洛茲集團 (L) 2002 Q3 法說會逐字稿

Good morning, my name is Princess, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Carolina Group Corporation's third 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 at this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. Mr. Kahn, you may begin your conference.

Thank you, operator. Good morning everyone, my name is Joshua Kahn, Manager of Investor Relations for Loews. I would like to welcome everybody to the Loews third quarter 2002 conference call. By now, you should have received a copy of our earnings release. If not, you may get a copy of it at our website at Loews.com. Carolina Group also should have a press release this morning, announcing its results for the third quarter of '02. The Carolina Group release is also available at the Loews' website.

The Chief Executive Officer of Loews, James Tisch; Chief Financial Officer of Loews, Peter Keegan; will lead today's discussion and will be joined by Martin Orlowsky of Lorillard. Before we begin, I'd like to make a few brief disclosures concerning forward-looking statements. This conference call will include the use of statements that are forward-looking in nature, actual results achieved by the company may differ materially from those projections made in any forward-looking statements. Forward-looking statements reflect circumstances at 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 disclaimer is only a brief summary of the company's statutory forward-looking statements disclaimer.

You are urged to read this disclaimer, which is included in the company's 10-K and 10-Q filings with the SEC, in full. There will be time for questions after Peter, Jim, and Marty have discussed the results. For those who have tuned in via our website, call 888-307-7192 during the Q&A session if you have any questions. I would now like to turn the call over to our Chief Executive Officer, Jim Tisch.

Good morning to everybody, and welcome. Generally, weak economic conditions led to difficult operating environment for a number of Loews' subsidiaries in the third quarter of 2002. But overall, our operating performance continues to improve. We're pleased that the year-to-date performance for each of our subsidiaries, especially within the context of their own industries, has done so well. Net operating income has increased significantly, from $116 million in the third quarter of '01, to $190 million in the third quarter of '02. However, I should note that last year's quarter included a significant charge at CNA, relating to the World Trade Center attacks.

The book value per share at the end of the third quarter of this year rose to $61.09 a share, from $59.18 per share at the end of the second quarter of '02, and from $50.39 at year end '01. For the quarter, Loews repurchased 664 thousand shares, at an aggregate cost of about $33 million, or a total of about $50.30 per share. Year to date, Loews has purchased almost 6.1 million shares, at an aggregate cost of about $344 million. Additionally, Loews, through its Carolina Group, made use of the weakness in the tobacco equity sector during the third quarter, to buy back 340 thousand Carolina Group shares at an average cost of about $7.7 million, or about $22.60 per Carolina Group Share.

Let me just take a few moments to take a brief walk through the different subsidiaries of Loews, I want to start with Lorillard. Lorillard faced a more competitive environment in the third quarter of '02. Excise taxing increases weakened consumer confidence, and unfavorable industry dynamics cost combined to create a more competitive pricing environment in the quarter. These factors, in addition to particularly difficult year earlier comparisons, caused Newport unit sales to drop 11 percent year over year, versus the third quarter of '01. However, it is important to note that our market share remained basically unchanged. For the first nine months of '02, Newport unit buyings declined about 1.1 percent year over year.

You should note that shipment numbers from tobacco manufacturers can vary widely from the actual retail consumption. And in fact, in the third quarter of '02, our retail consumption was not down nearly as much as shipments. Marty Orlowsky, when he makes his comments concerning Lorillard and Carolina Group, can address that further. In the discount segment, Lorillard continued to cede market share as our main focus remains profitability. Marty Orlowsky will give you more color on the tobacco situation in just a few minutes. At CNA, they just completed their conference call about ten minutes ago, their results were not stellar, but things are going very well at the company. The wind is currently at CNA's back

We are continuing to see significant price increases in CNA's property and casualty business. Increases are on the order of 25 to 30 percent. Additionally, the process of reunderwriting CNA's book of business is almost complete, and for sure the new management team in slowly in place. There were two items that adversely affected this year's results for CNA. Number one, the limited partnership income at CNA for the third quarter was down significantly from the prior year. Additionally, there were European storms that affected CNA's profitability. But the long and short of it is that we are pleased with CNA's progress to date, and we expect its performance to continue to improve.

At Diamond Offshore, the results were weaker in the third quarter of '02 than a year ago. Reflecting continued softness in the offshore drilling sector. Despite the current sector weakness, oil and gas price levels indicate that an improvement should soon be at hand. Exploration activity has been impeded, in part by the consolidation that has taken place over the past year or two among the oil companies. But as these newly formed companies' budgets get sorted out and responsibilities get sorted out, we're hopeful that the offshore drilling activity will increase. Diamond is reaping the benefits, though, of the strong balance sheet in an otherwise weak market. And we're doing a number of things to capitalize on the current soft environment.

First, on November 5, Diamond announced that it has agreed to purchase a third-generation rig named the Omega in South Africa for about $65 million. This price is down significantly from prior transactions for third-generation rigs. Diamond is also reviewing a number other rigs for possible acquisition. We continue to make capital improvements to our fleet, as well, which we are able to do because of our strong balance sheet. As you all know, the $170 million upgrade to the Ocean Baroness was completed earlier this year, and that rig is currently working in Asia. We're currently embarked upon a $200 million upgrade of the Ocean Rover to fifth-generation specifications, and that continues on schedule and on budget. We are in the process of $100 million upgrade of [INAUDIBLE] of Mexico jack-up rigs that began in the second quarter of '02. That program's completion stands to coincide nicely with the expected rebound of the jack-up market.

Additionally, Diamond made use of the interim weakness in its share price, spending about $43 million so far this year to buy back 1.7 million shares of its common stock. In the hotel sector, Loews Hotels results were down slightly relative to the third quarter of '02 as the travel and leisure market continues to face continue head winds. In the third quarter of this year, occupancy rates were stronger, up about 2.7 percentage points versus the prior year, but room rates continued to lag, down about 3 percent from last year. The Royal Pacific Resort at Universal Orlando, which is our third hotel in the park, opened in mid June, and in the first quarter of operation, we saw very strong results with occupancy rates at over 83 percent. Loews Hotels additionally plans to open a new 285-room hotel in New Orleans in just about a year from now. We will manage the Loews' New Orleans Hotel so there's no significant capital investment required and the hotel is in what has proven to be a strong and resilient market. The figures for comparable hotels in New Orleans are down only about one percent year to date.

For Bulova, we have stronger results relative to last year's quarter. That's largely the result of the addition of the Wittnauer brands in 01. And sales of a license agreement signed in May of '01 with Harley Davidson. Weak economic conditions continue to affect the company's performance and Bulova and Caravelle brand volumes have declined in the third quarter of '02. But the clock volume is up strongly. Bulova's well-rounded portfolio brands increase the operating efficiency and the international expansion efforts hopefully should continue to sustain Bulova's success.

With respect to investment performance, our aggregate gains in the investment portfolios were the result of an overweight exposure that we had to fixed income securities, which generally performed very well in the third quarter of of '02. To sum up, despite the overall weak economic conditions and certain difficult markets, we're still seeing solid trends in a number of our businesses. With that, I'd like to turn this over to Pete Keegan, who can talk more about the finances of Loews.

Thanks, Jim. Loews reported next income of $1.06 per share in the third quarter of 2002, compared to net income of $.85 per share in the third quarter of 2001. The third quarter of '02 results exclude net income attributable to Carolina Group stock of 44.4 million, or a $1.10 per Carolina Group share. Third quarter results of '01 included charge of $264.6 million after taxes and minority interest at CNA, related to the World Trade Center attack. Third quarter '02 net investment gains were $5.8 million, versus gains of $44.8 million in the third quarter of '01. Net operating income, excluding net investment gains or losses, and adjustments for discontinued operations, was $190.2 million in the third quarter of 2002, versus $116.3 million in the third quarter of 2001.

Lorillard contributed $165.9 million in third quarter 2002 net income available to Loews common stockholders. This represents Loews 76.8 percent interest in the earnings of Carolina Group, of which Lorillard is the principal asset. In addition, interest income after taxes of 2.5 billion of intergroup debt. Lorillard net income contribution to Loews of 229.9 million represents the 100 percent economic interest in Lorillard held by Loews at that time. Carolina Group also reported net income for the third quarter 2002. Net income attributable to Carolina Group stock was 44.4 million or $1.10 per share for the quarter.

Because the IPO of Carolina Group stock by Loews took place in early February 2002, there are no actual year-over-year comparative results for Carolina Group. However, we have provided pro forma results which treat Carolina Group as if it had existed at the beginning of 2001. On this basis, Carolina Group net income per share was $1.14 in the third quarter 2001. Through the third quarter, Carolina Group had built up all of its $150 million reserve for general corporate purposes. If the level of dividends paid by the Carolina Group remains unchanged, it is anticipated that roughly $60 million could be used to pay down notional debt in the fourth quarter of 2002.

CNA contributed 36.9 million to Loews' net operating income in the third quarter of 2002, versus a loss of 137.3 million in the third quarter of 2001. Third quarter '01 results included $264.6 million charge after taxes and minority interest related to the world trade center attack. The decline in CNA's contribution excluding the third quarter 2001 charge is principally due to a decline in limited partnership income. Loews' interest in CNA's net realized investment gains increased to 14.8 million in third quarter '02 from 100.1 million in third quarter '01. This improvement relates primarily to the strength of CNA's fixed income investments in the third quarter of 2002.

Diamond Offshore's contribution to net profits declined to 2.8 million in the third quarter '02 from 22.7 million in the third quarter of '01. Day rates fell year-over-year in high spec. floaters and rig categories and increased slightly for other semisubmersibles. Lower year over year for all rig segments. Loews hotels as a result of continued weakness in the industry, [inaudible] Strong results from its Philadelphia and San San Diego properties were offset primarily by decreased income from New York and Miami hotels. Average room rates for all hotels were 3 percent lower as against the year earlier period by occupancy for all hotels increased by 2.7 percentage points.

Bulova's contribution to Loews' third quarter '02 net income increased 53 percent year-over-year. Helped by the additional of the Wittnauer Watch brand and a result of the license agreement signed in May 2001 with Harley Davidson. The company's Bulova and other watch brands report lower volumes while clock volumes increased 40 percent year-over-year. Net investment income and other declined from a loss of $.6 million in the third quarter 2001 to a loss of $17.6 million in the third quarter of '02. The change was due mainly to lower investment income as a result of lower yields. With that, I'll turn the call over to Marty Orlowsky at Lorillard.

Thanks, Peter, good morning everyone.

Lorillard reported this morning that wholesale shipments for the third quarter of '02 were off 13.2 percent, and for the 9 months ending September 30, 2002, 5 percent. Newport, as Jim mentioned, for the same time period, experienced decreases of 11 percent and 1.1 percent for the 9 months. There are several factors that we attribute to the softness in volumes that we've experienced. First, there were moveups of shipments to the wholesalers in June, whereas they were anticipating state excise tax increases that were beginning in July of this year. Secondly, September year ago experienced a heavy buying period due to the upcoming FET increase on January 1, 2002, further distorting quarter over quarter comparisons. The third factor that we attribute to the soft volumes, relates to the onset of the effects of the state excise tax increases that took place in roughly 17 states, coupled with the generally weak economic conditions caused by more intense pricing pressure at the retail level. We expect fourth quarter shipments to demonstrate a slight degree of improvement over the third quarter.

Although, on a year-over-year basis, it may not be as favorably compared. Mostly, this is due to the effects of [inaudible] to wholesale shipments in November and December of last year, but again, I would point out that in October of a year ago, there was a continuing buildup at the wholesale level, again, in anticipation of the FET increase that took place in January, and a price increase by the industry that took place in late October. Even though I mentioned at the last call that Lorillard was going to modestly increase its promotional spending in the back half of the year, and that would principally occur in the fourth quarter, we do not feel the effect of this increase in spending will be -- the order of magnitude of the spending will be that significant to totally offset the price pressures being exerted either by competitive factors or the current retail price environment. In addition to this, we also feel that wholesalers are reducing their inventories compared with historic levels. And that, too, will contribute to fourth quarter shipment performance at the wholesale level.

However, on the retail side, based on our data that we receive from wholesalers reflecting movement from their warehouses to their retail accounts, we see a less severe influence on both an overall basis and specifically to Newport. For the third quarter, at the retail level, Newport was off 3.8 percent in volume, as opposed to the 11 percent reported on wholesale shipments from Lorillard. Total volume was down 7.2 percent, as compared with the 13.2 percent decrease, again, reflected in wholesale shipments. Our retail share of market for Newport in the third quarter was down marginally by about 8 hundredths of a percent, versus the last third quarter, and it's this contrast with an almost 7/10 percent decline at the wholesale level.

On a sequential basis, Newport reflected stronger retail share in September versus August of this year. In fact, it was up about a third of a share point. This was a result of somewhat, but not significant additional promotional support in the month of August. For the nine months ending September '02, Newport's wholesale shipment share was up .23 percent and for the same period, retail share is plus .26 percent. Newport's volume on the retail basis was up for the nine months ending September '02 by about 1 percent versus a 1.1 percent wholesale shipment share decline.

Looking at the retail menthol segment shares, we see the following: Newport's share of segment for the nine months ending September is up 5/10 of a share point to a total of 30.2 percent share of the menthol segment, versus a year ago. Other premium price menthol brand share segment are as follows: KOOL was up 7/10 of a percent to 10.8 percent. Marlboro Menthol was down 4/10 of a percent to 10.2 percent. And Salem was down one percent or one point, to 9.2 percent. These are nine-month numbers.

Given the current trends and expected continued price pressure in the marketplace, Lorillard will focus on defending and growing Newport's share of market in the near term. By that, we define near term as 2003 through competitive price promotion programs that are scheduled for next year. Thank you.

Okay, operator, I think we're ready to open the call up to questions.

Okay. At this time, I would like to remind everyone to ask a question, please press star, then the number one on your telephone key pad. And your first question comes from Bonnie Herzog with Salomon Smith Barney.

Good morning.

Good morning.

I guess I just have a question regarding the Newport brand. Marty, you went through a lot of numbers, thank you for doing that. But just really trying to understand, I guess, you know, with the volume coming down and you mentioned, you know, some retail share, actually your retail share was up, but where are you seeing the weakness? Mostly is it from the other premium menthol brands? Are you starting to see some of the deep discount manufacturers entering the menthol segment? Are you seeing that more?

Hi, well, there's general weakness obviously, and I think as I mentioned, it's attributable to the pressure being caused by the excise tax increases in particular.

Okay.

We're not seeing any major initiatives or movement by the deep discount menthol brands, there are no new entries that I'm aware of, of any consequence. However, there was a modest shift of share to some of these deep discount menthol brands. KOOL, as I said, did increase their share of segment and, in fact, did have some share increases in the third quarter. And that was primarily a result of their heavy discounting that took place. And it's still taking place in the market itself. So I can't attribute to it any one particular factor. Obviously, everyone's share in New York state and New York City, in particular,r and volume shipments were affected very significantly there. However, on an overall basis, in looking at our retail share, I this I we're more than holding our own, even though during the third quarter our promotion support was not as strong as it was in the first half of the year.

Okay. And then just in terms of, you know, your price point on the Newport brand, can you give us an idea of what the current average, again, net retail price is for Newport, you know, versus maybe a KOOL or Marlboro menthol, and then even, you know, a deep discount menthol brand, like you said, there aren't many, but if you have an idea of what they are, just to get an idea of the different gaps that we could see.

Well, I don't have that specific data. I can only answer your question in terms of what some of the other companies or brands are doing on the discount basis. And/or promotional discount basis. Now, KOOL has been promoting pretty consistently through most of this year up to a dollar off a pack. Newport was around $.60 for most of the year off a pack to $.75 off a pack. And in some instances, on a limited market basis, we went up to $.85. So, I think the difference -- I don't have the retail price numbers to quote from, but clearly the scope of our discounting is a lot less than is the competitive activity. So I think it comes down to on average, we're higher priced, obviously, than most of the premium menthol brands and clearly significantly higher priced than the deep discounts.

So absolutely that's been one of your advantages. I'm wondering if that gap has been widening. Because to your point, KOOL is obviously been promoting very aggressively, that could be explaining a lot of what's going on. And then you, I think, made a comment about your promotions in the third quarter. Did you say that you feel you weren't as promotional in the third quarter versus the first half of the year?

No, we were not. As a matter of fact, quarter-over quarter, we actually spent slightly less in price promotion than we did, as I said, the year before.

But fourth --

Third quarter was not our strongest quarter as far as promotional support.

Fourth quarter you're definitely picking it up and going into 2003, you expect to be more promotional, not, of course, as much as probably Philip Morris, RJR, [INAUDIBLE], but definitely for you, you're going to be increasing quite a bit?

Lorillard, we will increase our promotional support, and for the fourth quarter, while we're increasing it, it's not going to be the order of magnitude is not that great.

But then going into next year, because payments are coming down, I assume you're going to be using quite a major portion that have reduction and spend it back in the marketplace. Is that a fair assumption?

I think that's a fair assumption.

One final question, if I may: What are your long-term plans for Old Gold, and Maverick? I know you really haven't been promoting the brands, obviously the volumes have been down very sharply. You know, just going to keep them at the same price point, really not promote much and I guess wait to see what happens and keep losing shares?

Well, for Old Gold we've lessened the rate of decline to some extent. We became a bit more promotion-oriented in the beginning, I guess, the third quarter. So we are promoting a little heavier on Old Gold, we see modest declines or deceleration of the rate of decline. Maverick, we have no plans to increase promotional support on that.

Are you losing share to other price value brands, or is it really --

I think most of the major companies' discount brands are losing share to the deep discount brands. That's not really a change over the past couple years. There are obviously isolated instances where some of the competitive major company discount brands, such as Doral and Pall Mall are demonstrating share and volume growth, but it's obviously coming at a great price because they're very aggressively supporting each of those brands. And, in fact, I don't think they've yet to take the last price increase on their discount entries. So with some exceptions, most of the growth or penetration to major company discount brands are coming at the expansive growth of deep discounts. But I will add that the deep discount segment based on retail data is not necessarily showing a major change in terms of their rate of growth in terms of volume, but there are some share changes taking place.

Thank you so much for your help.

OPERATOR: Your next question is from Martin Feldman of Merrill Lynch.

Good morning, Marty, and everyone else.

Good morning.

A few question Marty, if you don't mind, if you can elaborate on what you were just saying. I guess what I don't really understand in what you've just said, is you gave obviously a good explanation as to why the premium segment is down, talking about shipments last year; the tax increases; shipments to wholesalers in June; all that kind of stuff, but if I look at industry premium volumes in the third quarter, they were down in terms of shipments, 4.8 percent, your premium were down 12.1, and Newport was down 11.5, I didn't hear anything that helped me on specifically why your premium volumes shipments were down by more than the industry. Can you give us any more color on that?

Yes, I think so. Newport, when the -- and this is typical of when wholesalers move up their purchases in anticipation of some event -- Newport tends to be represented in that sort of, call it a preload, if you will, on a disproportionate basis to most other brands. In fact, I would say that Marlboro, as well, is involved up to a much greater extent in that kind of moveup buying than any other brand. When there are advance purchases, we tend to be overrepresented, if you will, and then when there is a deload, we tend to be overrepresented there as well. I think that's one of the principal factors that affected Newport's shipments, wholesalewise, in the third quarter and when you look at comparisons year-over-year.

The in the fourth quarter, we should expect less harsh of a difference between the change in industry premium volumes and Newport premium volumes?

I would expect it to be less harsh, to use your term, yes.

Okay. Okay. That's helpful. You also mentioned New York state and New York City, I mean, is the materiality of the increase of the state tax increase or the city tax increase enough to affect Newport's growth rate to any meaningful degree?

In looking at our retail shares in New York City, we're more than holding our own on a relative basis. However, on the wholesale shipment side, obviously, we're affected to a large extent on the negative side. So the materiality there is that I think by the mayor of New York increasing taxes, he's also increased the opportunities for illicit trade to take place.

Okay Marty, do you have your MSA accruals for the third quarter?

Do I have them handy?

The number.

No. You always ask me that, Marty.

All right.

I should have gotten the message by now.

Was that an "uhm" from Peter?

I'm just looking in the backup, make sure I gave you the right numbers

While you're looking for that, if I could ask Jim or Peter or any of you, a question: Could you give us a little more color on the $37 million of investment income to Carolina Group?

Let me go back and answer your question on the MSA accruals. In the third quarter pretax, it was 255.2, post tax, 153.7.

153.7

After taxes.

Okay.

In terms of the investment income, we invest Carolina Group's cash in either money market instruments or very high quality fixed income instruments with a duration of up to 10 years. And going into the quarter, we had extended the portfolio somewhat towards the end of that 10-year sector, and by the end of the quarter, we had sold everything within the portfolio and thereby recognized the gains. Subsequent to that, 10-year notes have backed up about 50 or 60 or 70 basis points and we've been back and forth. But right now, the portfolio is pretty much benign. It's got some tips, bonds in it, those are inflation indexed bonds, and we also have a few Ginney Mays, but not a significant exposure to the market

Should we think about the investment income from the fourth quarter really reflecting the first quarter and second quarters of this year, rather than the third, and see the third as a bit of a balloon?

What you should think about is, there's about a billion dollars of cash assets that are being managed that are non-- what I would call non-MSA assets.

Right.

And those you should think of as being invested in short-term instruments, and to some extent, we may extend that and get higher returns, but it can vary from one week or month to the next. So it's really difficult to forecast. Especially in view of how steep the yield current is. Money market instruments are yielding about one and a quarter percent, and 10-year notes are close to four percent. So that's almost three times -- it is three times higher for 10-year instruments. So when and if we feel comfortable in 10-year instruments, we could generate those higher returns.

Okay. Because clearly one of the ways Carolina Group made its EPS numbers this quarter was through this fairly substantial degree of investment income.

You know, I strongly disagree with the characterization of that. It implies that the gains were taken in order to make a number, and that is absolutely, positively not the case. The reality is that through good market timing, we were able to sell out the portfolio basically at the high point of treasury prices, and these gains are not timed in order to make the earnings look better or worse

Okay. I didn't mean to imply it was to help you make a number, it's just I think it was 8/10 contributed, your good trading in investments contributed to the EPS for Carolina Group.

Right.

Okay. Last question: For Peter, you said that if the dividend payment was to remain unchanged for the fourth quarter, you would expect to be able to pay down about $60 million in debt?

That's right.

Is that correct? Peter, is that a reasonable assumption on a quarterly basis to make for 2003?

Well, the cash flows fluctuate from quarter to quarter and I don't think we're prepared at this point to make a prediction about what '03 might be like.

Not on a quarterly basis, but an aggregate basis.

We're not really prepared to make a prediction at this point. One clarification I'd like to add to just what Jim said, the non-MSA-related cash in Lorillard is in the range of a billion three to a billion four.

Okay. Thanks very much.

You're welcome.

Your next question comes from David Edelman of Morgan Stanley

Good morning everyone. Marty, I didn't understand what you were trying to say about fourth quarter volumes. Could you review that again?

Okay. What I'm basically saying is that we expect to see a slight improvement of Fourth quarter wholesale shipments versus the third quarter of this year.

Okay. So the percentage decline, you expect at this point will be somewhat or moderate than the decline in Q3.

That's correct.

Can you comment, Marty, on where trade inventories were at the end of the quarter versus other periods? I assume they've gotten to be very low, is that accurate?

Yes, definitely.

Are they lower than they were at the end of -- are they lower now than where they were coming into 2002?

I believe so, yes.

Okay. You probably won't answer this, but I'll ask it anyway.

Okay.

Are you budgeting to have flattish sort of operating income next year?

You're right, I'm not going to answer it.

Okay. Jim or Peter, why the decision to build up the $150 million cushion so quickly? Why not have used that money to have paid down intercompany debt, or to have bought back stock and build up those levels over time?

I can only tell you if, in fact, we had used that money to pay down debt, you would have asked us why we're we're dawdling in building up the cash. We think it's good to have $150 million balance, and we're happy to be there now.

Okay. And, Jim, I'm curious, the lower prices for the different publicly traded subsidiaries in the marketplace today, does that affect at all your inclination to use the parent company's cash to make a large acquisition, which you've talked about in the past?

When we look at acquisitions and buying in our own stock or buying in shares of subsidiaries, we take all of that into account. I can't say that one factor trumps another at any point in time. At a particular point in time that we look at something, we take all those factors into account, though.

Okay. Thank you.

Your next question comes from Rob Campiano of Prudential Securities.

Good morning. Marty, have you seen any weakness in the overall menthol segment?

I'm sorry, in the what segment?

Menthol segment's overall share of the market.

No. As a matter of fact, no, it's about the same, maybe even a little stronger.

Do you have a number for that?

On the retail level, let's see, I do. Total menthol is about flat for the quarter, a little over 26 percent. And --

Okay

That's about it. It's about the same.

Okay. That's fine. And you probably won't answer this, but earlier on, you mentioned that you would be -- the promotional dollars spent would increase somewhat in the fourth quarter, Can you speak to what form that would take? I mean, you've said that base rate discounting for Newport has reached $.85 in selective markets. Is that a number we're likely to see go up? Will you be more aggressive in certain markets?

Fourth quarter?

I'm sorry?

In the fourth quarter?

In the fourth quarter.

We are going to increase our overall spending, most of that will be directed into retail price support. The $.85 that I mentioned is a very limited proposition. It's not pervasive in nature as far as the number of markets involved. But there are some. We are spending at a lower rate per pack discountwise than most of the other markets.

And there was a fairly significant increase on a per-unit basis in the cost of goods sold. Just a little bit about 12 percent. Can you speak to that at all?

What are you referring to specifically when you say --

Well, per-unit basis, cost of goods sold increased about 12 percent, quarter over quarter.

Well, I don't know, offhand why, but just on a margin basis, our margins are actually a little stronger in the third quarter. If you look on the EBITDA, or even net income basis, our margins really are slightly stronger third quarter 2002 versus '01. So I don't recall specifically why our cost of goods might have gone up in the third quarter. I'm trying to look now.

Okay. If it's not available, it's something --

I don't know if that's true.

If we take care of this off-line --

I don't know what you're looking at.

At Lorillard, they watched manufacturing costs like a hawk. I find it very hard to believe that --

My data that I have here says cost of goods actually for the third quarter were down versus a year ago. I don't know what you're looking at to come up --

On a per-unit basis, per thousand cigarettes. We can take it off-line.

Okay.

We can talk later. Just a housekeeping measure, can you speak to the components of cash at the parent?

I'll let Pete handle it here here.

At Loews, excluding CNA, Diamond and Lorillard, we have slightly under $2.7 billion in cash, this is at the end of the third quarter. Lorillard held about $1.9 billion in cash.

Excellent. Thank you.

That's the end of the third quarter, so that is pre-lorillard's dividend to CG for third quarter, related to third quarter income which occurred in late October.

Thank you. Your next question comes from Bob Gostibel of Langen McAlenney.

Good morning. I couldn't write fast enough, what was the cash at the holding company at Lorillard?

Slightly under $2.7 billion.

Jim, first of all, congratulations on the fixed investments at Carolina Group.

I can't take the credit for that, but I will so convey your message to the portfolio manager that did it.

With that said, I wanted to dig deeper. Is that not netted out at the lowest level with your other capital gains and losses?

No, in fact, I think you're right. In our supplemental financial statement on the press release, the Carolina Group gains are shown within Lorillard.

So they're not netted out like the CNA gains and the corporate other gains?

Exactly right.

That's correct.

Okay. What's your thought -- I mean, should we Loews shareholders be happy that you're -- that Carolina Group is paying off the notional debt? I mean, that's carrying a pretty good interest rate. What drives the decision?

What drives the decision is that after Carolina Group has built up its $150 million of cash, it's basically obligated to pay down the debt.

Okay. So it's mechanically driven?

Yes.

Okay. And when shares are repurchased -- excuse me, I'm not an expert on tracking stock, does this increase Loews' interest in Carolina Group, or how does it work through the numbers?

Yes, our percentage interest in Carolina Group would increase. When shares are purchased, the amount of money that comes into Carolina Group is allocated between Loews and the other shareholders, and the other shareholders would be allocated less money because it would be fewer shares.

Okay. Well, footnote F says your share went down in the quarter versus the eight months fractionally. Despite the -- I mean, a lot of it depends on when you bought the shares and stuff, but I'm just surprised --

Shares --

I know the shares were purchased towards the end of the period, and that may have something to do with options.

The options [inaudible]

Let us -- we'll find out exactly what the story is with that, and get back to you off-line.

It doesn't matter this quarter, but because it's a material item, we want to be able to track what the EPS implications are.

I fully understand. We'll get back to you on it.

And the last question, sorry for that, is can you walk through investment income, it was 5 million better sequentially, or less painful sequentially. Is that sort of a pretty good run rate going forward? I know there are a lot of things that bounce around within that.

The investment income?

Right, the minus 17.6, investment income, net and other.

It's just a function of lower yields really.

It went down from the second quarter loss. I mean, it was less negative.

Yeah, I don't think --

So that would go the wrong way. [INAUDIBLE]shipping.

I don't know if there's anything major to talk about there, other than just some movements in yields.

Okay. We've got the cash flow from Carolina Group sort of going in there, and offset by whatever you do, and buyback and lower yields. Those are the three drivers on the margin?

Right.

Okay. Thank you.

Just to let you know, back to a prior question, Marty Orlowsky tells me that the cost of goods sold per thousand is up about one percent in the quarter due to volume. But, Rob, I don't think you can talk now, but we'll get to you directly on that.

OPERATOR: Your next question comes from Rob Midway of Royal Capital.

Hi, a couple of quick questions. The MSA payments that are going to be reduced next year for Lorillard, what is that in annual dollars and what is that per pack?

It's about -- roughly it's about $160 million, if you pulled everything in terms of volume and adjustments that are made. That's -- the or the of -- it's about $60 million.

Okay. And then what does that translate, roughly speaking, to per pack?

Well, I don't know. I can do the calculation, I guess.

Okay. I guess while you're doing that, is the parent company debt still $2.4 billion?

Yeah, the parent company debt is unchanged.

One last question: What was the cash flow from operations for the entire company for the quarter? Before financing?

Well, we don't really have that number. What I can tell you is that the number, the Loews cash balance from quarter to quarter, up in the range of about $20 million. Now, that would be after everything cash.

The reason we don't have that is because cash flow from an insurance company is a pretty meaningless statistic.

But the Loews cash balance is up 20. Could you give me a feel for what global capex and global repurchase was? I know I can add the numbers, but if you have them.

While they're looking, it's somewhere in the range of about 8 cents a pack.

Okay. And you implied that you'll probably give that back to the market to keep your promotional spend competitive, which is exactly what Phillip Morris and RJR have said?

I don't know if I implied that exactly, we will be spending more, so it has to come from someplace.

Got you.

Global capex, now, this includes CNA and Diamond, was $136 million in the third quarter.

Uhm-hmm.

Diamond however represents 88 million of that.

Okay. That's all right, I can add the stock. You gave all three pieces.

Oh, yeah. Do you have the -- we gave it all.

Yeah, I'll figure it out. Thank you.

Wait a minute, we'll get it for you. It's going back to the CG ownership. These are the absolute numbers, not weighted. But basically we started off with 40.25 million outstanding non-Loews' CG shares at the beginning of the third quarter, and at the end of the third quarter there were 39.910 non-Loews' CG shares. That takes the nonLoews' interest from 23.17 to 22.97.

And, in fact, I think now that Bob Gillespie [sic] can't respond, I think note F is correct, that minority -- public shareholders represented 23.14 percent in the third quarter, and for the year to date, they represented 23.16 percent ownership. Any other questions?

Your next question comes from Judy Hong, Goldman Sachs.

Good morning, everyone. Marty, you mentioned that your retail share trends for Newport improved sequentially from July and August to September. Do you have any mother recent data, maybe an October data you can share with us? That's when really the bulk or increased promotional spending took place starting in October.

Judy, I don't have the October data, it's too early for us to get that information.

Do you have any anecdotal evidence from salespeople or the trade that you can share with us in terms of what's happening competitively in the U.S. cigarette market since the major companies started increasing spending pretty substantially?

I've not received any feedback of any consequence regarding that. So I really can't answer that.

Okay. Then going back to the wholesale inventory situation, Marty, you talked about the fact that you're seeing the wholesalers really looking to reduce inventory even below the level that they're in right now, even though it looks like it's pretty low, even at this point. Is this on an industrywide trend that you're seeing, or is it more specific to Newport as maybe some of your other competitors are increasing promotions in a more substantial way and they're forced to carry more of their product instead of Newport?

No, it's industrywide. However the -- and the however deals with any individual company, major company, that might be running free goods promotion, buy one or two packs free and get one or two free. So whenever someone runs a buy-something promotion along those lines, it tends to inflate the purchase pattern for that brand and/or company at a given point in time. And you know, there's been a significant amount of free goods in those terms that's been offered during -- well, for the last couple of years, and certainly this year. That tends to inflate and distort the patterns. But generally speaking, inventory levels are low for everyone on -- if you look at the underlying business. One of our major distributors has reduced their inventories by a third of a week or maybe even to less than a week. So we're seeing that, and that's pretty prevalent.

Is it more excise tax increase driven, the states are anticipating the excise tax increases in the next few months, the trade doesn't want to hold as much inventory?

No, I think the carrying cost of the inventory is a factor today. The excise tax increases make it more expensive for the wholesalers to carry that inventory and clearly, I think that has an effect. And then, you know, whatever speculation goes on in the minds of a wholesaler at any given point in time regarding where the market may be, influences what they may do. If they take a conservative outlook on the market, in combination with the increased cost of carrying the goods, they're going to hold pretty tight on inventory levels.

Okay. And then just my last question to either Peter or Jim, just a clarification on the fact that when Carolina Group builds up the $150 million reserve, you mentioned that it automatically triggers Carolina Group to pay down the notional debt to Loews. Does that mean that $60 million that Carolina Group is expected to generate in the fourth quarter, we should assume that all of that's going to be used for intercompany debt pay-down and not for share buyback?

No, you shouldn't make any -- let me take you through the water fall. The way it works is Lorillard dividends cash to the Carolina Group. The Carolina Group, out of that cash, first pays any intercompany obligations or makes any accruals for itself it needs to make. Those are de minimus. And then pays interest on the notional debt, which if no debt had ever been paid off, runs at the pretax rate of $50 million a quarter.

Uhm-hmm.

It then pays dividends on the Carolina Group stock, both to the CG shareholders and to Loews. If there's money left after all of that, it can either build up the 150 or pay down debt. Once it has built up the 150, whatever is left over has to go to pay down debt. But it can use monies within the 150 to repurchase shares and to replenish the 150. Does that answer your question?

Replenish 150 using the 60 million level over.

Yes, it could do that.

Okay, that's clear. Thank you very much.

I'd like to just go back and answer a prior question, which was just the aggregate amount of share repurchases, and this is Loews' shares, CG shares, and CNA shares. In the third quarter, that number in dollars was about $42.5 million. And on the year to date, it's about $424 million.

That's total share repurchases.

Your next question comes from Roger Patil [INAUDIBLE].

I think you just answered my question on the 150 million and how had relates to the stock repurchase, but I'm confused about the Q4 shipments. Are you saying that sequential units will improve slightly from Q3 or only year-over-year changes will be a little bit better than the negative 13 percent we saw in Q3?

The year-over-year changes should improve.

Okay.

That was Q3.

Thanks.

I think we have one time for one more question.

Your last question comes from Robert Lyon [INAUDIBLE].

Two brief things. This may have come up on the CNA call, but can you just go over on the partnership income, you know, why you really want to stick with these partnerships, given -- it's not a huge part of the investment portfolio and it really swings the returns around, you know, pretty wildly from quarter to quarter. And secondly, do you have any optimism that in the early next year that there might be some legislation passed that would address asbestos?

Let me take the second one first. With respect to asbestos, I feel like Charlie Brown trying to kick the football. So I'm not expecting any legislation and if I get it, I'll be happily surprised, assuming that it deals with the issue and just doesn't extend it or make it worse, which sometimes can happen in Washington. With respect to the partnerships, we have at CNA, very little in the way of equity. And these partnerships have been a way for CNA, over the past several years, to achieve rates of return in excess of what we felt we could achieve in fixed income markets. Having said that, even before these third quarter results came in, we came to the conclusion that in many of the strategies in which we are invested, two things have happened: Number one; a lot of money has come into the strategies, into hedge funds, and Number two, there are fewer opportunities. For example, in the risk Arbitrage market, there aren't as many deals. So we've seen the expected spreads in many of these strategies come down. So we made the decision to reduce our exposure in limited partnerships by about 1/3. And this will be accomplished hopefully by the end of the year.

Okay. So do you think on a going-forward basis, depending on the market, there will be somewhat less of a swing and to the extent that damage in this last quarter was done through high yield, it looked like, you know, the June, July, August period, which is the quarter that was referred to, was really like the maximum bad time, and that subsequently it should be better?

We hope so, but you know, we're still not through the quarter. So we have to wait and see. You know, I can't -- making predictions about limited partnership income is very, very dicey. So I don't want to do that.

Okay.

Okay. Thank you very much for joining us this morning. That concludes our call. Just as a reminder, in about two hours, a replay of the call will be available from our Website until November 14. CNA's call will be archived later in the day for replay on their Website, also until November 14. And that does it. Thank you very much.

This concludes today's conference call. You may now disconnect.