洛茲集團 (L) 2004 Q1 法說會逐字稿

Good morning and welcome to the Loews' first quarter earnings release conference call. All participants have been placed in a listen-only mode and the floor will be open for questions and answers following the presentation. It is now my pleasure to turn the floor over to Mr. Josh Kahn, Director of Investor Relations.

Thank you, operator. Good morning, everyone. This is Joshua Kahn, the Investor Relations Manager for Loews. I would like to welcome you to the Loews Corporation first-quarter 2004 earnings conference call. By now, you should have received a copy of our earnings release. If not, you may get a copy from our website, Loews.com. Carolina Group also issued a press release this morning announcing results for the first quarter of 2004. The Carolina Group release is also available at the Loews website. The Chief Executive Officer of Loews, James Tisch, and the 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 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 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.

I would also like to remind you that during this call today we may discuss certain non-GAAP financial measures, such as operating income. With regard to such financial measures, please refer to our earnings release for reconciliation to the most comparable GAAP that measures. There will be time for questions after Jim, Peter and Marty have discussed our results. For those of you who have tuned in via our website, please call 877-692-2592 during the Q&A session if you would like to ask a question.

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

I'm pleased to report you a relatively good quarter for Loews. Net income before net investment gains and losses increased more than 30 percent year-over-year. Much of the improvement was driven by the performance of CNA, which happily had what I would call a boring quarter, its second in a row. In the past year, CNA has been reinvented. It has dramatically sharpened its focus, selling noncore assets like its reinsurance group and life businesses, the latter of which is due to close in the next few days. It has completely reunderwritten its book of business, and at the same time, has also shown growth in its property casualty line.

P&C premium rates continued to improve, although not quite as robustly as in the recent past. In the meantime, CNA continues on its mission to reduce expenses. CNA is fully aware of the cyclical nature of pricing in its industry, and is today well prepared to maximize the value of its property-casualty franchise, regardless of the rate environment.

Lorillard is performing well in a difficult environment for full price cigarette brands. Newport continues to grow its share of the menthol and aggregate cigarette markets, while the competitive pressures from deep discount brands seems to have stabilized somewhat more recently. But I will let our resident expert, Marty Orlowsky, explain in detail in just a few moments.

Diamond Offshore continues to suffer from what I call the Charlie Brown syndrome in the offshore drilling market. Diamond Offshore is ready to kick the football, but Lucy keeps pulling away. Nevertheless, it has been able to achieve almost full employment for its independent cantilevered jackup rigs, and demand for the international floater fleet is improving. The utilization of marketed international semisubmersibles is currently approaching 90 percent, which bodes well for Diamond Offshore's semisubmersible rigs.

With resource prices at their current levels, we continue to expect a full recovery in rig demand in the near future. Historically, rig demand recoveries have a tendency to take off quite quickly and dramatically once exploration budgets are reignited by oil company cash flows.

Texas Gas had a good quarter, again producing the consistent performance we had anticipated when we acquired the Company last year. It continues to deliver double-digit cash-on-cash returns on our investment.

Loews Hotels continue to benefit from a rebounding lodging market this past quarter. Average room rates and occupancy rates were higher relative to the previous year, with New York and Miami properties again registering the strongest revenue gains. The first quarter also saw the successful completion of the first full quarter of operation of the Loews New Orleans Hotel.

While it may not have made the news here, the esteemed shipping newspaper of record, Lloyd's List, ran a banner headline the other day announcing the sale of the four large super tankers that Loews' shipping partnership took delivery of two and three years ago. The sale was made in view of the enormous recovery in the shipping market, and I commend our partner, Hellespont Shipping, for their discipline to sell when times are good. The transaction will close by early August and will mark the first time in 22 years that Loews will not have an investment in super tankers. Is this the end of an era or just a hiatus? We will have to wait and see.

And now, I would like to turn the call over to our CFO, Pete Keegan, who will provide the more insight into the financial performance of Loews this past quarter.

Thanks, Jim, and good morning, everyone. Loews reported net income of $43.6 million in the first quarter 2004, compared to 190 million in the first quarter 2003. Net income for Loews common stock was $9.2 million, or 5 cents per share, in the first quarter of 2004, versus $161.4 million, or 87 cents per share, in the first quarter 2003. Net income in 2004 includes a charge of $368.3 million after taxes and minority interest related to the planned sale of CNA's individual life business.

Net operating income, determined by excluding from net income investment losses of $277 million and income attributable to Carolina Group stock of $34.4 million, increased to $286.2 million in the first quarter of 2004, from $218.3 million in the first quarter of 2003. This was primarily due to improved operating performance at CNA. Net investment results declined from a loss of $56.6 million in the first quarter of 2003, primarily as a result of the impairment related to the planned sale of CNA's life unit.

Net income for Carolina Group stock measured $34.4 million, or 59 cents per Carolina Group share, in the first quarter 2004, against 28.6 million, or 72 cents per Carolina Group share, in the first quarter 2003. First quarter 2004 income attributable to Carolina Group stock includes net earnings attributable to 57.965 million Carolina Group shares. Loews sold 18.055 million shares of its interest in Carolina Group in the fourth quarter of 2003. First quarter 2003 income attributable to Carolina Group stock includes net earnings attributable to 39.91 million Carolina Group shares.

Lorillard contributed $93 million to net income attributable to Loews common stock in the first quarter of 2004. This represents Loews' 66.57 percent interest in the net income of Carolina Group, of which Lorillard is the principal assets. Lorillard's $124.8 million contribution in the first quarter of 2003 represents the 76.99 percent economic interest in Carolina Group Loews held at that time.

CNA contributed $194.2 million to Loews' first quarter 2004 net income, versus 123.4 million in the first quarter of 2003. Loews' interest in CNA's net realized investment gains and losses declined from a loss of $43.9 million in the first quarter of 2003 to a loss of $302.2 million in the first quarter of 2004. The first quarter 2004 loss includes a loss of $368.3 million related to the planned sale of CNA's individual life insurance unit.

Loews Hotels’ net income improved to $6.9 million in the first quarter of 2004 from $5.4 million in the first quarter of 2003, as the travel and lodging industry continued to experience a rebound. Average room rates for all hotels increased by 2.6 percent, while occupancy was 70.7 percent in the first quarter 2004 versus 69.1 percent in the previous year's quarter.

Diamond Offshore's contribution to net profits improved to a loss of $6.9 million in the first quarter of 2004 from a loss of $12.1 million in the first quarter 2003. The high specification floater markets saw a slight decline in day rates and utilization, but both the jackup and other semisubmersible segments of the Company's fleet registered higher day rates and utilization.

Texas Gas contributed $26 million in net income to Loews in the first quarter 2004. There is no comparable figure for the first quarter 2003, as Loews acquired Texas Gas in May of 2003. Net investment income and other, which includes income from Loews' Bulova subsidiary, as well as corporate overhead and interest expense, declined from a loss of $23.2 million in the first quarter 2003 to a loss of $27 million in the first quarter 2004. Bulova contributed $1.7 million net earnings to Loews in the first quarter 2004 versus $3 million in the first quarter 2003.

Interest expense for the first quarter of 2004 includes an additional $11.1 million relating to the early redemption of Loews' 7 5/8 percent notes due in 2023. At March 31, 2004, total cash and net investments, excluding CNA, Diamond Offshore and Texas Gas, was $3.38 billion. $2.16 billion of cash investments are at the holding company level, and $1.13 billion resided at Lorillard. The cash position at the holding company level at March 31 includes proceeds from the $300 million principal amount of 5 1/4 percent notes due 2016 issued in March.

Long-term debt, which includes debt at the holding company and Loews Hotels levels, was $2.75 billion at the end of the quarter. This debt position also reflects the new notes issued in March. In April, Loews redeemed its 7 5/8 percent notes due in 2023, which reduced both cash and debt balances by $300 million. And now, I will turn the call over to Marty Orlowsky of Lorillard.

Thanks, Peter. Good morning, everyone. First-quarter 2004 results were generally consistent with the second half of 2003, in that Newport continued its positive performance related to increased promotional support that began last year. Our objective is to maintain and/or grow Newport's market share, and in fact, share increased both on a wholesale shipment basis as well as the retail level. Although no new major factors emerged during the first quarter of this year directly affecting marketplace performance, the general nature of the industry's operating environment continues to be price competitive.

A comparison of our financial results for the first quarter of this year with last year's first quarter was unfavorable. This is principally due to significantly higher promotional spending for Newport as compared with the first quarter of 2003. As a reminder, we began to increase this spending to some extent during the second quarter of 2003; however, the full effect of our spending redirection did not reach its heaviest level until the third and fourth quarters of last year.

Total Lorillard's first-quarter shipments, which include Puerto Rico, domestic, and U.S. territories, were off 1.4 percent as compared with the first quarter of 2003. Domestic U.S. shipments were down 1.7 percent for the comparable period. Two factors affected our first-quarter shipments. First, according to our data, both Lorillard and the industry shipments were negatively influenced to some extent by a reduction in wholesale inventories. Secondly, Lorillard had shipped fewer promotional units this past first quarter than in the same quarter of 2003. If we exclude these two variables, shipment volume for Q1 '04 would have compared favorably to the prior year's quarter.

Newport's units were most affected by the events just described, and as a result, its domestic first-quarter shipments reflected a decrease of 1.2 percent versus the first quarter of 2003. With the exception of Maverick, the balance of our brand portfolio had volume declines essentially consistent with their historical rates. Maverick continues to demonstrate improved shipment performance, basis the list price reduction implemented last May, and was up 88 percent for the quarter versus the first quarter of 2003, albeit on a relatively low volume base.

The volume picture is somewhat more positive, when we look at our retail database as a sources of information, since it discounts wholesale purchase patterns that at times tend to distort underlying business trends. According to our retail data, Newport's first quarter 2004 volume was up 4.8 percent versus the prior year's first quarter, while wholesale shipments, as I mentioned, were down 1.2 percent for the same period. The brand's market share at the retail level was up 0.46 points versus the increase of 0.2 points to 9.56 percent of the total market as reported for wholesale shipments.

Newport's share of the menthol segment, basis retail shipment data, improved 1.2 points, from 29.7 percent in the first quarter of 2003 to 30.9 percent of the segment in the first quarter of 2004. Our promotional strategy for Newport during the first quarter of this year followed the same selective investment orientation as in the past. Spending was allocated on a market-by-market, store-by-store basis. This enables us to attempt to attempt to spend where we believe the return will be greatest.

Given the relative status quo condition of the market overall, we will continue to support Newport at comparable spending rates as in recent quarters, as long as we believe it to be consistent with our goal to sustain the brand's competitiveness in terms of market share. Thank you, and now I will turn it back to Josh.

Before we take questions, I would like to alert listeners to the fact that Loews will be holding an analyst conference at the Plaza Hotel on Wednesday, May 5 beginning at 8:00 AM Eastern time. Operator, now we would be happy to field any questions.

Thank you. (OPERATOR INSTRUCTIONS) Bob Glasspiegel of Langen McAlenney.

Actually, I have two questions. With CNA's capital plan complete and back on their footing reporting pretty solid results, is Loews in a position where if they wanted to, they could buy back stock or do you still just want to keep your powder dry in case additional capital is needed? I have a follow-up.

Bob, as you know, we tend not comment on our share repurchase plans. But it will still take a few quarters for us to fully rebuild cash balances to the satisfaction of the rating agencies. So for the time being, we are conserving our cash and investing wisely.

Is that a CNA issue or a Loews issue, when you say --?

It really is an issue for both companies, because the ratings of Loews affect the ratings of CNA.

Great, okay. I apologize. I don't want show my embarrassment, but I guess I don't read the shipping trade publication that you cited. Did they or you indicate what the terms were, and how much has shipping been contributing to earnings? Anything figures you can give on that would be helpful.

The newspaper reported that the transaction price was $112 million per ship. And we take in the earnings from our ships on a one quarter lag. And in this quarter, the earnings of Loews Corporation included $5 million after-tax of shipping income.

Okay. And 112 per ship, how many ships are there?

There were a total of four.

And your percentage ownership is what?

Fifty-one percent, but our economic interest is higher than that.

Okay, that's helpful. I appreciate it.

I'm sorry -- our interest is 49 percent.

Okay, I appreciate it.

David Adelman of Morgan Stanley.

Marty, I wanted to ask you some questions, please. I didn't hear it if you said it. What was Newport's retail share as you gauge it during the first quarter?

Newport's retail share for the first quarter was 8.38 percent.

Okay. And given the fact that the brand is doing quite well, gaining share consistently over the last several quarters, why do you feel it necessary to maintain this level of promotional spending? Why not back off marginally and allow the profitability to improve?

Obviously, that's always a consideration. However, we want to maintain a solid positive momentum for the brand, and so for the first quarter certainly, we continued on the same path. But as I indicated in my comments, certainly that option is available to us at some point.

But we have to look at -- it's not just Newport's share growth. It's the competitive activity that is taking place and it's at times difficult to dial in a certain amount of promotional spending and equate that to market share on a precise level. so right now, as I indicated for the first quarter, we have maintained a fairly aggressive level.

Did the (indiscernible) March launch of the new Marlboro menthol variant or Salem's repositioning efforts, did either of those dynamics affect your shipments or retail performance, as best you can gauge, during the quarter?

It's hard to attribute any impact to Newport specifically. Clearly, in both instances, the Reynolds' repositioning program on Salem and the introduction of the Marlboro product, there's a lot of promotional activity associated with it, so it tends to hype the shipment numbers and share for those brands as well as at retail. We did not see any particular effect on Newport. According to our field sales reports, the Marlboro 72 brand is not performing -- other than from the promotional standpoint -- not performing at very high levels. And we believe that the Salem repositioning is probably leveling off at this point. So it's hard, as I said, to relate it specifically to Newport. Newport continues, as I have indicated, to demonstrate a very solid performance.

You mentioned that absent some unusual factors, your shipment volume would have been up in the quarter. Can you quantify --?

Newport was most affected by this reduction of inventory and certainly the promotional unit reduction. It would probably be up on Newport somewhere between 100 and 200 million units.

Okay, and last question, Marty. It appears in looking at the data that sequentially (indiscernible), both Reynolds and Philip Morris moderated their promotional spending on the margin on a per pack basis, and you kept your spending essentially consistent from Q4 to Q1. Would you agree with that broad characterization?

I would make a distinction there, David. On an overall basis, it may appear that way, but if you look at how each company is supporting their menthol entries, that is not true. The promotional support, in addition to the buydown values or discount values on either one of those brands, Salem and/or Marlboro menthol, remain high and even higher on the Marlboro 72 product. And in addition to that, there's a lot of free goods promotions for those brands.

So I think you have to pull out the spending and the margin relationship when you look at this. You can't look at the overall numbers. Because obviously, Philip Morris total Marlboro dwarfs -- the Marlboro menthol is dwarfed by it. So it gets lost in the shuffle. They have not abated their support, either Reynolds or Philip Morris, for their menthol entries.

Fair point. Thank you, Marty.

Daniel Peris of Federated Investors.

Thank you. I sort of want to follow up with David's question about promotional support for Newport -- and it may be somewhat complicated by the Marlboro launch and by the Salem repositioning. But stepping back, the extensive buydowns that you have maintained on Newport versus the broader shift towards -- I won't call it EDLP, but off-invoice pricing -- if I understand that correctly, it creates the risk of a lot of leakage, where some smaller merchants, particularly in the core markets where Newport is sold, just buy it from other retailers and then resell it, and the discount doesn't necessarily make its way down to the ultimate consumer. Is that -- that's what some of my retailer friends in the Northeast tell me. Is that not a big issue or is that something that is driven by the current promotional environment?

It is not a huge issue. Does it happen? Yes. But we are pretty vigilant at the retail level in monitoring that, and we have in fact taken promotional support away from retailers who we have discovered were taking that kind of action.

But they were the sellers. They are not the buyers, presumably. They were selling it to other retailers.

I understand that. And where we find out that that occurs, we are suspending their promotional programs. I would not characterize it as a huge problem. And you really have to look at certain states, and New York in particular and New York City, as unique situations, given the extremely high tax rates there. But it is not a prevalent issue. It exists and we are pretty good at spotting it and dealing with it.

Would you though -- the trend of the overall industry is to move to more of an off-invoice price adjustment, rather than these very large buydowns, which tend -- I would think are less efficient and a lot of paperwork and so forth.

(multiple speakers) I don't think it's a trend. It really hasn't changed in the last year or so. Philip Morris for their focus brands goes off-invoice. Reynolds is still doing buydowns in the same way we are, and B&W, in effect, reduced the list price of Kool over a year ago, and doing buydowns on top of that. And in fact Philip Morris is doing buydowns on top of their off-invoice program. So there's no change in the trend.

You're now at the top end of the absolute dollar amount of those buydowns.

Not really. On an average basis, we are not. Our operating income per thousand would -- we are still better than Philip Morris in the first quarter. Our operating income per thousand in the first quarter was $24.07. Philip Morris was at $22.76, and Reynolds was at $13.68. So if you look at operating income per thousand price, I still think that is a good benchmark for indicating the (technical difficulty) our investment through promotion on a relative basis.

Thank you.

(OPERATOR INSTRUCTIONS) Michael Millman of Millman Research.

I wanted to follow up on a couple things. One is on the sale of the super tankers, it looks like your share will be about $225 million. Can you tell us how much of that you will end up keeping and adding to cash?

Secondly, could you let us know as of March 30 -- or is it 31 -- what the notional debt was? And on CNA, could you give us your thoughts on where the reserves stand relative to current industry thinking? And then finally, I didn't quite get the holding company cash. Did you say that was 2.16?

The holding company cash -- that 2.16 sounds right. Let me -- repeat the first question first. Oh, the first question was the share of proceeds that we will get from HSC on the sale of the ships. I said before that we own 49 percent of HSC, but our economic interest is significantly higher than that. So when, as and if HSC is liquidated, we would expect to receive significantly more cash than is indicated by our percentage ownership of the common stock.

With respect to reserves, we were out at CNA for the past two days, and we spent time speaking to the actuaries out there. And we have seen no deterioration at all in the level of reserves. We are comfortable with the overall level of reserves. We are comfortable with our level of asbestos and environmental reserves, which are at the upper end of survival ratios for the industry. So we are pretty sanguine about where CNA's reserves are. What was your other question?

The notional debt.

Notional debt is about $2 billion.

Back on the ships, what is your cost basis for those ships?

The ships each cost roughly $90 million apiece.

And is that still what your basis is or has it been marked down?

Our basis is very complicated because we don't have a basis in the ships; we have a basis in our investment in Hellespont Shipping Corp, which was a partnership that we entered into going back to 1990.

The bottom line we're looking for is how much cash are you going to end up after the sale, assuming that it gets sold at $112 million per?

We don't know what's going to be distributed out of the HSC as a result of the sale, but you can multiply 4 by 112, and it will be a significant percentage of that.

Okay, great.

But I am reminded, there's debt in that company, also, on the ships.

Okay, thank you.

(OPERATOR INSTRUCTIONS)

If there are no other questions, we will wrap it up.

We do have a follow-up from Bob Glasspiegel of Langen McAlenney.

It's a quick one. Couldn't let that go by -- the debt associated with the ships?

It's about 188 million (ph), Bob.

April Scoggins (ph) of Prudential Equity Group.

Actually, this is just a housekeeping item. Could I get the MSA accrual number for the quarter?

After taxes, it was $122.7 million -- 201 pretax.

Thank you very much.

Sir, there are no further questions.

Okay, great. In that case, 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. Thank you very much.

This does conclude today's teleconference. You may disconnect your lines at this time and have a great day. Thank you.