洛茲集團 (L) 2001 Q1 法說會逐字稿

LOEWS CORPORATION'S FIRST QUARTER EARNINGS CONFERENCE CALL

Good morning. My name is Janice and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Loews Corporation first quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press the number '1' on your telephone keypad and questions will be taken in the order they are received. If you would like to withdraw your question, press the '#' key. Thank-you. Mr. Kahn, you may begin the conference.

Thank-you Janice and good morning everybody. Welcome to Loews Corporation's first quarter 2001 earnings conference call. My name is Joshua Kahn and I am the Manager of Investor Relations for Loews. By now, you should have received a copy of our earnings release. If not, you may get a copy from our website at www.loews.com. Lorillard also issued a press release this morning announcing unit volumes for Q1 2001. Please contact Steve Watson of Lorillard at 336-335-7713 for a copy if you don't yet have one. The Chief Executive Officer of Loews, James Tisch, and the Chief Financial Officer of Loews, Peter Keegan, will lead today's discussion. Before we begin, I would like to make a few brief disclosures concerning forward-looking statements. The statements will be made during this conference call using expressions such as intend, anticipate, expect, believe, or similar terms, and will include explanations of the company's plans and objectives as well as estimates of future performance and similar statements. These statements will be forward looking in nature. The actual results achieved by the company may differ materially from the projections made in these forward-looking statements. The information describing factors that could cause the actual results to differ materially from those in the forward-looking statements are described in the company's various filings including the current registration statement and current periodic financial reports filed by the company with the SEC. Those filings are available from the commission over the Internet or on hard copy, and in some cases, from the company itself. The forward-looking statements speak only as for the time they are made and the company expressly disclaims any obligation to update or revise any forward-looking statements made during this call. This forward-looking statements disclaimer is only a brief summary of the company's statutory forward-looking statements disclaimer. You are urged to read those disclaimers, which are included in the company's 10-K and 10-Q filings with the SEC in full. As the operator mentioned, there will be a time for questions after Jim and Peter have discussed the results. For those of you who have tuned into our website, please call 888-307-7192 during the Q&A session if you would like to ask a question. Now, I would like to turn over the call to our Chief Executive Officer, Mr. James Tisch.

Good morning everybody. I'd like to talk about, first, our results for the quarter [_______________] and then I'm going to turn this over to Pete Keegan who is going to go into a bit more depth concerning the financial results. In general, we were very pleased with results for Loews for the first quarter of 2001. Our earnings per share increased a 166% on the strength of improved operating performance by our subsidiaries, and also, significantly larger investment gains at both CNA and at Loews. Net operating income was up by over 10% to $1.51 per share, up from $1.37 per share. Most importantly, from my perspective though, book value per share increased significantly rising to $59.82 per share, up from $56.74 per share at the end of the year 2000, and up about 20% from the same time in the first quarter of 2000 when the book value per share was $49.78. Going through each of our individual businesses, I would like to start with Lorillard, which continued to perform well despite a weakening economy and a softer market for consumer goods. Newport in unit volume, which represents over 80% of our volume, was up about 5% against a year-over-year period at 7.9 billion versus 7.5 billion units. We also had a brand extension in Newport, introducing in this quarter, Newport Medium. We continued to seed a market share in the discount segment because our focus remained on profitability, not on market share. With respect to CNA, many of you on the line were just previously connected to the CNA conference call; so, I am not going to review CNA in depth. The highlights though are, the net income and book value per share increased appreciably in the first quarter of 2001 versus first quarter of 2000. With respect to book value per share on a per CNA share basis, book value increased to $55.21 versus $52.64 at yearend 2000, and $49.21 at the end of the first quarter of 2000. Net operating income on a comparable basis increased by 24% quarter-over-quarter, and CNA's core property, casualty business, made progress in its turnaround. All the individual life business continued to deliver strong results and the group life business showed strong profit improvement as well. In Diamond Offshore, they fared very well in the first quarter of 2001. They previously reported their earnings. Their revenues grew by 22% and their net income grew by almost 25% over the first quarter of 2000. Generally, all the markets in which Diamond operates throughout the world showed improvement, but I'd like to highlight, if I could, what's going on in the intermediate water-depth market where our second-generation semisubmersibles operate. That market, until the beginning of 2001, had really lagged the recovery in the jackup markets and the ultra-deepwater markets. But in the first quarter of this year, we have seen a significant improvement in the second-generation market that has benefited Diamond Offshore. Currently, today, we're seeing rates on the order of $60,000 a day in the Gulf of Mexico for a standard 2000-foot capable semisubmersible. That's up from about $35,000 a day that we saw just 6 months ago, and not only has the day rate improved, but also the utilization has improved such that the rigs are being used full time rather than being stocked for significant periods of time as happened previously in 2000. Generally, Diamond is seeing, as I mentioned, good improvement in all rig classes in all areas of the world. Two reasons I would like to highlight are the Ocean Confidence, which went on its inaugural 5-year contract with BP in the Gulf of Mexico on January 5th, 2001. That rig is performing very, very well with very few shakedown problems. So, we are very pleased with the operation of that rig and I have high hopes for its future. Additionally, the Ocean Baroness is in the shipyard and it is still on track for delivery in the first quarter of 2002, so, a little less than a year from now. That's a rig that we are upgrading for about a $180 million that will be capable of operating in water depths up to 6000 feet. It's a fifth-generation rig that we are doing on speculation, and again, that's something we have high hopes for. I would also like to mention the refinancing that Diamond Offshore did in April of this year. In April, Diamond called and redeemed its 3 in 3/4% Convertible Subordinated Notes that we'll do in 2007. This was basically the first time that those notes were callable. We called them and we paid out the $400 million in cash, and a day or two later, we issued $460 million of 1% Convertible Senior Debentures that are due in 2031. We view this as a very favorable transaction because we lowered our interest expense from 3 in 3/4% down to 1.5%, and we also raised the conversion price from $40.5 a share to about $49 a share. At Loews Hotels, they had a difficult quarter in part, as a result of the softer New York market, and also resulting from higher utility cost especially in other California Hotel. In January, we opened The Hard Rock Hotel at Universal Orlando, and the third project at The Park, The Royal Pacific at Universal Orlando is scheduled to open in 2002. I should say that we are very pleased with the reception that we've had for The Hard Rock Hotel. It's really exceeding our projections with its initial opening and doing very well. At Bulova, they suffered from weakness in consumer spending in the first quarter of 01. The net sales fell by $3.2 million compared to the first quarter of 2000, and earnings dropped about 10%. Overall, we're seeing good price increases in CNA and in Diamond Offshore, and Lorillard, likewise, is performing very well. The hotels in Bulova are both affected by the apparent slowdown in our national economy. But overall, we are very satisfied with the year-to-date performance of Loews and its subsidiaries. Now, to get into a bit more detail on our earnings. I would like to turn this over to Pete Keegan, our Chief Financial Officer.

Thanks Jim. Loews reported net income of $2.40 a share in the first quarter of 2001 compared to ¢90 a share in the first quarter of 2000. This resulted from continuing improvement in operating income and a large increase in investment gains. Net operating income improved from $278.1 million in the first quarter of 2000 to $296.9 million in the first quarter of 2001. CNA, Lorillard, and Diamond Offshore, all contributed to the net operating income improvement. CNA contributed a $106.2 million to Loews net operating profit, representing an approximate 1% increase over 2000. As Jim mentioned, its underlying operating performance increased 24% after adjusting for first quarter 2000 seeding commission from all state related to the sale of CNA personal lines to all state in 1999. This seeding commission did not recur in the first quarter of 2001. Lorillard had net profits of a $164.1 million in the first quarter of 2001, compared to the net profits of a $155.5 million in 2000. Lorillard's profit improvement was again driven by the continued shift to product mix from discount to full price brands. Newport's share grew from 7.35% to 8.01% on a 5.8% volume increase. Lorillard's total share of market declined slightly from 9.59% to 9.57% due entirely to the anticipated decline in Lorillard's volume of discount price brands. Full price share rose from 8.2% to 8.7% on a 2.4% volume increase, while discount brand share dropped from 1.4% to 2.8% on a 40% volume decline. Diamond Offshore's contribution to first quarter net profits improved to $14.7 million in 2001, from $13.8 million in 2000. Day rates improved in all 3 rig categories, [high spec], semisubmersibles, jackups, and other assemblies. Loews Hotels' net profit declined from $9.2 million in the first quarter of 2000, to $5.5 million in the first quarter of 2001. Average rates for comparable hotels increased 3% while occupancy declined by 2.2 percentage points to just under 78%. Bulova profits declined slightly from $2.7 million to $2.4 million. Investment income and other improved from a loss of $8.7 million in 2000, to a profit of $3.7 million in 2001, largely due to increased income from Loews investment in Hellespont shipping, which increased from 0 in 2000, to $7.3 million in 2001. Investment gains in the first quarter of 2001 were $228.7 million or $1.16 a share versus a loss of $94.5 million or ¢47 a share in 2000. This improvement resulted from the absence of losses on SMP and other indexed put options experienced in the first quarter of 2000 in the Loews portfolio as well as significant realized gains in CNA's portfolio. CNA's gains related primarily to the sale of fixed maturity securities and the sale of a building on Maiden Lane in New York City. Loews and its subsidiaries adopted FAS 133 in the first quarter of 2001. This adoption resulted in a charged income of $53.3 million or ¢27 a share. This standard affects the accounting for derivative and hedge instruments and the impact was solely in the CNA portfolio. Loews' effective consolidated tax rate was 35.58% in the first quarter of 2001 versus an effective rate of 33.75 in the first quarter of 2000. The change in the tax rate is principally due to lowered income from tax-preferred securities in 2001. Also, in April, Loews' Majestic shipping company subsidiary closed on its financing related to the 4 ULCC ships that Majestic is building, that was a $200 million facility in a syndicate led by Chase, Citibank, and Quartus. And now, Josh.

Operator, I believe we're ready to begin the Q&A session.

At this time, I would like to remind everyone, if you wish to ask a question, please press the number '1' on your telephone keypad. Your first question comes from [_______________] from [_______________] Capital.

Hi, good quarter. Just some financial questions for you. What was the net cash I guess less the debt at the holding company, and if you could also give the cash flow from operations and capex company wide and then I had two other small questions.

The gross cash was $3.8 billion and long-term debt is $2.45 billion.

Okay.

And you wanted depreciation?

Capex and cash flow from operations.

Capex in the first quarter of 2001 was 102.3 million, and cash flow, I can't give you right now.

Okay, and then, do you have for the Hotel Division and for Lorillard what their interest income was in their little segment reports? In other words, what was their revenue or operating income without interest income if I wanted to back that out?

I can give you interest income Robert.

Sure, that's fine.

Interest income at Lorillard was $28.6 million, and in hotels, it was $1 million.

Okay, and then last question is on Marlboro Menthols. If you could just comment on your continued vigilance, you know, kind of how has the market changed with that introduction and have you seen Newport being affected in your distribution by the heavy promotion of that brand?

I think what I would like to do is introduce Martin Orlowsky who is the Chief Executive Officer of Lorillard and have him answer that question.

Thank-you Jim.

Fine. No, we have not seen any radical change in the makeup of the menthol segment. It continues to reflect about 25% of the total market, which is consistent with historical position. In terms of Marlboro Menthol products, they continue to demonstrate some share growth although we believe their share growth is moderated somewhat. Last year, the Menthol brands from Marlboro increased their share with the introduction of Milds, and a year or so before that, the introduction of Ultralights Menthol. So, other than line extensions, there is some growth obviously coming from those brands. It's certainly not affecting Newport as, I believe, Jim Tisch mentioned. Newport's share had healthy share growth in the first quarter, a good part of that due to the introduction of Newport Medium.

And is your promotion per pack, has it gone down a little bit? What's your promotion per pack?

We are currently competitive on our pack promotion. The general discount is roughly ¢50 a pack for the major competitive brands, and we're consistent with that.

Thank-you very much.

The next question comes from Bob Glasspiegel of Langen McAlenney.

I was wondering, Jim, if you could address what you're doing, investment was as apparent, you admit buying back stock for a couple of quarters, it sounds like you've sold some bonds in CNA, which suggest maybe that you have taken a conservative posture there. Where should we look for new cash flow to be directed?

Sorry, I don't know if you are talking specifically about the parent or it's CNA. Let me just talk about CNA for a moment. At CNA, we tend to move from sector to sector whichever sector appears to be the cheapest to us. So, for example, we have moved out of municipal bonds at the end of last year and in the first quarter, and we moved significantly into corporate bonds because the spread had widened so much. Additionally, we've made some investments in bank loans for higher yielding credits, and we've also moved out of some of the mortgage back and agency paper. Right now, we are starting to lengthen our portfolio somewhat in response to the increase in interest rates that we've seen in the 10 year sector of the market. With respect to Loews, our investments have been pretty quiet and we've just been quietly trading the markets but there has been no major investment themes in what we're doing.

Okay, this is a followup to Pete's overview of the private sector which was hopefully year-over-year, but the 3.7 million was however down sequentially from 8.5 in the fourth quarter, and I thought, given that shipping was on a one quarter lag, we're going to look for more help sequentially in the first quarter or the fourth quarter. Any specific idea that contributes to the sequential decline?

I don't have that comparison in front of me Rob. I will take a look at it and get back to you.

Okay, I'd appreciate it.

The next question comes Jason [_______________] of Farallon Capital.

Hi guys! I had two questions. One was, I was hoping you might be able to give a little commentary on your outlook on the shipping side of the business. I know you've been pretty bullish on it lately, and the second thing is, have you given any thought to buying in some more CNA? I know you've done it in the past, in small amounts, with given the current discount to book?

Let me take the shipping first. As many of you may know, the shipping market has been very strong really for the past 6 to 9 months. We have an interest in 6 supertankers that were built in the 70s and those ships have been operating, as what we consider to be very, very favorable rates, for the past 3 quarters. Right now those ships are averaging, I would say, day rates of about $40,000 a day. That means that we have operating expenses of $10,000 or $11,000 a day, but they're generating free cash flow on the order of about $30,000 a day. Having said that, we are seeing, right now, some weakness in the charter market. Day rates for those ships would probably be down 15% to 20% I would say, but unfortunately, those ships are on charter out through June and some for even longer than that. So, right now, we're not so worried about it. Additionally, we have, as you know, new build ships that are going to start to be delivered in the third or fourth quarter of this year. We have ordered four 300,000-ton tankers, and we've also ordered four 440,000-ton tankers. That will be delivered throughout the next year and a half or so, and its our belief and hope that the market for those ships will do very well. Number one, charters are willing to pay a premium for new double-hauled ships, and additionally, we think that if the market goes soft and there will be significant amount of scraping, that will occur to the older fleet. In the mean time, we have an agreement to sell one of our ships for about $15 million that would be used in FPSO project in Brazil. With respect to buying in more CNA, I prefer not to comment on that. Simply because it's a general rule, we don't comment on our share repurchases, and I consider repurchases of CNA could be to fall under that rule book.

Okay.

At this time, there are no further questions. I would like to give everyone an additional moment to ask a question. Please press the number '1' on you telephone keypad.

Operator, I think, we're ready to wrap up the call.

Okay. Sir, you do have a question from Marc Cohen of Goldman Sachs.

Okay.

Yeah, well, I thought I'd just try and tie up some loose ends on the tobacco side as long as Marty is on the phone. First of all, I wonder if you can give us the last year's interest expense number or interest income number for Lorillard. Second of all, I wonder if you can talk a little bit about what you've done in this recent round of pricing, and how you, sort of, read what competitors have done I guess Brown & Williamson really didn't follow at the bottom end of the market? And related to that, how you see this growth of the nonparticipating manufacturers and Newport's premium really relative to those brands, and I mean, I suppose you're pretty confident about it because you're emphasizing profitability here rather than pushing maverick, but I just like some more color on it.

I'd rather let Pete go first with the interest and then Marty can answer the rest of the question.

Thanks Jim.

Yeah, interest income in Lorillard in the first quarter of 2000 was 17.4 million.

Marty?

Okay, I'll try to remember all your questions. Help me if I miss a few. In terms of the current outlook on I believe you asked about the current pricing situation out there and what's going on?

Right.

Most of the manufacturers, as we're in the midst of a buy down on your major brands and they, as well as we at Lorillard, have maintained what we call retail price protection so that, for the duration of the buy down promotion period, we are protecting, in effect, the retailer by adding an additional discount on top of what was a ¢50 per pack, we added another ¢14 to maintain the pricing. That is really done essentially to allow us to keep our pricing and our point of sale materials consistent with what they were. It would be awfully difficult to change all of it to reflect a higher price and that's become a fairly standard reaction over the last couple of price increases. So, we're slightly higher on the discount. We're at the old price basically plus the discount. As far as the minor companies, the growth there we have see has moderated although they are still growing in the aggregate. Individual companies or of the minor manufacturers are reflecting various patterns, some are declining slightly, some are growing. But overall, they are growing as a total factor in the marketplace, but that growth is not as steep as it was in the past. We saw slowing of that growth quarter-to-quarter for the past year, but we continue to believe that will grow obviously as price increases occur from the major companies. It will continue to represent an opportunity for some of the minors, but it's in erratic pattern of growth, if you will, among the 70 plus companies that are now selling cigarettes at what we call a super discounted rates. I think I forgot the rest of question.

Well, let me follow up with [_______________]. About midyear, last year, you started to put more money behind the Newport brand. Can you talk a little bit about your plans this year in terms of investment behind that brand and how it's changing versus a year ago?

Well, with that question, we, beginning last August, increased our promotional support to some extent on Newport, mainly in terms of keeping pace on a per pack discount basis with our major competition, and right now, we're consistent with that. Currently, our outlook is, we will continue to maintain that strategy, if you will, of being competitive if any of the other competitors raise their discount, we will, most likely, do the same.

Okay, thanks.

Okay.

I got no further questions at this time.

Okay, we would like to thank-you then for joining us this morning. As a reminder, in about 2 hours, a replay of this call will be available at our website loews.com until 11:59 p.m., May 10, 2001. A recording of this call will also be available in approximately in 2 hours until 11.59 PM May 10, 2001. The phone replay number is 800-642-1687 and the password is 651010, and as a reminder, a tape replay of CNA's first quarter conference call would be available at 11:00 a.m. Eastern Standard Time until 11.59 p.m. Eastern Standard Time on May 9, 2001, by dialing 888-203-1112 and using pass code 416430. It will also be archived later in the day for replay on CNA's website cna.com until the date of next conference call. Once again, thank-you very much.

This concludes today's conference call, and you may now all disconnect.