洛茲集團 (L) 2003 Q2 法說會逐字稿

Good morning and welcome to the Loews' second-quarter earnings conference call. At this time all participants have been placed in a listen-only mode and the floor will be opened up for questions and comments following the presentation. It is now my pleasure to turn the floor over to Mr. Josh Kahn, Director of Investor Relations. Sir, you may begin.

Thank you Stephanie, good morning everyone. This is Joshua Kahn, the Manager of Investor Relations for Loews. We would like to welcome to the Loews Corporation second quarter 2003 earnings conference call. By now you should receive a copy of our earnings release. If not you may get a copy from ourwebsite @Loews.com. Carolina Group also issued a press releases this morning announcing its results for the first second quarter 2003. The Carolina Group release is also available at the Loews website. The Chief Executive Officer of Loews Corporation, James Fish and Chief Financial Officer, Peter Keegan will lead today's discussion and will be joined by Martin Orlowsky of Lorillard.

Before we began, I would 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 projected 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 companies statutory forward-looking statement disclaimer. You are urged to read this disclaimer, which is included the company's 10-K and 10-Q filings with SEC in full. There will be time for questions after Jim, Peter and Marty have discussed our results. For those of you have tuned into our website please call 877-692-2592 during the Q&A session, if you would like if a question.

Now I would like to turn the call over to our Chief Executive Officer Jim Tisch.

Good morning everybody. Net income in the second quarter improved over the comparable period last year but the second quarter of '03 was generally not a particular robust period for Loews and its subsidiaries. We're disappointed by the quarter's results especially with those for CNA. Nevertheless CNA's results reflect legacy issues relating to the 2000 accident year end prior and its property casualty business is otherwise doing very well.

As you just heard, CNA recorded a net operating loss for the quarter as a result of unfavorable reserve development in its property casualty segment which relates primarily to workers compensation and D&O coverages as well as to an adverse arbitration decision disclosed earlier in the order. These events were discussed on a CNA conference call that concluded just moments ago and for which a replay will be available shortly. Although its prior year net reserve developments proved a burden in the quarter, CNA's current accident year continues to show a good deal of strength as rate increases remain vigorous and the recent net accident your loss ratio improved 7 points year-over-year.

Lorillard's second quarter earnings were significantly impacted by increased promotional spending as well as a number of other factors but I will let Marty Orlowsky, Lorillard's CEO fill you in on the issues regarding tobacco in just a few minutes.

Diamond Offshore which recorded a loss for the second quarter continues to suffer from weakness in the offshore drilling market. Demand for InterMedia Gulf of Mexico semi-submersibles remain soft. However, Diamond Offshore deepwater semi-submersibles or utilization rates rise both sequentially and year-over-year. And the Gulf of Mexico jack-up market now appears to be in the early stages of recovery although this was not yet evident in the jack-up dayrates for the quarter. Utilization for independent leg cantilever rigs is now about 95 percent in the Gulf of Mexico. High enough for us to see some movement in dayrates for those rigs in the near future.

Bulova reported lower net income in the quarter as weak consumer spending patterns led to lower sales volume for all its core brands except Accutron. Loews Hotels as evidenced by its lower net income in the quarter continues to suffer from persistent weakness in the travel leisure market. Some major markets have however begun to show signs of a rebound. Loews Hotels also recently made some adjustments to its asset portfolio. In late July, we sold the Metropolitan Hotel, a New York hotel that we have owned since 1961. In the second quarter, Loews Hotels signed a management agreement for 137 room hotel in Beverly Hills and assumed management responsibility for the Don Cesar Resort and Beach House Suites in St. Pete Beach Florida.

As you may know, Loews completed the acquisition of Texas Gas Transmission this past quarter. In its first reporting period as a Loews subsidiary, Texas Gas reported slightly higher revenues and significantly improved earnings over that posted in the second quarter of '02. Texas Gas' earnings improvement was due in part to cost reductions resulting from it's acquisition by Loews.

Now I would like to turn the call over to our CFO, Pete Keegan, who will provide some more insight into the financial performance of Loews.

Thanks Jim. Loews reported consolidated net income of $214.8 million in the second quarter 2003, compared to $198.8 million in the second quarter of '02. Net income attributable to Loews common stock was $189.8 million or $1.02 per share in the second quarter '03, versus $157.4 million or 84 cents per share in the second quarter of '02. This increase in net income attributable to Loews common stock is the result of increased investment gains offset by lower net income excluding investment gains and losses.

Net income excluding investment gains and losses amounted to a loss of $61.2 million in the second quarter of '03, versus income of $276.5 million in the second quarter 2002. Net investment results improved from the loss of $119.1 million in the second quarter 2002, to a gain of $251 million in the second quarter of '03. The majority of the net investment gains were contributed by CNA, which benefited from both equity and fixed income market strength.

Net income attributable to Carolina Group stock measured $25 million for 63 cents per Carolina Group's share in the second quarter of 2003. Against $41.4 million or $1.03 for Carolina Group's share in the second quarter 2002. Carolina Group's second quarter '03 net income includes a charge of $16.8 million net of taxes to settle litigation with tobacco growers. Carolina Group's earnings declined year-over-year as revenues fell $246 million as a result of 8.4 percent lower domestic volumes and increased promotional spending.

Lorillard contributed $114.5 million in net income attributable to Loews common stock in the second quarter of '03, versus $163.7 million in the second quarter of '02. This represents Loews 76.99 percent interest in the net income of Carolina Group of which Lorillard is the principal asset, as well as interest income relating to Carolina Group's notional debt.

CNA contributed a loss of $156.1 million excluding investment gains and losses to Loews' second quarter '03 net income, versus income of $124.7 million in the second quarter of 2002. Loews' interest in CNA's net realized investment gains and losses improved from a loss of $93.9 million in the second quarter of '02, to a gain of $230.4 million in the second quarter of '03.

Diamond Offshore's contribution to net profits excluding investment gains and losses, declined to a loss of $9.3 million in the second quarter of '03, from a gain of $1.7 million in quarter '02. Dayrates were lower year-over-year in all rig segments. While utilization was lower year-over-year in all rig segments except for high specs floaters which improved 12 percentage points.

Loews Hotels net income declined from $6.7 million in the second quarter '02 to $5.7 million in the second quarter of 2003. Average room rates for all hotels decreased by 1.5 percent while occupancy was 72.9 percent in the second quarter of '03, versus 76.9 percent in the previous years quarter.

Bulova's contribution to Loews' second quarter '03 net income decreased to $1.9 million from $2.6 million in the second quarter of '02. Watch and clock product volumes declined 23.8 percent in 16.9 percent respectively as selling price increased 7.6 percent and 4.7 percent respectively. Net investment income in other and proved from a loss of $22.9 million in the second quarter '02, to a loss of $19.5 million in the second quarter of '03. This improvement was largely the result of greater earnings from tank ship operations and was offset by lower corporate investment income.

At June 30, 2003, cash and investments excluding CNA, Diamond Offshore, and Texas Gas, was approximately $3.3 billion. Excluding CNA, Diamond Offshore, and Texas Gas, and Lorillard there was approximately $1.7 billion of cash and investments at Loews. Excluding CNA, Diamond Offshore, and Texas Gas, Loews had roughly $2.4 billion of long-term debt at the end of the quarter. That concludes my remarks, and now I will turn the call over to Marty.

Thank you Peter. Good morning everyone. Lorillard's second quarter business performance is a reflection of our evolving strategy to balance the stabilization of volume and market share trends and profitability. As we have discussed in the past, beginning the second half of 2002, the industry and Lorillard's performance had been adversely affected by the increases in state excise taxes, heavy competitive promotional spending and a generally weak consumer economy. Lorillard said most recently during the Loews Corporation analyst conference, that we were following the strategy to defend and/or grow Newport's market share, and that this approach might affect earnings.

On the financial side, the second quarter of 2003's operating income has been directly impacted by substantially increased promotional expenditures in support of Newport. As we enter 2003, promotional spending was at a greater level than past quarters. As we move through the first quarter, we further increase spending in response to marketplace conditions. The second quarter of '03 represents the fuller effects of that spending pattern. I might add that up to this point in the third quarter, we do not see any reason to end spending to a greater level than was the case during the second quarter. In addition, the second quarter reflects as mentioned a pretax charge of $26 million related to Lorillard's share of settling tobacco growers litigation.

Comparisons of the second quarter of 2003 versus the second quarter of 2002 were unfavorable due to a number of factors. These included as just explained; higher promotional spending, vary strong wholesale shipments of last second quarter, caused by heavy distributor purchases in advance of various states implementation of increased excise taxes, and a somewhat less intense competitive environment last year in which Newport was competing.

Lorillard's second quarter 2003 domestic U.S. wholesale shipments were minus 8.4 percent as compared with the year ago quarter. Newport shipments were off 6.7 percent for the same period. I would note that this rate of change is actually improved over Newport's first quarter 2003, versus the first quarter of 2002 comparison of a negative 11 percent. Total Lorillard shipments which includes domestic, Puerto Rico and U.S. possessions were down 8.2 percent for the second quarter '03 versus the second quarter of '02. To place this second quarter's performance in another context, one in which I feel reveals a better indication of current trends, and the effects of our spending strategy, we see the following.

Sequentially, Lorillard's total unit shipment pattern has demonstrated quarter-to-quarter positive results. As compared with quarter four of '02 shipments, quarter one '03 was up 7 percent. And the second quarter of '03 versus the first quarter of '03 improved by 3.9 percent. Newport improved its shipments by 9.4 percent in the first quarter of '03, versus the last quarter of 2002, and was up 3.2 percent in the second quarter of '03, as compared with the first quarter of this year. Comparing the first half of 2003, with the second half of 2002, again we see overall improvement. Total Lorillard was up 2.5 percent and Newport shipments were up 4.5 percent for the same period.

Using our retail movement database share of market performance indicators, we see similar patterns of improvement. Newport's second quarter '03 retail market share was 8.09 percent. Up .34 versus a year ago quarter. Sequentially, Newport's retail market share increased .68 share points for the second quarter of this year versus the fourth quarter of last year. Growing to 8.09 percent in the second quarter of '03 versus 7.41 percent in the fourth quarter of '02. Newport's second quarter '03 retail share of the menthol segment was up 6/10 points to 30.4 and increased 1.9 share points over the fourth quarter of 2002.

Lorillard's retail share of the premium segment was 11.8 percent for the second quarter of(technical difficulty) increase of 2/10 of a point over the same period a year-ago. Although we see more positive trends for premium price brands, the fact remains that the deep discount segment has a significant presence in the marketplace. The segment is a competitive factor that must be recognized as such even in light of the fact that current trends for this segment appear to have basically flattened out.

Lorillard's strategy for Newport through the second quarter continued its selective promotional by targeting certain markets and retail outlets for investments based on the opportunity we defined to offer the best return. The overall premium segment has remained highly competitive mainly through (technical difficulty) buy downs and free goods promotions.

Newport's core business approach has been, as we stated numerous times, to defend and/or grow the brand. We will monitor the brand's performance and all of the variables affecting this performance as time progresses to insure that our objective is reached by making whatever appropriate adjustments are necessary within our stated purpose. And that purpose is to strike a balance between stable trends and profitability.

I would like to just a brief update in terms of the Maverick brand which I think you are all aware we repositioned in May to a lower list price, and as a result of this change, the brand is gradually building its unit volume levels and is reducing the size of the negative comparative gap with the prior years performance. That concludes my formal comments for this morning. Thank you.

Thank you Marty. Operator, we would now like to open it up for questions.

The floor is now open for questions. (CALLER INSTRUCTIONS) David Adelman (ph) of Morgan Stanley.

Good morning everyone. Marty, I wanted to ask you a few questions. Could you talk about the issue of the right balance between promotional spending and profitability in the quarter because I think Lorillard had its lowest level of per unit profits in about 13 quarters? And in the first quarter rather, you increased promotional spending but you weren't nearly at the second quarter levels and yet then you were seeing sequential share growth in the business?

Okay David. The right balances in our terms as I said in the general sense, to improve Newport's, primarily Newport's trends relative to shipments and market share. Now, there is no magic formula there and you are right, we did show strong results in the first quarter in terms of improvement over the fourth quarter. However, there were a number of changes that to place in the middle of the first-quarter. For one, Philip Morris announced their reduction of price through their off- invoice promotional allowances on Marlboro, and certainly Marlboro menthol for affected by that. We saw heavy discounting on behalf of Kool, and we responded to that.

Now we didn't really begin to see the effects or to begin our increased promotional spending until literally the last part of the first quarter, which was the month of March, and that really takes some time to be implemented and have a broader effect. So, we are looking at past performance obviously, in terms of our decision as to how to spend, but we are also gauging performance on a monthly basis in a number of markets based on competitive actions and what we forecast the effects of those to be in the future.

In the quarter, your profitability converts pretty close to where Philip Morris was. Do you think over time you can re-establish the traditional substantial superior profitability that Lorillard has traditionally been able to generate?

You're right. I think we were still about 5 percent better on an operating income per thousand unit basis (indiscernible) Philip Morris and certainly significantly better than R.J. Reynolds. Look, our guideline is not necessarily driven by whether or not we will relatively outperform Philip Morris. We feel that our investment strategy vis-a-vis promotional spending is such that we are point to spend based on decisions made it to insure that Newport retains its strength in the marketplace.

For one, as I mentioned, we're still operating on a selective promotional approach, so we have not discounted Newport 100 percent of the stores, 100 percent of the time. Now whether or not that continues remains to be seen, as I indicated, we will continually monitor the situation. But we're not driven by any particular benchmark other than what we feel is the best and most correct decisions to support Newport.

One last question Marty. Originally when Philip Morris went to your EDLP, your sense was that that was not necessarily an escalation in the competitive promotional environment. Have you reevaluated that assessment?

I don't think, I would not isolate the Philip Morris alone. As I mentioned, Kool not only was heavily discounting in the first quarter, but then in April of this year, they reduced their list price, their wholesale list price on a permanent basis and added buy-downs on top of that selectively. So we have to look at the nature of competitive actions as I have indicated as well as the general economic climate. Keep in mind too that there have been continuing increases of state excise taxes which we factored in to our equation as part of our decision-making.

Thank you.

Rob Campagnino or Prudential Equity Group.

Good morning, gentlemen. Marty, a quick question for you. Could you give us an idea of what the consumer has seen in terms of your promotions? For example, what the effective price of Newport has moved from say January 1, to a fairly recent data point?

We have varying levels of promotional discounting and that is based on a model that we have developed on a market-by-market basis. So, what the consumer sees in the store will vary market-to-market in terms of the discount price. Obviously, in general terms, the discount is substantially greater than it was certainly in 2002. But, we do have varying levels. There is not an absolute application of discount in every single, similar application discount in every market.

I understand that. On average there has to be an average selling price for Newport across the country. Has it declined 25 cents, 30 cents since January 1 or am I -- ?

To be honest with you, Rob, I don't know the answer to that. We don't really look at the average price per se. We're looking at our investment per market and what the discount is per market. We don't really calculate average prices on those terms.

Okay. Fair enough. Next question. Would it be fair to say that you have in the second quarter moved towards a larger percentage of free product? My numbers have you in the first quarter maybe a little less than 2 percent of your volume being given away on BOGOs and nearly twice that in the second-quarter. Is that a fair statement?

It is a fair statement, but it is a byproduct of timing, on an overall basis we have not substantially increased our free goods promotions. It is just a matter of where it falls timing wise.

So for the balance of the year it would be fair to suggest that the number would lie somewhere between those two?

I won't comment on the balance of the year, but all I'm saying is that we have not substantially increased our free goods promotions. Our major form of promotion continues to be in terms of retail discounting.

Thank you for your time this morning.

Bonnie Herzog of Smith Barney.

Good morning. It's actually Kate McShane (ph) for Bonnie today. I just have a few quick questions. I was wondering if you had seen any evidence of an increase in retailer-to-retailer sales of your products in the last few months?

We don't, obviously we can't quantify that because exists probably, but we don't have any measure of that activity.

Do you have any sense or any measure -- we just heard anecdotally there seems to be more in terms of menthol brands and deep discount producers producing menthol brands. Have you heard of an increase in that manufacturing activity?

We have not heard of an increase and based on our retail numbers there has not been a substantial change in terms of discount menthol with respect their market share gains. It still remains a relatively small fraction of the total market.

My final question is just a housekeeping question. On your accrual this quarter, do you have that number for the settlement cost?

I can give that Marty. In the second quarter of '03, it was $180.1 million pretax.

Okay. Thanks very much.

Judy Hong of Goldman Sachs.

Good morning everyone. My questions is also for Marty. Marty, can you give us some more color on the competitive activities that you're seeing in the third quarter? I think you mentioned that the need to, you don't see a need to increase your spending in the third quarter and I am just wondering if that means that we are actually seeing a moderation of some of the competitive activities that we have seen in the second quarter? I'm just wondering if you to give some more color on that?

We are basically seeing a continuation in effect of second quarter competitive promotional activity, Philip Morris announced the continuation through, I can't remember anymore, the end of September, August of their (indiscernible) invoice allowance. Kool continues its programs, so there really has not been any substantial change so far through the third quarter, of any competitive actions. It is essentially a continuation. Now when you say moderation, to me moderation implies a reduction of sorts. But it is a continuation of same level.

Okay. Secondly, as a result of Philip Morris' new wholesale leaders program and a need for some of the wholesalers to carry higher percentage of Philip Morris' brands, are you seeing those retail wholesalers shifting their focus from maybe the non-Philips Morris' premium brand to Philip Morris' brands as opposed to going from deep discount products to Philip Morris' brands?

I am not specifically aware in every instance, generally speaking of the wholesaler actions there. Clearly, some of the wholesalers must be making some form of adjustment, but I think that we have not seen any specific direct impact to us. Certainly we expect wholesalers to represent our brands, especially direct buying wholesalers on an equal basis, and I would not attribute any impact of this point to that program.

Okay. Do you think that the industrywide consumption is still declining around 2 to 3 percent?

Yes I do. I think it may be even a little higher than that. As I've mentioned and as we are all aware, the state excise taxes have continued to increase obviously not at the same rate as last year, but they continue to be an issue. I do think it does affect consumption. Regardless of where we are.

My final question, the Carolina Group paid debt down to Loews this quarter. It doesn't look like the interest expenses have changed in the quarter?

Our next dividend won't be declared until the Loews Board meets next week, the week after next. But there was a paydown from the first quarter dividend which was paid in May.

Thank you very much.

Martin Feldman of Merrill Lynch.

Good morning Marty. Marty, I think I have just two questions for you.

Only two Martin?

I think so. If we look at your rate of discounting between the first quarter and the second quarter, clearly it stepped up. You did in your prepared remarks state that on a sequential basis the performance of Newport was a little better in the second quarter. If we look at the Newport was still down something like 6.7 percent in the quarter, by contrast, Marlboro's shipment volumes were up 8 percent in the quarter. Are you satisfied with the performance of Newport in the second quarter given the discounting, the increased discounting that you put into the market?

Well, again, I will repeat what I said before. As we have increased spending and it's been on evolving basis, through the beginning of the end of the first quarter through the second quarter, I do think the brand is responding. I certainly would point out that Marlboro's being discount of 100 percent of the time in all stores. We are not. So, there is some impact relative to that. I would also add that to some degree the second quarter unit shipment performance was aided by or increased by virtue of the Blend 27 introduction.

So, while not all of that increase was attributable to the Blend 27, but it certainly did have some impact with respect to Marlboro's performance. Are we satisfied? Obviously we would like to show even greater improvement, but I also think consistent with our past decisions, we still keep an eye toward balancing, not to overstate this principle that we operate on, but balancing profitability with share performance. While we have never been in the mode to buy market share, we still aren't, but we are certainly are in a mode to insure that we have a sound foundation.

Perhaps it's an unfair question, but do you think your volumes would have been down significantly further had you not increased the rate at discounting?

I would assume so, yes, I believe so.

My other question was, is your discounting aimed at the price level predominately of Kool now and Marlboro Menthol at this point? Rather than you did make comments on the deep discount segments of the market but presumably it is those two brands that are your main focus?

We are not specifically targeting the price points, reduced price points of either Kool or Marlboro. There are markets, remember I said we vary our discount levels by market. There are markets where our discount is not as great as either Marlboro Menthol, for example or Kool. So, our model is based on where we think we have the best opportunity for Newport, if it coincides to the point where the discount level is equal to Marlboro or and/or Kool that is the way it is. But we're not targeting it on that basis.

Marty, is a fair characterization to look at the industry or look at Lorillard and say from the time the U.S. market started breaking down maybe in the middle of the second quarter of last year, Lorillard is a company and Newport is a brand very, very substantially outperformed at certainly in profitability terms all of its key brands in the other manufacturers. Now we're seeing that trend begin to break, or actually break at this quarter. Do you think that going forward from here you are looking at stability versus the other companies, or there may should be, or may need to be further discounting?

I would like to point out that we started to feel the affect not recently, but last year, beginning in the third quarter. If you look our second half 2002 results versus the first half, you see a very dramatic difference. I think that what we have to use is really second half and that is why I referenced second half performance versus first half performance this year. Second half of last year to set first half of this year, because I think that is a much more relevant benchmark period to look at.

Our performance, Newport's performance did begin to feel the effects of the price pressure beginning in the third quarter of 2002. It is not a sudden development. 2002 results, financial results, were very much carried by first-half very strong performance financially as well as the fact that we did not react in a very intense way in the second half in terms of increasing our promotional dollars. That began, as I indicated in the first quarter, and we have ratcheted up as we move through this year. So far.

So, it is not a sudden development. I think what we're dealing with is an industry issue, not necessarily a Newport or and/or Lorillard issue. I think if we step back in industry and the in particular premium brands of the major companies, we see a very significant shift in the dynamic of purchase behavior driven by any number of factors. And I think that what we're doing is recognizing that, but we continue to try to strike a good sort of balance between the profit side and the performance side in terms of market share.

Okay. Marty. Thanks for that. (technical difficulty) just a housekeeping question. Can you give us the worldwide volumes not just the U.S. volumes in other words, taking in the territories and total volumes in the quarter?

Our total volume for the quarter was 8.8 billion units which represented and 8.2 percent decline versus the second quarter of 2002.

Okay. Thanks very much.

Tonya Odem (ph) of Alliance Capital. Michael Millman of Millman Research

I actually I have several questions. Maybe you can talk a little bit about where you expect cash to be for the parent of the holding company by year end. I think before or during the Texas Gas that you thought you would be back to I think 2.9 by year end. I want to know if that is still on track. Secondly, could you talk about where you expect the notional debt to be at year end, and I think someone asked this, but I'm not sure if the answer was direct, if there was any paydown in notional debt in the second quarter?

Could you also talk about Carolina Group's or Lorillard's free cash flow after any upstreaming and could you also on your M&A expenditures, if that has changed or expect any change in your M&A expenditures? Then one naive tobacco question, talk about what the supply and demand in tobacco is, in other words what the manufacturing capacity for cigarettes is in what the actual demand has been? Thank you.

Why don't we start with the tobacco questions since that was the last one.

I will respond to that. When you say the capacity there is certainly excess capacity from a manufacturing standpoint. I'm not quite sure what the question related to specifically.

I was wondering if this excess capacity, if it is huge, if in fact it really is doesn't matter --

It really is immaterial. In our case, we are not, we don't have lots of -- we only have one manufacturing facility, and we are able to make adjustments within that facility to meet demand without having it cause us to have any sort of major financial, negative financial impact. We have a very flexible manufacturing platform and that has enabled us in years when our volumes have increased as well as in years when they decreased to respond to it in a pretty efficient way. So it is not really a big factor for us. I hope that answers your question.

Some of your questions we can answer and some we can't Mike, but the level of notional debt currently, that is before the dividend which may be declared the week after next is $2.336 billion. I am not going to comment or speculate as to what that dividend may be a couple of weeks from now. Nor am I going to comment or speculate as to what the cash flows from Lorillard or the cash flows from Loews going forward are going to be as we head into year end.

I think Jim had suggested that he expected the cash to be back up to this 2.9 billion by year end and I was curious as to whether that still seems to be --?

We're uncomfortable making forecasts about our cash levels going forward.

Okay. Can you then talk about your M&A expenditures have been and --

M&A as in the acquisition of Texas Gas?

$518 million on Texas Gas if that was your question.

No your acquisition, what your M&A, I guess I misstated it. Were you looking at your staff expenditures, whether you continue to have M&A staff, if that staff has been increased, decreased, aged?

M&A staff costs are not a material number.

It is not so much the number, it is really sort of where you're going to that. If you continue to have a robust activity or is if it has declined at all?

We have (technical difficulty) in M&A staff. We have people that have worked on it from time to time and those people are still here and they have got lots to do.

Thank you Jim.

Mitchell Martin of Mitchell Advisory.

Thank you. This question is for James. I'm wondering what you're doing for Loews shareholders in terms of working for shareholder value? Right now the stock price is significantly below book value and essentially if you kind of liquidated the company, all of your subsidiaries, basically Loews shareholders would have about a 46 percent increase. The subsidiaries are not performing particularly well. Your dividend payout ratio to shareholders is extremely low. Under about 14 percent or so. Your corporate board is filled with Loews' insiders, in terms of corporate governance, I guess there was a study done and it was rated very, very poorly.

So, as a shareholder, I am wondering what we're really getting? Have you guys been thinking more radically? Are things, are you please with the performance of your stock price and what is your intention? What are you intending to do? In particularly with the change in the dividend tax laws, are you thinking at giving shareholders some kind of benefit by increasing the dividend payout ratio?

Let me try to address a number of the issues that you have mentioned. Number one, we are entirely focused on shareholder value. With respect to the board, first of all, there are five insiders on the board and there are six outsiders on the board. Those people that are outside the company are entirely independent directors, and I would stack them up against any directors that you might have, might suggest from other companies.

With respect to the report that you cited, I have not seen it, but if you want off-line, you could send it to me and I would be happy to debate it. But, I stand by our board 100 percent. With respect our subsidiaries, there are a number of them that are -- I submit to you they are all doing well within the context of their industry. Lorillard has done very, very well within the context of the tobacco industry. This is really the first quarter that it is have a significant drop in its operating income.

When you look at our competitors, their income has dropped significantly in prior years and prior quarters. So, Lorillard as Marty said, is doing its best to balance profitability and long-term viability and has found in this quarter that it had to step its promotional spending in order to compete more aggressively with the yet more aggressive competition from others.

When we look at CNA, I see a company that has good news and bad news. The good news is that the business that we are writing now is very strong and very profitable. We have a new management in place that has dramatically turned around the book of business, and that business is doing well. The problem relates to the legacy issues. Primarily in accident years 2000 and prior. The company is doing its best to clean out those problems so that CNA can earn much better rates of return on its capital going forward.

With respect to the payout, I am not so sure that dividends dramatically affect the value of the stock. Loews likes to spend its cash and its capital so they can take advantage of opportunities. That is how we got into the shipping business in the early '80s, that is how we got into the offshore drilling business, which I will tell you that when we took it public, we got back all of our investment so that the investment that we now have in Diamond Offshore, which is almost worth $1.5 billion at depressed values is basically free and clear for Loews.

Certainly had we not had the cash on a balance sheet, we would not a been able to make the very attractive acquisition of Texas Gas just this past spring. So, we are here trying to build value. We are cognizant of all of our different constituents. Shareholders, employees, rating agencies, and customers, and we try to balance all of those. Sometimes it may look to you and to other shareholders like we are not giving appropriate weight to how we balance those items, but we think that we are, and I think for sure our Board concurs.

You still have not addressed, why do you think the market is -- that you are selling at such a significant discount to your book value? Isn't that indicative of the lack of benefits of the holding company? Isn't that, how do you react to that?

These things go in phases. Sometimes companies trade at discounts, sometimes they trade at premiums. There is no real saying just when they will do either. We believe that our subsidiaries have very good value that they are performing very well, and at some point in time, we believe that the market will recognize that. Beyond that I cannot say anything.

Okay. Thank you.

Larry Greenberg of Langen McAlenney.

Good morning thank you. I know this might be a little bit premature because CNA has not completed all of its reserve studies, but can you just talk about the possibility that they may need more capital and your appetite to provide that? Should we expect a continued buildup of liquidity at the holding company, just in case of that possibility?

Again, we don't know whether CNA is going to need capital or not. What I would say simply is that if they do, Loews will assess the need at that time and make the investment decision at that time.

Thank you.

Jacque Garibaldi (ph) of Royal Capital.

Quick question on Texas Gas. Do you have a pro forma full quarter revenue and operating income and pretax income for Texas Gas?

Hold on just one second. I will tell you what you can do, you can call Josh Kahn after the call, and we will see if we can get that, have it. Also, Texas Gas is a filer with the FCC. So, you the other place you can get that information is from Edgar.

How many months are included in the press release figures?

The press release figures for Loews just pick up the period of time which we owned it, which would be from mid-May until June 30.

Okay. Thank you.

Gentlemen, there appear to be no further questions at this time. Do you have any closing comments?

Yes, thank you for joining us this morning, as a reminder in about two hours a replay of this call will be available on our website until August 14, 2003. CNA's call will also be archived later in the day for replay on CNA's website until August 14th as well. Once again, thanks very much.

Thank you for your participation. That does conclude this morning's teleconference. You may disconnect your lines at this time and have a great day. Thank you.