- ViacomCBS an advantage and why advertisers are spending with you rather than, say, a platform like an Amazon Fire or Roku TV. And then second, just on costs. There's a number of puts and takes as we look forward with the synergies and timing. But as you go through this transition and invest in this transition to streaming, can you talk about how we should think about margins for the business maybe into the sort of like launch period, and then over the longer term, if this is margin-expanding initiative?

Yes. Sure, Michael. Thanks. So look, I couldn't be happier that we acquired Pluto TV last year. When we announced that acquisition, the market was confused. Most people didn't know what it was. Since then, AVOD, or now what people call FAST, has been accepted as a legitimate and important part of the streaming ecosystem, and others have followed us. But we haven't let up, not even close, like we leaned into its content, into enhancing the platform, into expanding distribution, into building the brand and into monetizing its ad inventory and most recently, global expansion. And as a result, we've grown Pluto TV dramatically and arguably extended our leadership position. The reality is no other U.S. FAST asset can touch the combination of Pluto's 100,000-plus hours of high-quality content, which we built through a combination of assets we own and these innovative revenue share-based models that we use with third parties. It's on over 30 devices and platforms. You name it. If it's significant, Pluto's there. We're rapidly expanding the distribution. We talked about these 80 million devices that are coming through new partnerships with Verizon, TiVo and LG not only adds to the expansive base we're already building through Amazon, Roku, Comcast, Viveo and more. And many of those have preferred placement and/or built-in carriage. And by the way, we got more deals coming in the pipeline, which is going to take these numbers up higher. Importantly, we're -- to the ad question, we're rapidly monetizing it. Pluto TV benefits both from programmatic flow and from direct ViacomCBS ad relationships. As a result, that business has grown dramatically. And as I said, it's bounced back to pre-COVID growth levels already. And now we're building an integrated ecosystem where Pluto's platform will feed our pay offerings. Now to your…

It's Chris. The other thing I'll add about the cost management is we're 2 quarters into the combined ViacomCBS, which is a powerhouse to manage all the costs across the company. So we're highly focused on strategically managing them all, and we will continue to prioritize investment in streaming and studio production. And given that we're now combined and we have a lot more experience understanding what's under every rock of cost, cost savings will continue and we will find more.

Our next question comes from the line of Ben Swinburne with Morgan Stanley.

Bob and Chris, I know it's too early to sort of hone in on 2021 free cash flow. But I'm wondering if you could just help us think about cash content spend this year. And any help in thinking about what it's going to mean to sort of resume production as the COVID restrictions lift, hopefully, and things return back to normal heading into next year? Just anything you can do to help us think about cash content spend this year and into next year. And then I wanted to ask you, as you think about the super service and evolving All Access, sports is obviously something that is a huge driver of consumption and pricing power. I think you guys have a unique opportunity already in how you use sports and All Access, but that's something you're certainly leaning into. Can you just talk about your sports strategy on All Access and how you think about leveraging sports content on streaming versus linear and sort of the trade-offs of that strategic decision?

Yes. Sure. So you're right, it's too early to provide 2021 guidance, and we're not going to do that. But I will say with respect to your question on return to production, which obviously is critical, particularly when you get to a cash basis, you saw our very strong cash flow delivery in Q2, close to $900 million on an adjusted basis. Certainly, that number benefited from working capital implications of our sort of production, I'd say, radical decline. It's not totally shut down but certainly radically declined. And you should expect that as we move forward in Q3 but more likely Q4 at scale, that, that working cap benefit begins to go the other way a bit. And just to give you a little more color on the return to production because I think it's a topic everyone is interested in, we are currently executing a multifaceted return to production. Obviously, we're focused on health and safety of all involved in front of and behind the screen. And we have a real commitment to evolving approaches, locations, even story lines, to deliver that fresh product to customer and, ultimately, the consumer needs on a timely basis. And as we do that, by the way, we are finding some ways that we can operate less expensively. We've learned a lot through this COVID phase from the productions that are on. And we're rolling that through -- whether it's entertainment or sports, and we're rolling that through. We are dealing with all this through a centrally managed process so we can ensure application of best practices, mitigate risk, and we have the whole portfolio going through it. That has led us to having a whole bunch of fresh content on or coming to air shortly, unscripted, like Big Brother, which is…

I would also add to that, that conceptually, we do still believe for now and the long term, the key drivers of free cash flow improvement are cost optimization, working capital efficiency and our continued focus on further revenue monetization.

Our next question comes from the line of Brett Feldman with Goldman Sachs.

So during your prepared remarks, you talked about plans to release originals on the new All Access, enhanced All Access product, spanning all of your key brands. I was hoping you could just elaborate, give us a little more insight into what that output is going to look like over maybe the next 12 or 24 months, particularly as your ability to resume full production comes back. And then just on the same content side of things, when we look at your TV library and All Access, it stacks up incredibly well versus other streaming products. You tend to be a little more focused with your film portfolio. So I was hoping you can maybe just discuss the importance of movies to the enhanced product and whether there's an opportunity to be a little more differentiated there, particularly in light of the fact that you own a movie studio.

Yes. Thanks, Brett. Let me take that from the angle of the overall -- where we're going with the overall super service, and I'll deal with each of your questions within that. So our guiding objective for a super service is to have a broad differentiated product at a compelling price point. And to get a real sense of that, take a good look at the preview launch we did last week where we materially broadened CBS All Access. The entertainment offering is now far wider. We added 3,500 episodes from 70 series from our flagship brands. It unquestionably widens the demographic appeal because we now have a real offering for kids, young adults, millennials and more. And look at the sports offering, now including UEFA. In fact, if you look at the collection of football, basketball, golf, soccer and more on the platform, we really are the first that have taken sports over the top in a meaningful way. And we believe there's real appeal here as part of a broad streaming service. We obviously have events like the GRAMMYs, the Tony's, the Super Bowl. There's news, which is something people need these days, or maybe not, I don't know. And then there are originals, to your other part of your question. Today, All Access has a baseline of compelling originals, shows like Star Trek: Picard, Discovery and now Lower Decks, which is animated, The Good Fight, Twilight Zone and The Stand. Starting in '21, that slate will greatly expand to include all flagship brands. And as an indicator, really a taste, we announced last week that Kamp Koral, which is a SpongeBob spin-off, will join the super service as the first Nickelodeon original. And that will be on the back of the exclusive availability of the latest SpongeBob film, Sponge on the Run. So that's the kind of way we're using franchises. We have an original plan that goes through '22 quarterly. And I'm super excited about it, and you're going to hear more about that at another time. But that gives you a sense. The originals are going to be important, and they're going to be defining as well as the sports.

Our next question comes from the line of Rich Greenfield with LightShed Partners.

When you -- it was reported the other day that you and the team from CBS Sports were up in New England meeting with the NFL to talk about the next round of media rights. I think sort of everyone has talked about, not just on your call but on multiple calls, sort of the importance of the NFL specifically. And if the AAV of the contract moves from sort of around 1 billion upwards towards 2 billion a year, your subscribers -- and this is not a Viacom issue, this is an industry issue, subscribers will have dropped from mid-90s into somewhere probably in the 60s by the time you get to the next contract. How do you think about the return on investment of the NFL? Like how does anyone essentially stay in the NFL business as subs are falling with the cost of the content going up so much? Like just how do you frame it? Or how do you think about it? Maybe how does CBS All Access or the new super service fit into the equation?

Yes. Rich, sure. So I'm not going to get into commenting specifically on press speculation, but what I will say is we value the NFL and the partnership. We're long-standing partners, and that relationship has been a mutually beneficial one. And as ViacomCBS, we're even better positioned to drive value for the league and for ourselves. And to that end, it's important that you understand, as ViacomCBS, we have many monetization vectors for the NFL rights. Obviously, affiliate revenue, advertising, to your point, streaming, and that's both subscription streaming and ad-supported streaming, and potentially international revenue. So there's a lot of ways we can go here. And I am very confident that the partnership will continue to deliver value for both sides as it has for decades.

Our final question this morning comes from the line of Michael Nathanson with MoffettNathanson.

I'll keep it easy, Bob. I want to ask you about international, the pay services coming in 2021. Can you talk a little bit about how you're thinking about maybe the pricing points, whether or not it will be an AVOD, SVOD hybrid like All Access? And will there be any like foregoing content licensing to launch this business in these markets? So just give us -- I know it's early, but any kind of piece you can about how you're thinking about the structure of these new services.

Yes. Sure, Michael. So streaming is clearly a global opportunity. And for ViacomCBS, we believe, obviously, as part of that, there's substantial international opportunity. We believe that's true both in free and pay. You look at our global operating footprint, which includes our linear reach, the content we own, including local content, on-the-ground resources and relationships, we really see that as a powerful go-to-market advantage and feel we're well positioned to succeed. You look at where we are today on the free side, we're already in Europe and Latin America, Spanish-speaking Latin America with Pluto. We've seen very strong growth to date, particularly in Latin America, which we've only been there a couple of months. We do have almost 7 million international MAUs, 33 million global. And we got -- we're just getting going there. We got plans to enhance our product, expanding our channel lineup. We're adding a bunch of distribution partners. We will enter Brazil and Spain later this year, France and Italy in early '21. So there's real growth ahead. And obviously, we're thinking about other things from Pluto as well. On the pay side, we're targeting early '21 for the launch of our international streaming service. The exact product details and pricing, which we haven't announced, will vary by individual markets. But broadly speaking, the new service will feature exclusive first-run premier. So we're going to get those from the slate we're using with CBS All Access in the U.S., from Showtime and from Viacom International Studios. And alongside that, we'll use Paramount movies, box sets from CBS and Viacom media networks. If you want to just compare it at a high level to what we're doing in the U.S., it will be a much more entertainment-focused product. It doesn't really have a sports -- a…

Thanks, everyone, for joining us. Have a great day.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.