Conference Call Transcript
VIA - Q2 2005 Viacom Earnings Conference Call
Event Date/Time: Aug. 04. 2005 / 4:30PM ET
Event Duration: 53 min
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Filed by: Viacom Inc.
Pursuant to Rule 425 under the Securities Act of 1933, as amended
Commission File No.: 001-09553
Subject Company: Viacom Inc.
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Operator
Good day, everyone, and welcome to the Viacom second-quarter earnings release
teleconference. Today's call is being recorded. At this time, I would like to
turn the call over to the Senior Vice President of Investor Relations, Mr. Marty
Shea. Please go ahead, sir.
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Marty Shea - Viacom Inc. - EVP, IR
Good afternoon, everyone. Thank you for taking time to join us for our
conference call today. Joining me for today's discussion will be Sumner
Redstone, our Chairman and CEO; Tom Freston and Les Moonves, our Co-Presidents
and Co-COOs; and Michael Dolan, Executive Vice President and CFO. Sumner will
have some opening remarks and then we will turn the call over to Mike for some
specific financial issues. We will then hear from Tom and Les for a discussion
of strategy and operations, and then we will open the call up to questions.
Let me note that statements on this conference call relating to matters which
are not historical facts are forward-looking statements which involve risks and
uncertainties and that could cause actual results to differ. Risks and
uncertainties are disclosed in Viacom's security filings.
This call contains information relating to the proposed separation of Viacom
into two publicly traded companies. In connection with that proposed
transaction, Viacom intends to file a registration statement on Form S-4 with
the SEC. Investors and security holders are urged to read the registration
statement and related materials that are filed with the SEC when they become
available because they will contain important
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information about the proposed transaction. Investors and security holders will
be able to obtain copies of these documents and other documents containing
information about Viacom without charge at the SEC's website, SEC.gov.
A summary of Viacom's second-quarter 2005 results should have been sent to all
of you. If you did not receive the results, please contact Maureen Kenny at
212-846-7536 and she will get a copy to you.
A webcast of the call, the earnings release, Dateline Viacom and other
information related to this presentation can be found on Viacom's corporate
website under the address of Viacom.com.
Now I will turn the call over to Sumner.
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Sumner Redstone - Viacom Inc. - Chairman of the Board & CEO
Thank you, Marty. Good afternoon, everyone. And I thank you for joining us on
our quarterly earnings call. The second quarter was another solid quarter for
Viacom. We have great momentum as we head into the second half of the year and
transition from the Viacom of today into two new and truly pioneering companies
whose sharp strategic focus and operating strength will usher a new era in the
media industry.
These will be two thriving and dynamic organizations, and based on the response
we've received from the investment community, we know that we have not only
piqued interest, but we have also addressed the frustration that many of us feel
as investor sentiment about the prospects of the media industry has waned.
With that in mind, we will devote a great portion of today's call to discussing
both companies, including their operational strategies and associated capital
structures. But first, I'm going to take you through our quarterly highlights of
the second quarter.
On a consolidated basis, in the second quarter of 2005, Viacom's revenues
increased 10% to $5.9 billion, compared to the same quarter in 2004, led by 14%
gains in Cable Networks, 24% increase in the Entertainment segment, Outdoor
revenues are also up 3% and Radio up 1%, partially offset by a 1% decline in
Television.
Viacom's advertising revenues were up 6% and our affiliate fees grew 8% in the
second quarter. The Company's operating income for the second quarter increased
4% to $1.4 billion on the strength of Cable Networks and Outdoor as well as
higher contributions from Radio. This performance was partially offset by
decreases in Television and Entertainment. Television's decline was primarily
due to lower license fees for syndicated product, which as you know, will vary
with the availability of series.
This overshadowed continued strength at both CBS and UPN. In line with our
guidance, we continue to generate significant per-share growth for shareholders.
Diluted earnings per share from continuing operations in the second quarter of
2005 were up 15% to $0.47 versus $0.41 for the same quarter last year. Our free
cash flow was $889 million, compared with $990 million for the same prior-year
period, as higher earnings were more than offset by higher cash taxes and
increases in capital expenditures.
Our commitment to returning value to shareholders is also evident in our
continuing buyback program. For the second quarter of 2005, we purchased 28
million shares of Class B common stock. Add the additional 9 million shares we
purchased in the period from July 1 to August 2 and we have acquired a total of
$4.7 billion under the $8 billion program authorized last fall. Likewise, Viacom
returned approximately $112 million to shareholders in the form of dividends on
July 1.
Looking ahead to the third quarter and the rest of 2005, we remain on track with
our guidance of mid-single-digit growth in revenue and operating income and
high-single-digit growth in earnings per share.
So, we can move quickly to details on the new Viacom and CBS Corporation, I
won't go into the usual operational highlights of every segment. Those details
are available in the earnings release, and we will of course answer any
segment-specific questions during the Q&A session.
But I would like to leave you with a just a few thoughts. First, you don't have
to be a visionary to see that the media industry has changed dramatically over
the last few years. Consolidation was a necessary and positive trend in the
evolution of these businesses. But we have entered a new era of rapid
technological change and global competition. Bulk will not assure success.
Agility (technical difficulty)
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Operator
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Sir, you are now live into the conference again. Please go ahead.
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Sumner Redstone - Viacom Inc. - Chairman of the Board & CEO
Let me leave you with a few thoughts. First, you do not have to be a visionary
to see that the media industry has changed dramatically over the past few years.
Consolidation was a necessary and positive trend in the evolution of these
businesses. But we have entered a new era of rapid technological change and
global competition. Bulk will not assure success. Agility, innovation will
separate the winners from the losers. In the 21st century, large is no longer in
charge. Leverage will belong to the nimble and the swift, and of course, content
will always remain king.
We are pursuing a fundamental acceleration in performance by creating two more
focused and more nimble companies. The new Viacom and CBS Corporation will have
the right amount of scale and operational strength to support compelling new
strategic visions to take better advantage of inherent strengths, and they will
have the financial wherewithal to get the job done in the rapidly evolving
competitive environment.
There is no doubt that each company will have a strong management team with a
proven record of success. Tom Freston will become CEO of the new Viacom and
Leslie Moonves will become CEO of CBS Corporation. I will continue as Chairman
and controlling stockholder of both companies.
Now, we like our odds of success and we think our shareholders also should like
those odds. With Tom and Les at the helm and the deep bench of talent that
extends through both companies, shareholders will have the benefit from a
best-in-class management team right out of the gate and all the way down the
track. And one player, by the way, on this deep bench that I would like to
formally introduce now is our CFO, Mike Dolan.
Many of you already know Mike, but for those of you who don't, I tell you Mike
is a seasoned executive with a wealth of experience in the media business. His
financial background is impeccable. In the short time he's been with us, we've
all been terrifically impressed with his grasp of our business. Most
importantly, Mike's committed himself and renewed our commitment to running a
tight ship at Viacom as we navigate the spinoff to create two new companies. He
is a great addition to our team and a strong and disciplined financial leader.
With that said, I will now pass it over to Mike.
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Michael Dolan - Viacom Inc. - EVP & CFO
Thank you, Sumner. In the month and a half since our Board approved the spinoff,
we've been diligently working through the intricacies of this transaction. We've
made significant progress, thanks to the hard work of our corporate staff and of
Tom, Les and their respective teams, who have rolled up their sleeves and
fleshed out the structures of the new Viacom and CBS Corporation. There is a lot
to do, but we are well on track to complete the spinoff by the first quarter of
2006.
At this point, we've completed our analysis of the initial capital needs of the
two companies and have worked through the various options available to us. As
you might imagine, with two companies that will throw off a great deal of cash,
we're fortunate to have a wide range of choices. We have reviewed our proposal
with the Board, which concurs with our plan.
Let me add that in anticipation of the spinoff, Viacom has realigned segments to
reflect the new management structure under Tom and Les, effective as of July 1.
Accordingly, Cable Networks will now include the results of MTV Networks and
BET. Showtime will be reported in the Television segment. The Entertainment
segment will be comprised of Paramount Motion Pictures and Famous Music, and
Paramount Parks and Simon & Schuster will represent a new segment for Viacom,
Parks and Publishing.
With that said, let me take you through the basic structure of the plan, which
is also spelled out in our second-quarter results announced this afternoon. The
exact details on the legal and financial structure of the transaction will be
available when we file the prospectus -- the Form S-4 with the Securities and
Exchange Commission. We anticipate this will happen by the end of September and
are working hard to make that date.
Our objectives, as we have said consistently, are to offer our stockholders two
strong industry-leading companies that have the ability to take full advantage
of the opportunities in their sector. At the same time, we want to create
capital structures, dividends and share repurchase policies that mirror the
unique operating profiles of the new Viacom and CBS Corporation.
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As you've heard before, the spinoff company -- the new Viacom -- will be
comprised of our faster-growing businesses and should be an attractive growth
stock. CBS Corporation, comprised of businesses with more moderate growth
profiles, will mainly focus on returning capital to shareholders in the form of
dividends.
Given these objectives, we anticipate that CBS Corporation will initially target
a ratio of adjusted debt to EBITDA in a range of 2.5 to 3.0 times, consistent
with rating agency methodology. And by the way, when I say adjusted debt, I'm
including debt and debt-like obligations such as pensions, OPEBs and asset
securitization. We believe this leverage will translate into a solid
investment-grade rating.
The Company expects to pay a regular dividend to shareholders that is no less
than Viacom's current annual dividend of approximately $450 million, resulting
in an initial payout ratio that is among the highest of our peers in the media
industry.
The capital structure should enable the Company to balance its needs, to invest
in its businesses, deliver superior returns to shareholders and maintain a solid
investment-grade status. That creates an attractive capital structure for CBS,
with strong free cash flow focused primarily on dividends.
Now, let's talk about the new Viacom. Initially, it's expected to have an
adjusted debt to EBITDA ratio of approximately 1.5 to 2.0. Obviously, on day
one, the new Viacom will be significantly underleveraged, but our intention is
to address that issue directly by leveraging the Company to approximately 2.75
times, and again, as in the case of CBS, consistent with a solid
investment-grade rating.
The growth company intends to use its free cash flow and unused debt capacity
against three major areas. One, to grow organically; two, to make acquisitions
in high-growth areas, particularly in the digital and Internet space -- and
before I leave this, I want to add and stress here that we're committed to being
financially disciplined and we're particularly focused on improving return on
invested capital; and thirdly, to make significant share repurchases.
In anticipation of the spinoff, we intend to immediately accelerate our buyback
of stock, taking advantage of the opportunity the market is providing us. We
currently have $3.3 billion remaining under our existing $8.0 billion program.
In addition to putting in place capital structures that complement the profiles
of the two companies and enhance value, we're examining ways to enhance the
generation of free cash flow. There are a couple of immediate opportunities that
we hope to capitalize on. The first is in cash taxes. Viacom is likely to pay
approximately $1.65 billion in cash taxes this year. We are working hard to find
a more efficient tax structure, particularly on the international side of the
business.
Another key area we're focusing on is working capital. We see an opportunity to
lower our average days-sales-outstanding, and we're currently working with our
divisions to collect receivables in a more timely manner. Just to give you a
sense of this, each day we lower DSOs, we generate tens of millions of dollars
in additional free cash flow for the Company.
The same discipline will be ingrained in our operational DNA as well. In fact,
one of our current tasks is to analyze the corporate and divisional structures
that exist throughout the Company in order to eliminate unnecessary costs and
create two nimble, streamlined organizations. We believe the capital structures
we've described are appropriate. They will complement the objectives of each
company and they should provide current and potential stockholders with
attractive investment options more closely aligned with their particular
investment objectives.
And importantly, the financial foundations we put in place will enable us to
directly maximize our opportunities and produce superior results over the long
term. In short, the new Viacom and CBS Corporation will be right-sized
organizations with solid and customized balance sheets that calibrate
operational needs with shareholder returns.
And I would like now to pass it along to Tom.
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Tom Freston - Viacom Inc. - Co-President & Co-COO
Thanks, Mike, and good afternoon, everybody. We've made a lot of progress
finalizing the structure for the new Viacom. With our strong assets, we're
combining the power of a more focused vision with the ability to be a more
nimble and agile Company. We think we are extremely well-positioned to exploit
the emerging technological and consumer trends that we all see evolving
everyday.
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Now that you've heard about the new Viacom's capital structure, I'd like to walk
you through our broad strategic vision and how the second quarter provides
evidence of its tremendous potential. First, the new Viacom will be a
consumer-focused, branded content company. As you know, our cable network
business gives us an incredibly strong foundation from which to build. In the
second quarter of 2005, we continue to fire on all cylinders creatively.
For example, the second quarter was MTV's highest quarter in its history in its
key 12- to 34-year-old demographic, VH1 and CMT's highest-rated second quarters
ever and their 12th and 13th consecutive quarters of growth, respectively. It
was also Nick at Night and TV Land's best second quarter ever in terms of total
viewers. Spike TV saw its highest 18 to 49 prime ratings ever, and midway
through 2005, Comedy Central is having its highest-rated and most-watched year
in its history.
Nickelodeon remained the number one full-day rated cable network for the 10th
year in a row. And lastly, BET had its highest-rated second quarter in its
history. And this ratings performance helped MTVN to once again be a leader in
the domestic ad market, posting strong double-digit growth. And while we have
seen a scatter market that has become increasingly late to book, when the dust
settled, we saw MTVN posting strong growth on a comp quarter basis.
Late and strong scatter has become a trend, and that is continuing in the third
quarter. In addition to our strong ad sale performance, we've done very well on
the affiliate sales side as well. This quarter we completed long-term
distribution deals with both DIRECTV and Charter Communications. These deals
provide for strong, predictable revenue growth; increased carriage for our
existing brands; and the launch of new brands like Logo, our new service for the
gay/lesbian community. In fact, Logo beat its distribution goals and launched at
approximately 13 million U.S. homes and will be in 18 million by September.
Going forward, we clearly have a very strong position to build on. Even with the
consolidation in the MSO community, our distribution is increasingly robust and
cable advertising should continue to gain share. We believe significant pricing
upside remains relative to broadcast CPMs, and with our services at all-time
rating highs, we are uniquely positioned to reap a great share of that growth.
Additionally, we see significant growth potential as we deepen our relationship
with our older audience segments. With additional investment in our adult
brands, such as VH1, BET, Comedy Central and Spike TV, we have a lot of headroom
to grow on those networks.
But as we all know, today's growth is no longer just about the performance of
linear TV networks, and that's why the second key element of the new Viacom is a
multiplatform strategy. Our leading brands now live across television, motion
picture and digital media platforms, enhancing our relevance to our target
audiences, which builds loyalty, deepens the entertainment experience, thus
driving superior financial growth.
We've made significant progress in the second quarter in this area, starting
with the introduction of a series of new, innovative digital broadband
extensions of our cable brands. We launched MTV Overdrive on MTV.com, which
gives viewers immediate access to exclusive short-form programming. We call it a
hybrid network, as it combines both streaming and on-demand content. And our
initial research shows that consumers love it. And even though we have yet to do
any significant promotion, unique visitors and video streams are already well
into seven figures.
We're rolling out these broadband channels for each of our major brands this
year, with a unique feel and look for each of them. Nickelodeon has already
launched Turbo Nick, VH1 launched VSpot and Comedy Central and MTV U will be
launching their offerings shortly. These will be great businesses for us and
allow us to really leverage our video production skills and our considerable
libraries.
Know that in addition to our organic initiatives, we intend to do some selective
acquisitions that grow our businesses in our key demos and strengthen our
position, particularly in the digital space. Our ability to do this will be
enhanced by a potentially higher multiple stock of the new Viacom, giving us a
more valuable currency for these acquisitions.
Between now and then, we will consider smart acquisitions, as we did in the
second quarter with the acquisition of Neopets, one of the world's largest and
fastest-growing youth communities on the Internet. By combining Neopets'
incredible consumer success with our Nickelodeon ad sales and consumer products
capabilities, we see an opportunity to create significant value, and we believe
that there will be other opportunities like it.
In addition, in Q2 we continued to partner where it made sense. For example, MTV
Networks' new interactive games division, MTV Games, saw the creation of two
alliances -- one with Myelin Media to deliver their poker game Stacked on our
many platforms, and the other with Midway Games to incorporate our multiplatform
strategy with three of their upcoming games.
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The wireless platform is also a ripe medium for us. MTV Networks is already
aggressively building wireless services for all of our core brands and
partnering with carriers like Virgin Mobile and Verizon to develop new
programming experiences, including ring tones, text updates and other short-form
content. Our wireless business, from content distribution to integrative
sponsorships to on-air ad spends, is well over the $100 million mark just
domestically, and we are just getting started.
And finally, and importantly, our cross-platform strategy highlights the
incredible potential of having a more integrated Paramount Pictures, MTV
Networks and BET in the new Viacom. And again, Q2 gives us a taste of that
potential. MTV Films and Paramount Pictures coproduced a summer blockbuster, The
Longest Yard, which has already reaped more than $155 million at the domestic
box office. It received considerable promotional support from both MTV and BET.
At the same time, it's critical to note that we do not intend to turn Paramount
Pictures into a studio exclusively focused on these brands or audiences. Our
overall goal is to lead Paramount's resurgence as a powerhouse studio. Under
Brad Grey and his team, the release of the blockbuster Spielberg-Cruise
production of War of the Worlds has worldwide reaped more than $532 million at
the box office to date, and we have many exciting films in the pipeline, like
Babel with Brad Pitt and Mission Impossible 3. Brad and his team are well on
their way to making Paramount Pictures a significant contributor to the new
Viacom.
The third attribute of the new Viacom is our global focus. The potential for
further growth and marketing expansion with our international business is
significant and it's happening. In the second quarter, we once again broadened
our footprint across the globe, including the launch of Nickelodeon in Portugal.
We now run 107 networks worldwide. We have an ever-increasing presence in China
through our 24-hour channel MTV Guangdong, our joint venture with Nickelodeon
and our Shanghai Media Group and our partnership for digital music content with
the world's second-largest mobile player, China Mobile.
In addition to organic and financially disciplined growth, we see a role for
selective acquisitions in the international space, like the deal we made last
year to acquire Viva Media. And once again, the second quarter tells a story.
After purchasing and repositioning Viva last year, we've seen a 30% increase in
Viva's audience share during June 2005 compared to a year ago.
Going forward, know that we're looking to deepen our investment in high-growth
territories like India, Japan and China, and franchise territories like the UK
and Germany, both through organic investment and, where appropriate, selective
acquisitions. But again, it's not just TV and digital. We're also focused on
taking advantage of our film potential globally. That means retaining more
international film rights, which should enhance our upside, as well as beginning
to focus more on local coproductions and capitalizing on our enhanced
distribution capabilities.
When you add it all together, we think our consumer-focused, multiplatform
global story is a compelling one. And as you see by looking at Q2, we intend to
bring it to life through a combination of organic strategies, partnerships and
selective acquisitions, all with one goal -- to drive superior return to
shareholders through financial growth, and as Mike indicated, the use of that
financial capacity to return capital to shareholders through share repurchase.
We couldn't be more excited about the new Viacom and look forward to sharing
more news with you soon. And I'm now going to pass it over to my partner, Les
Moonves.
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Les Moonves - Viacom Inc. - Co-President & Co-COO
Thank you, Tom, very much. I will be the last speaker, and good afternoon to
everybody. I'm excited to talk to you today about the future of the great CBS
Corporation. We have grand plans for this strong, well-positioned successful
group of mass media businesses -- a potent mix of national and major local
market assets with a great content portfolio. I am thrilled to have these
amazing assets for this new company.
CBS plans to continue building and reinvesting in its businesses to further
grow, deliver strong operating results, generate significant free cash flow, and
most importantly, provide shareholders with a consistent and significant return
on their investment.
Let me provide a more strategic, specific blueprint for the CBS Corporation.
First, we will continue to focus and build on the strength of our mass media
businesses. Led by CBS and UPN in the Television segment and our Infinity Radio
and Viacom Outdoor operations, these are strong, well-positioned businesses with
long and successful histories and all positioned to generate free cash.
We plan to ride the momentum of the CBS Network as we come off our
record-breaking 2004-2005 season win in all demos in regularly scheduled
programs for the first time in many, many years. This also includes a fantastic
May sweep. In fact, CBS won the 2005 May sweep --
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households, viewers and adults 25 to 54. We generated 12 of the top 20 programs
in households and 11 of the top 20 in viewers, more than all other networks
combined.
We also boasted eight of the top 20 among 25 to 54s and seven of the top 20
among 18 to 49s, again, more than any other networks.
We also had a stellar upfront showing where we dramatically monetized our number
one status. And most recently, a summer to-date performance that gives us more
shows in the top 20 in households, viewers and adults 25 to 54 than all the
other networks combined. In fact, CBS remains the primetime leader in the summer
period as we continue to be number one in households and viewers with a 23% lead
over NBC and ABC, our closest rivals. We also have an 8% advantage over ABC in
adults 25 to 54, who are our closest rival in that demo, and we are tied for the
lead among adults 18 to 49. Yes, we are strong, and we are young.
We're also continuing the turnaround at UPN, which is probably the single most
highly regarded fall premier in a show called Everybody Hates Chris, produced
and narrated by Chris Rock. We'll also continue to focus on taking market share,
as we've done in the last year with our television stations, increasing margins
and creating duopolies in the top 20 markets.
In television production, the new Paramount Network Television Group had their
best-selling season in many, many years with nine new shows on the fall network
schedules and now working seamlessly with our two broadcast networks. As I
mentioned before, the Chris Rock show is one of them. So, if this show works
for UPN it works for Paramount, and we will have a terrific double-play.
On the syndication front, with King World and Paramount Domestic Syndication
leading the way, we have eight of the top 10 shows in syndication, and we were
very pleased to announce yesterday that on behalf of King World, the very
successful Dr. Phil franchise was re-upped through the 2013-2014 season. And I'm
sure we will all still be around then to tell you about it then.
Additionally, we plan to stay the successful turnaround course in radio,
investing in content and promotion and selectively rebalancing our stations to
more attractive markets. Upgrading, revamping and improving our formats is
already underway, as evidenced by our recent launch of nine JACK-FM stations,
which are doing extremely well, with huge turnarounds in L.A., Seattle and
Dallas.
Another significant shift is to expand into the ever-growing Hispanic markets.
In Washington D.C., where we changed WHFS to El Zol, we doubled our share in the
target demographics. KCBS also had an unprecedented run in the second quarter,
to number one in 25 to 54s in the L.A. market. We are already seeing a return on
our investment in the radio sector and we are excited about the continued high
cash generation in this segment.
As you can see from our second-quarter results, Outdoor has turned the corner
and we intend to build on that momentum by pursuing billboard growth
opportunities in domestic and international markets and driving more margin
expansion through the renegotiation of unprofitable transit contracts. We upped
our second-quarter operating income by 5% over last year.
This is a powerful combination. Leading broadcast networks, coupled with
well-positioned local businesses, including TV stations, Radio and Outdoor in
the largest and most attractive markets. Bringing us to our second strategic
objective. We will create opportunities to expand and extend our broadcast
brands and content across emerging digital platforms, including Internet,
wireless and multicasting. This is key, taking great content to multiple revenue
sites.
As I've said before, I believe in the power of brand building through the
broadcasting medium. It's a great business model unto itself, but also an ideal
platform from which we can launch our quality brands into all sorts of promising
new areas. The recent relaunch of CBSNews.com as a 24-hour multiplatform
broadband news network is really just the tip of the iceberg in the media and
entertainment space.
Larry Kramer, who heads our Digital Media Group, has a mandate to keep CBS on
the cutting edge of trends in this arena and fully exploit our natural strengths
in the digital space in news, sports and entertainment. We are well-positioned
with big national events like Survivor and NCAA March Madness to drive users to
our sites in other platforms. We're also uniquely positioned with a strong local
presence as a result of our TV and radio holdings, which we believe will give us
significant opportunities as broadband proliferates.
And where others see adversity, we see opportunity. For example, despite all the
hand-wringing over the impact of Digital Video Recorders, early research on DVR
usage shows that DVR owners are watching significantly more television and that
a greater proportion of that viewing is to the top network programs such as CSI
and Survivor. So, while others fret, we're looking forward to a world where DVRs
are part of our lives and we're working with advertisers on innovative ways to
reach these avid viewers through product placement and other techniques to
retain and capture new revenue streams.
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Turning to Radio -- Infinity is already on the forefront of technological
advances, as illustrated by their launch of the world's first podcasting radio
station in San Francisco and their premiering of the nation's first continually
programmed commercial HD radio multicast channel in Chicago. Additionally,
Infinity is working with HP to deploy visual radio to U.S. listeners. Digital
radio developed by Nokia and offered by HP enables listeners to tune into local
FM radio via their mobile phones while simultaneously receiving interactive
information and graphics.
Infinity also launched an online audio stream of 12 of its leading news and talk
stations. Infinity's all-new stations are among the most listened to in their
respective markets and reach an estimated 12 million viewers -- listeners,
excuse me -- per week.
CBS Corporation, like the new Viacom, will fully exploit its roots as a premier
content creator. From CBS Productions to Paramount Television to King World
Productions, we are the home of television hits. We intend to proactively seek
out opportunities to maintain our competitive edge by exploiting all available
platforms for that content.
Third, we will deliver superior returns by continuing to grow our free cash flow
and returning a hefty portion to stockholders in the form of cash dividends. As
Mike said, we plan to put in place an initial payout ratio that will place CBS
Corporation ahead of all other companies in the media business in terms of
returning value to shareholders.
We're very comfortable with that, based on our significant free cash flow
generation and our belief that over time there is a significant upside in our
business on the top and bottom line. Today, approximately 70% of our revenue
comes from advertising, and we plan to leverage our leadership positions in
multiple platforms to ensure we make the most of this revenue stream.
We also intend to capitalize on our top position in content creation over the
long term and to seek out additional avenues to further improve our growth
rates. This includes the Internet, cellphones and possibly video-on-demand as we
have started to see the consumer appetite grow for our television product on
this platform.
We're also starting to see certain cable channels syndicate our reality series
like Survivor and Amazing Race. Additionally, as I noted on our last call, now
that we will be independent from our cable partners, we plan to pursue value for
retransmission consents. Our programming has a great deal of value and we think
it is reasonable and appropriate to seek cash subscriptions from MSOs and
satellite services. Additionally, retransmission consent can benefit Showtime
Networks channels and our over-the-air digital channels in subscription
video-on-demand.
In summary, with industry-leading positions in content creation and delivery,
CBS will be extraordinarily well-positioned to maximize existing opportunities
and execute on new areas designed to create value. Our goal is to provide growth
in revenues, profits and free cash flow that can provide shareholders with an
attractive yield. Thank you and now we are all ready to answer your questions.
QUESTION AND ANSWER
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Operator
(Operator Instructions). Jessica Reif Cohen, Merrill Lynch.
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Jessica Reif Cohen - Merrill Lynch - Analyst
I have three quick questions. Mike, I think you said corporate expenses will not
be higher than they are now? I just wanted you to clarify, will they be lower?
Second (multiple speakers)
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Michael Dolan - Viacom Inc. - EVP & CFO
Well, Jessica, we're looking at that right now. We haven't finished the study.
We'll be finished probably by the end of August. But our objective would be that
they would certainly be no higher. And by the way, when we say expenses, it's
important that, you know, that we're looking not just at corporate expenses, but
we're looking at expenses in the divisions as well. So, we're taking a broad
look at what the cost structure of the business is over and above the
revenue-producing items of the Company. So, it's very inclusive.
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Jessica Reif Cohen - Merrill Lynch - Analyst
And if I could just get two more quick questions -- one for Tom, one for Les.
Tom, you focused a little -- a lot on international. I'm just wondering if you
could tell us what percent of MTV's revenue is it now and what would you expect
over the next three to five years? I mean, for a long time, Sumner said it would
equal domestic, but I guess you've grown so much in domestic. So could you just
bring us up to date on that? And Les, could you talk a little bit about the tone
of the advertising business in Q3?
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Tom Freston - Viacom Inc. - Co-President & Co-COO
Okay, our domestic -- our international revenue as a percentage of total volume
at MTV Networks is about 18%, 19%. And one of the reasons that it has been
growing -- one of the problems has been is our domestic business has been
growing very healthy double digits, and it's going to be awhile before I believe
international is equal to domestic. But I do foresee reaching the 25% threshold
in the coming years.
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Les Moonves - Viacom Inc. - Co-President & Co-COO
Jessica, generally advertising revenue -- now obviously for the network in Q3, a
small part of it is from the upfront sales, which we are extremely high on, and
we did very well there, as well as scatter seems to be holding up just fine for
that. Obviously, this station, the comps aren't great because there was a lot of
political a year ago, so it's a little bit down, but the results in Radio, you
know, I am guardedly optimistic, but they are better than we expected. So, I'm
looking forward to Q3.
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Operator
Douglas Shapiro, Banc of America Securities. Mr. Shapiro, your line is open.
Please go ahead.
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Douglas Shapiro - Banc of America Securities - Analyst
Sorry about that. I had two things. One is just regarding the dividend at CBS.
We calculate that's only about a 40% payout ratio. I was just wondering what
you -- how you envision using the other 60% of the free cash flow. The other
thing is that if you look at the combination of 2.5 to 3 times on CBS and 1 3/4
at Viacom, it looks like it gets you something like an additional $5 billion of
liquidity. Just kind of curious how you envision deploying that, or does that
imply that you're going to -- you intend to try to exhaust remaining repurchase
authorization between now and the split? Thanks.
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Michael Dolan - Viacom Inc. - EVP & CFO
You know, Doug, I think what we're doing is looking at the multiples, including
the other liabilities that are debt-like -- not including just debt, but
debt-like liabilities as well -- as I mentioned, the pension liabilities and the
other employee benefits as well. So that has to be taken into account. So I
think the actual additional debt capacity will probably be a bit less than that
$5 billion you mentioned and maybe something on the order of $3 billion or $3.5
billion by the time we settle it down.
What we're looking at, as I said, on the new Viacom side is a very -- in
addition to the business as it is and acquisitions that will be part of the
normal course of business, we're looking at a very significant share repurchase
program that we think will be a user of some of that additional capacity.
And on the CBS side you mentioned about the payout ratio. The payout ratio
initially will be in the low 40s. We think that's attractive compared to anybody
else in the industry. And that creates -- given the future of revenues and
profits in the Company, it creates an opportunity for the new management team
and the Board to review what to do with the excess cash flow from the business.
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Douglas Shapiro - Banc of America Securities - Analyst
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And I'm sorry, Mike, just to clarify -- the $3.5 billion of liquidity, is that
something you intend to use in repurchases between now and the split, or you're
talking about using that at the new Viacom post-split?
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Michael Dolan - Viacom Inc. - EVP & CFO
Well, we're going to increase the share repurchase program beginning now, but it
won't make a significant dent into that additional capacity. So for the most
part, that additional capacity will be used post-split.
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Operator
William Drewry, Credit Suisse First Boston.
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Operator
Mr. Drewery, please, if you would, un-mute yourself and go ahead with your
question. Thank you.
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William Drewry - Credit Suisse First Boston - Analyst
Hi, can you hear me?
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Operator
Yes, sir. Please go ahead.
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William Drewry - Credit Suisse First Boston - Analyst
Okay, thanks. One for Tom and one for Les. Just Les, on the Radio side, just
wondering where you stand on reinvesting in programming and format conversion,
if you feel like that is driving the better revenue results that you're seeing,
and just wondering if you can give us any visibility on when you can get back to
an advertising growth rate in the mid-single digits, perhaps, that can start to
drive some real leverage on the bottom line.
And then for Tom, just wondering, now that you've launched Logo and it looks
like it's successful, any potential future greenfield start-ups on the cable
network side on the near term, and any opportunities to start launching more
broadband-type networks like MTV Overdrive? And can you leverage off of the
content, or can you create new types of networks in the broadband space that you
might not launch into the regular video space? Thanks.
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Les Moonves - Viacom Inc. - Co-President & Co-COO
Bill, this is Les. In terms of the Radio investment, the good news about this
JACK format, if you have heard it or not, we have no DJs, we have no news, we
have no sports and we have no weather. It's more of an iPod on the radio. So our
costs are greatly reduced. When we did that program last year, we invested about
$13 million. That money more than came back to us. Where we invest in some
promotions -- programming costs are significantly down. And you say, when can we
get back to mid-single digits? I don't know, but we're heading in the right
direction, certainly. As I said, the third quarter is looking very good, and I'm
optimistic about Radio and it's going to continue to provide a lot of cash, and
I don't make predictions about when we're going to get there, but we are going
to get there.
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Tom Freston - Viacom Inc. - Co-President & Co-COO
On my side, we do have several networks in the development stage. These networks
will be both linear networks, but would have a very major VOD component. It's
too premature to talk about them precisely now. I'll also say that we have a
focus on launching ethnic networks in the United States. We just launched last
month a network called MTV Desi, which is targeted at second-generation South
Asians. We also have sort of keyed up similar networks for Korean-Americans,
Russian-Americans and Chinese-Americans. We're able to do this on our platform
extremely efficiently. I think it's going to be a great business for us.
The second part of your question was on broadband. We're sort of full-scale,
full-blast there. By the end of this year, all of our major brands are going to
have broadband -- these broadband hybrid networks up there like Overdrive. We've
also got internationally much of the same thing going. We've created an
operation in Japan called Flux and its job is to create original programming for
the wireless world and distributed not only in Japan, but in other countries
throughout the world. So we have a lot of focus and a lot of activity on the
whole digital side of things.
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Operator
Spencer Wang, J.P. Morgan.
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Spencer Wang - J.P. Morgan - Analyst
Thanks and good afternoon. Firstly, on CBS, I know you have set an initial
target leverage ratio of about three times, but it seems like the
characteristics of CBS should be able to support some more leverage. So would
you consider taking that up over time to increase the payout? And then secondly,
on the cable networks, given that you've signed deals recently with DIRECTV and
Charter, can you give us a sense of the affiliate rate growth? Thanks.
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Mike Dolan - Viacom Inc. - EVP & CFO
Let me just jump in on the first question, Spencer, that you asked about the
leverage. And what we -- one of our objectives here is to be conservative, to
really make sure that both companies as they start their new lives have solid
balance sheets, that they have strong ratings and have access to the debt
markets on very beneficial terms going forward. So, we want to be a bit careful
about how they start out life. And so we've set it at a level that we think is
attractive to shareholders, but also gives them a balance sheet that is very,
very solid as they begin life on their own.
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Les Moonves - Viacom Inc. - Co-President & Co-COO
And on the distribution front, we see rate growth basically in the mid- to
high-single-digit range, but if you look at volume dollar growth, which accounts
for rollout of a lot of the new digital networks and so forth, it's generally in
the low-double-digit range.
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Operator
Raymond Katz, Bear Stearns.
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Raymond Katz - Bear, Sterns - Analyst
Thank you. Two questions. First is could you explain how you will take the cap
structure of Viacom from leverage of 1.75 to 2.75? Will that be for tenders,
share repurchases, dividends, acquisitions, etc.? And secondly, Tom, if you can
shed a little light on how the cable upfront went at the MTV Networks?
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Mike Dolan - Viacom Inc. - EVP & CFO
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Yes, Ray, let me just start in terms of the new Viacom. It will be, you know, we
will get that leverage largely initially through bank debt, and the immediate
use of that capacity will be for the share repurchase program and the
acquisitions that I mentioned earlier. So as I said, you can expect that the
share repurchase program for new Viacom will be significant.
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Tom Freston - Viacom Inc. - Co-President & Co-COO
Now we estimate about $250 to $400 million move into the cable marketplace. I
think MTV Networks performed very well. We're up, I'd say, mid-single digit in
terms of CPM and volume growth. That varies by network, of course. You know, a
trend we've seen over the last two years, an increasing reliance on scatter on
the cable side of things, where you will see marketeers waiting longer to spend
money, recognizing that inventories are usually available. We've seen very
strong scatter markets in the first, second and certainly looking that way in
the third quarter. So, we feel we are in a very good position with higher
ratings virtually everywhere and good inventory availability to meet our ad
sales targets for the year and into next year.
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Marty Shea - Viacom Inc. - EVP, IR
We have time for one more question.
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Operator
Anthony Noto, Goldman Sachs.
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Anthony Noto - Goldman Sachs - Analyst
Thank you very much. Now that you've walked through the structure of each
Company and their strategic focus, I was wondering if you could put a little
context behind what you think the growth rate in revenue and operating income
for each company will be, or a general profile. If you look back over the last
five years, the Company's compounded annual growth rate in OI, operating income
has been sub-double digits. And I just wonder if this will allow the component
parts to actually achieve a double-digit growth, and if not, what will the
growth profile be? Thanks.
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Michael Dolan - Viacom Inc. - EVP & CFO
Let me just get started. I welcome Tom and Les to join in. But I think on the
new Viacom side, it's a double-digit business and double-digit on the top line
as we look out, and as far as we look out into the future, it's double-digit on
the earnings line and probably significantly double-digit on the EPS and free
cash flow. On the CBS side, it will be more of a single-digit, mid-single-digit
growth business on the top line, and hopefully higher than that growth on the
earnings side. And free cash flow as well.
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Anthony Noto - Goldman Sachs - Analyst
And then just one follow-up. Given that both businesses will be focused on the
Internet, the Internet is very different than television, given the lack of sort
of adjacencies of programming channels. Will there be some type of organizing
concept or centralized theme in which each of the individual linear program
sites have one location, one destination, and if so, what would that umbrella
sort of organizing concept be? Thanks.
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Les Moonves - Viacom Inc. - Co-President & Co-COO
Anthony, this is Les and I will go first on that. Obviously, we've set up our
new digital group under Larry Kramer, and right now specifically there is
CBSNews.com, which is working hand-in-hand with news; SportsLine, which is
working with sports; and an entertainment site, which works with our
entertainment division. And they are working hand-in-hand where the contents of
one leaps over to the contents on the other.
Just to give you an example, CBS News, which obviously spends millions of
dollars gathering news, 70% of what we gather is not used during that day. Now
it is on CBS.com without any incremental costs in the news-gathering operations.
So, it's another revenue stream for basically the same operational structure.
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On the entertainment site, we have the Survivor game, we have a CSI game. We're
going to be doing a lot of stuff with the NCAA basketball tournament, which once
again, don't cost us anything since it's just extending our content brands and
bringing in new revenue for that. So overall, there really is a parallel right
now with our Internet sites to our network sites.
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Tom Freston - Viacom Inc. - Co-President & Co-COO
And Anthony, on our side, as I explained briefly before, our concept is
multiplatform approach built around our brands. So all of our various websites
are going to be very much attached to what we're doing on television for that
network. For example, Nickelodeon is going to reflect directly to Nick.com,
Neopets, NickJr.com, Nick Turbo and so forth, where they all seek to sort of
reinforce and would flow the audience from one place to another. We know a lot
of the audiences are multitasking and online while they're watching the network,
and the people who use us online the most are our most dedicated and loyal
viewers.
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Marty Shea - Viacom Inc. - EVP, IR
Thank you, everyone. And we will be available for questions right after the
call.
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Operator
This does conclude today's conference. We do thank you for your participation.
You may disconnect at this time.
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