洛茲集團 (L) 2004 Q2 法說會逐字稿

Good morning, and welcome to the Loews second 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 Joshua Kahn, Director of Investor Relations. Sir, you may begin.

Thank you. Also, good morning, everyone. This is Joshua Kahn Investor Relations Manager for Loews. I would like to welcome you to Loews Corporation Q2 2004 earnings conference call. By now you should have received a copy of our earnings release, if not, you can get a copy from our website, Loews.com. Carolina Group also issued a press release announcing results for the second quarter 2004 and release is available at the Loews' Web site. CEO James Tisch and CFO Peter Keegan will lead today's discussion and 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 forward-looking in nature and actual results may differ materially from those projections made in forward-looking statements. Forward-looking statements reflect circumstances at the time they're made and the Company expressly disclaims any obligation to update or revise any forward-looking statement during this call. This disclaimer is only a brief summary of the Company's statutory forward-looking statement disclaimer and you're urged to read it with the Form 10-K and the SEC in full. I'd like to remind you during the call we may discuss certain non-GAAP financial measures such as operating income. Refer to the earnings release for reconciliation of the most comparable GAAP measures. There will be time for questions after Jim, Peter and Marty have discussed the results. If not tuned in call 877-692-2592 if you would like to ask a question.

Thank you Josh. I'm pleased to be able to report to you a solid second quarter for Loews. Net income attributable to Loews is Common Stock improved more than 93% over the year earlier quarter at CNA continued to forge a path of steady performance. After the events of last year we welcome that things have become relatively boring at CNA. The combination of favorable market conditions and CNA's improved underwriting discipline and expense management lifted it's contribution to Loews's second quarter net income from red to black. Property casualty premium rate growth continues albeit it a more measured pace than 2003 and we're confident that CNA is now in position to generate considerable long term returns. Lorillard performed well registering increases in revenue and income against both the first quarter and last year's second quarter. Newport grew its share of the menthol market while the competitive pressures from deep discount brands remain more stable. We'll turn the call over to Martin Orlowsky to give us more color on all things that tobacco markets in a few moments. Diamond Offshore suffered from general weakness in the offshore drilling market, posting a loss in the second quarter. A meaningfully brighter spot, however, was the U.S. Gulf of Mexico jack-up market that displayed upward momentum in the last few months outside of the U.S. gulf region the Company has seen increasingly demand conditions. We continue to expect the current level of oil and natural gas prices will yield a full recovery and mid demand in the near future. Texas Gas continues to chug along producing the consistent double digit cash on cash returns that we had hoped and expected for when we acquired the Company last spring. During the quarter, Texas Gas signed agreements with customers and filed an application with the [ INDISCERNIBLE ] To expand the storage capacity and this project will cost a little more than $20 million and financed with funds generated from Texas Gas's operation. Loews Hotels experienced a fairly robust quarter and the majority of the properties registered revenue improvement action while Philadelphia, San Diego and New York hotels made the most significant gains. In aggregate the occupancy and average room rates rose materially against the previous year's quarter. As we mentioned during the call last quarter, Loews' shipping partner agreed to sell the four large super tankers it took delivery of two and three years ago. The transaction will close in the third quarter and we'll report it as part of the third quarter results. Shipping has been a very profitable enterprise for Loews over the last 22 years and prevailing market conditions signal to us it's time to cash in our chips. We are pleased to declare victory and retreat, even if it possibly is only a temporary retreat. Now I'd like to turn the call over to the CFO Peter Keegan to speak in greater detail about the financial performance of Loews this past quarter.

Thanks, Jim. Good morning, everyone. Loews reported net income 407.3 million in the second quarter 2004 compared to 214.8 million in the second quarter 2003. Net income attributable to Loews Common Stock was 366.7 million, or $1.98 per share in the second quarter 2004, versus 189.8 million or $1.02 per share in the second quarter 2003. Net operating income, determined by excluding from net income net investment gains of 107.3 million and income attributable to Carolina Group stock of 40.6 million, increased to 259.4 million in the second quarter 2004. From a loss of 61.1 million in the second quarter 2003. This recovery was primarily due to the improved operating performance of CNA. CNA's results for the second quarter 2003 included 277.3 million after taxes and minority interest of unfavorable net prior year reserve development. Net investment results declined from a gain of 251 million in the second quarter 2003, to a gain of 107.3 million. Net income attributable to Carolina Group's stock was 40.6 million or .70 for Carolina Group share in the second quarter 2004, against 25 million or .63 per Carolina Group share in the second quarter 2003. Second quarter 2004 income attributable to Carolina Group's stock is 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 2003. The second quarter 2003 income attributable to Carolina Group stock includes net earnings attributable to 39.91 million Carolina Group shares. Lorillard contributed 104.8 million to net income attributable to Loews Common Stock in the second quarter 2004. This represents Loews' 66.57% interest in the net income of Carolina Group of which Lorillard is the principal asset. Lorillard's 114.5 million contribution in the second quarter 2003 represents the 76.99% economic interest in Carolina Group Loews held at that time. CNA contributed 162.6 million dollars to Loews' second quarter 2004 net income. Versus a loss of 156.1 million in the second quarter of 2003. Loews interest in CNA's net interest investment gains and losses declined from a gain of 230.4 million second quarter 2003 to a gain of 108.8 million second quarter 2004. Loews hotels net income improved to 7.9 million in the second quarter 2004, from 5.8 million in the second quarter 2003. As the travel enlarging market continued to strengthen. Average room rates across Loews Hotels increased by 3.7% while occupancy was 81.8% in the second quarter 2004, versus 74.1% a year earlier. Diamond Offshore's contribution to net profits improved to a loss of 6.7 million in the second quarter 2004 from a loss of 9.3 million in the second quarter 2003. The high spec floater market declined in day rate utilization versus [ INDISCERNIBLE ] And utilization improved and day rates declined slightly in other semisubmersible rig segment. Diamond Offshore Jack-up rigs registered significant year-over-year gains in day rates and utilization. Texas Gas contributed 5 million in net income to Loews second quarter 2004. In a second quarter 2003 Texas Gas contributed 1.6 million net income to Loews but this represents the results from an abbreviated reporting period as Loews acquires Texas Gas in May 2003. Net investment income and "other" which includes income from Loews Bullova subsidiaries and corporate overhead and interest expense improved from a loss of 17.6 million second quarter 2003 to a loss of 14.2 million in the second quarter 2004. Bullova had a break even second quarter 2004 and contributed 1.9 million to Loews net income second quarter 2003. As June 30, 2004, total cash and net investments excluding CNA, Diamond Offshore and Texas Gas, was 3.8 billion dollars. 2.3 billion of cash investments at the holding company level and 1.4 billion resided at Lorillard. This past June, CNA received regulatory approval to repay 300 million of surplus notes to Loews. This 300 million plus incurred interest was paid to Loews on June 16th and included in Loews' cash balance at the end of the second quarter. Long-term debt, which includes debt at the holding company in Loews Hotels was 2.45 billion at the end of the second quarter. And, now, I turn the call over to Martin Orlowsky of Lorillard.

Thank you Peter. Good morning, everyone. Overall, Lorillard's second quarter 2004 performance demonstrates the continued successful outcome of the strategy behind Newport when compared with both the second quarter 2003 and sequentially with the first quarter of this year. This has been achieved in light of the fact the cigarette market itself has not experienced any shifts, significant shifts, relative to variables affecting the business and the market remains competitive via retail price promotions, continued affect of the state excise tax increases and deep discount segment retains the influence as a competitive factor. Operating income for Lorillard for the second quarter 2004, increased 13% over the second quarter 2003. Excluding a one-time tobacco grower's settlement charge in the second quarter 2003, of 26 million, pretax, the comparison for the same period results in the plus 44-10th of 1%. Operating income results were favorably affected with the change in procedures by the regional price discount buy down program resulting in improved efficiencies on a spending basis. Loews returned good expense particularly due to the Maverick's brand stronger movement at retail and slightly increased revenues as a result of approximately 1 percentage point reduction in Lorillard cash discount rate offered to direct buying customers affected February 9, 2004, and finally increased revenues due to additional units shipped. Total Lorillard wholesale unit shipments for the second quarter '04 up 3.8% over the second quarter 2003. And domestic shipments were up 4%. Newport domestic shipments reflect 5.2% increase in the second quarter of 04 versus the second quarter of 03. Maverick continued to demonstrate favorable volume shipped comparing the second quarters '04 and '03 with a 54% increase, on a relatively low volume base. Brief comment regarding market shares as reported by MSA. Effective with the June reports MSA revised the estimation model for the purpose of calculating deep discount volume and market share. Additionally, common wealth tobacco is now reporting actual shipment data as opposed to prior periods when this Company's data was included as part of MSA's estimate. The net effect of this change is that the five original reporting companies, Lorillard, Philip Morris, R.J. Reynolds and Brown and Williamson, and Ligits market shares are reduced offset by an increased share estimate for deep discount brands and plus Commonwealth's actual numbers the data reporting for wholesale market shares and the comparisons for the prior period reflect the change. Based on Lorillard's retail shipment database, Lorillard total shipments for the second quarter '04 were up 5.7% versus the first quarter of this year, demonstrating positive sequential movement. And Newport's retail shipments increased 6% for the second quarter '04 compared with the first quarter '04. On a shipment share basis Newport share for second quarter '04 vs. '03, 7.92 vs. 7.43 or improvement of plus .49% over the previous quarter. In terms of retail share, Newport's second quarter '04 vs. '03 was moved from 8% year ago to 8.24% for the second quarter of 2004. Basis retail data, Newport share of the menthol segment for the second quarter of this year, was 30.8%, an increase of .6% over the second quarter of '03. Total menthol share of the market for the second quarter was essentially flat at 26.8% as compared with the second quarter '03. We continue to support Newport during the second quarter of this year in promotional terms in on a comparable basis with past quarters. And wholesale shipments were relatively strong for the period. We will continue to monitor the brand's performance for the balance of this year and make whatever adjustments to the brand's spending we determine is appropriate to sustain a positive competitive share position as well as a balance profit performance. Depending on competitive and overall market conditions, this approach may or may not achieve the same level of unit volume improvement experienced during the second quarter of this year. I would take this opportunity to reiterate Lorillard's long standing view that the rationale for spending behind Newport is not intended to solely drive volume, rather we'll continue on a path that results in a disciplined share and profit result to sustain long term competitive strength. And now I'm turn the call back to Josh.

Thank you Marty. Operator, we'll open the floor up to questions now, please.

Thank you. The floor is now open for questions. If you do have a question please press *1 on the telephone keypad at this time. If at any point your question is answered, you may remove yourself from the queue by pressing the pound key. We do ask while you pose your question you utilize the handset to provide optimum sound quality. Once again, *1, on the telephone keypad for any questions at this time. One moment while I poll for questions. Our first question is coming from Martin Feldman of Merrill Lynch please go ahead.

Thank you good morning, Jim, Peter and Marty. Marty, a few questions on the tobacco business. Firstly, tell us where the menthol segment was sold as a proportion of the overall U.S. cigarette market was in the quarter and when the little -- is it still growing as it had been in the previous few quarters?

Hi, Martin. The overall menthol segment, as I indicated, was pretty much flat. With the first quarter at 26.8% of the total market. So there really hasn't been any significant shift there.

Okay. Thanks for that. Marty, this -- I suppose, could be characterized as an unfair question, but I'll ask it anyway. When I look at the quarter, the -- Lorillard has always enjoyed -- or CG always enjoyed the highest profit per thousand cigarettes of any company by a big margin. Comparing it to PMUSA I see in this quarter, you were down to the difference between your profit per thousand and PM U.S.A. down to 32 cent and $1.88 in the first quarter. Of course there's other brands involved, how much of that is due to the fact that PMUSA has been quite considerably more aggressive in promoting the Marlboro menthol as opposed to other products and so to some extent you wanted to grow your percentage profitably and that's the cause reduction or PMUSA is almost flat in profit per 1,000.

This question has come up, obviously, in other calls. The trend for us, over the last year and a half, has been lowering operating income per thousand units. We still, as you indicate, slightly ahead of Philip Morris. Philip Morris benefits -- this is against total volume. So, since Newport is the predominant volume factor in our mix, the heavier spending on Newport obviously has a impact on our profit per thousand. In Philip Morris's case, even though they're very aggressively promoting Marlboro menthol, they obviously, and this is a supposition on my part, they have, obviously, reduced their spending in other -- behind other brands and/or on the base Marlboro brand. So, in our case, there's a disproportioned affect because Newport represents the bulk of our volume.

Marty, talking about the competitive environment for a second, I note in the quarter, Kool's volumes were down 2 1/2%. Any notion as to where those volumes went or who picked up the extra share? Do you think it was mostly Newport.

I think Newport and to some extent [ INDISCERNIBLE ] picked up the share.

Okay. That's really helpful. Thanks for that. Okay Well, Marty, perhaps I should say, another question. Or perhaps -- well, you're accruals for the balance of this year, and next, you're MSA accruals, should the per pack amount be essentially flat with the second quarter?

Well, our accruals are date and part on based-on volume outlook and as well as inflation factors. And one of the reasons are the two main reasons are: settlement expense, as stated currently, is up, vs. a year ago is attributable to increased estimates on the consumer price index as it affects our accrual on settlement costs, as well as to the lesser extent increased volumes that we've generated this year. So -- but the answer to the question is: it will depend on where the inflation factor comes out and the projections are as well as volume.

Thanks for that. If I might a quick question for Jim. Jim, I noticed that CG did not pay down any debt during the quarter, and I think it's been a while since that was the case. I wonder if you could give us any color as to why it didn't? And if I'm -- if I might just perhaps make a comment. If the national rate of debt of 8% becoming, obviously, as it's harder to achieve that in the market, that 8%, is that an encouragement against paying down debt from CG to Loews just because you like obviously that attractive rate of interest? That's one question. And the other one, I think I lost it in the past, but can you give any color on the investment income to CG during the quarter?

Sure. Let me talk about just what's driving the pay down of the debt. And that is that number one, our goal is to pay down the debt as quickly as possible. And Loews has maintaining a cash position of a maximum $150 million for the benefit of CG. And everything over that goes to pay down CG's debt. My guess, although I haven't seen the numbers yet for this quarter, is that there will be a pay down authorized by the Board in the coming weeks.

Jim, just a clarification on something Martin said. We are, in fact, paying down debt. It isn't at as high a rate as it had been in prior years in the first quarter, and this was paid down in the second quarter when the dividend is declared. The debt was reduced by, approximately, $18 billion and stands 1.980 billion and at this time we haven't yet declared -- the Carolina Group hasn't declared -- Loews hasn't declared the second quarter dividends but I would anticipate it will be a further pay down when that is done.

And as for the investment income for Carolina Group, we have been investing -- as you know, from time to time, we will invest in securities longer than money market instruments in order to improve the yield, but we only like to do that when we have confidence the yields will be stable or go down. We really haven't had that confidence for the past three or four months, so we basically been in cash investments. That has generally served us well because of the significant increase in yields along the yield curve, but at some point in time, we may make a stab and re-enter the market.

Okay. Then, Jim, thanks for that. Last question for Peter. Could you give us a tax rate that you are comfortable with for the balance of the year for CG?

Peter, are you there?

Did you hear the answer?

No, please repeat.

I said, we really can't project tax rates for the balance of the year, looking forward.

Okay. Thanks very much.

Thank you. Our next question is coming from David Adelman of Morgan Stanley please go ahead.

Good morning, everyone.

Hi.

Marty, can you amplify the comment you made about changing the procedures for retail price discounts, please?

Yeah. Part of the shift in our promotional spending is a result of newly instituted procedures in terms of how we account for buy-down volume at the retail level. By our sales force. And that's resulted in a more efficient use of our promotion dollar resource, if you will. So its a matter of administrative issue in terms of how to keep track of the buy-downs the retailers were doing and the change occurred, basically, coming into this year as I said, resulted in a more efficient use of the dollars.

But there wasn't any type of one offer or one-time benefit in this quarter as a result of that change?

No.

Okay. Secondly, Marty. The -- I mean, the top line numbers to me, and the way I calculate it, would show some moderation in the rate of promotional spending.

Yes.

Q1 to Q2 is that the case?

Moderation in absolute spending is correct. The affect of what we've done, both in terms of the economies that we've realized through the change in the buy-down approach as well as we made some adjustments to the discount values by market grouping, so the mix of discount has changed and it's lowered the per-pack basis that we promote against. And nonetheless we still have promoted on an absolute volume basis and we slightly increased our -- the scope of our promotional effect over the volume, vs. the quarter last year. That was clearer, if it's not--

No, then, the change, in how you're executing the programs, that in and of itself, is that a deficiency issue or did that in and off itself result in lower per-pack promotional spending or less, sort of, funny business in the trade?

It's a combination of all of those.

Fine. The -- and do you think that the promotional spending can stay at these levels through the second half of the year? Is this sort of the right -- planning run rate as you proceed?

Well, you know, David, we don't provide any forward-information on that subject, but I -- I'll stand by what I said in that the end of my prepared comment, and that is that we, you know, are constantly looking at the market. And we may or may not make the adjustments, depends on how we view the overall market and competitive factors and it may or may not [ INDISCERNIBLE ] same rate.

Okay.

I'm afraid I can't be more specific.

Can you comment on the cost of SG&A in the quarter in up 15% and 10% respectively

Well, SG&A broken out separately?

No just I have the number broken out.

yeah.

Up 10%, cost of goods sold, excluding MSA cost and excluding excises up 10%.

Right.

That's a little abnormal for how the cost structure normally behaves is there anything unusual in those items in the second quarter?

The -- we had a couple of shifts in terms of -a lipo factor as well as some increase in terms of some of our promotional goods because we had some for free goods promotional unit expense in the second quarter that really will affect the market in the third quarter. So, that pretty much contributes to that change. There was other minor changes.

Two other things, Marty. One, the heavy-up initial promotion on Marlboro menthol 72 millimeter did that have a visible impact as far as you read it on Newport's performance?

Not really. I don't know. If you look at total Marlboro menthol whether or not the emphasis on 72s increased the overall promotional support behind Marlboro menthol, clearly, Marlboro menthol in totality, whether it's72s or any other packing continues at a high rate of promotional spending, I can't attribute necessarily any specific shift to the 72s.

And, then, Marty, the Newport share sequentially at retail, if I have my numbers right down very modestly, am I correct? If so, is that a concern at all of yours?

No, it's not a concern. It was down sequentially, slightly. You know, it comes back to what I've also stated as our approach. We may make adjustments on the spending, in promotion. You know, the questions come up in the past, you know, I think the call before this one somebody stated that our share increases may be too costly. Well, we're always looking at the relationship between the shared growth and the profits and there's adjustments to be made, likely.

Then, Peter, one question. You mentioned in the prepared remarks, a billion 4 at cash at Lorillard. Are you including the cash at CG in that number?

No. That's included in -- that's not included in the Lorillard.

And is it the CG cash at 100 million or 150 million?

100.

100.

100 plus a little bit of accrued interest.

So the total is more like on a CG basis, about a billion 5.

If you added them together, that's correct.

Okay. Thank you.

Thank you our next question is coming from Donald Lipkin of Bear Stearns please go ahead.

Good morning. According to MSA Inc., we're doing our numbers differently to include deep discounts. What were the total market shipments for the quarter according to MSA Inc.?

Let me point out the change is not affected by adding additional deep discount manufacturers the change is the basis of the change is the model that MSA has been using to estimate deep discount volume. So, they've increased, basis the new model they're using, the deep discount volumes have gone up. And I don't have the number handy, I'm afraid.

Okay.

But the effect is on market share, that's the bottom line.

What is your market share?

Our market share for this quarter, for the second quarter, on shipments, or you talking about the retail?

I'm sorry, shipments.

Shipments, right. Our Lorillard overall market share for the second quarter 8.73 vs. 8.29 last year and Newport's wholesale market share was 7.92 vs. 7.43 a year ago, second quarter.

Okay. And that number if I divide by 9.1 billion in sales, gives me the total market and that would include all of the deep discounters?

Yes, that would include that.

Okay. And do you know what the market share of -- I guess it's the other way of asking the market share of the five companies, four OPMs plus Ligit?

I don't have it.

I'll get it later. Thank you very much.

Thank you our next question is coming from Judy Hung of Goldman Sachs.

Hi, everyone. Marty, to follow up on the questions asked earlier, if we look at the operating profit per thousand this quarter down about 4% vs. last year and yet you're revenue per 1,000 was up close to 9%. So, from what you're saying, is the difference some of the one-off items like the lipo factors that caused the cost of goods sold and other costs to come in higher than expected?

Essentially, yes.

Okay. And, then, just, again, to follow up on the settlement payment questions, I know that you're adjusting that number as the year progresses and some some of the factors you're considering, second quarter, settlement payments up 25% seems it's unusually high. So, I'm wondering if you could add more color to why that would be up so much and what you're expecting for the fuel year to be in terms of the settlement of [ INDISCERNIBLE ] per thousand.

As I indicated, Judy, the inflation had a significant impact. The adjustment in the inflation outlook had a significant impact as well as the higher sales volumes from the second quarter. And, then, other adjustments that typically take place in terms of the accrual of that settlement clause. So, as I said earlier, it's kind of hard to -- the rate would be pretty constant, if all of the factors I mention remain pretty much the same. If the inflation estimate doesn't change and if the volumes pretty much stay in the same direction, then that's, you know, that will be the end line number, basis.

Okay. And, then, looking at the second half of this year, I know you don't want to comment on the forecast specifically, but, if you could give some perspective on, you know, on -- on -- on -- on how the profit could actually unfold in the second half? On one hand you got volume comparisons pretty tough because of the second half of last year you had pretty good volume growth.

That's correct.

On the other hand, the second half of last year is when you really stepped up on the promotional spending so the spending comparison seems to be easier. To balance those two and unless -- and -- and -- and unless something unusual happens from the competitive standpoint what happens to in terms of the profitability per unit?

It's's really difficult to give you an answer, short of providing an estimate what we think the result would be for a performance look, the variables here, as you said, we'll face a tougher volume comparison in the third and fourth quarters vs. last year and so the influences on our profit will be the direction of the volume and the relative spending on the promotion. And so that's going to affect it and I can't really give you a better answer than that at this point in time.

How much of uncertainty is there in terms what Reynolds American come out and change the brand per fully strategy as it relates to the menthol brands?

here's no uncertainty in the sense that if they're committed -- if Reynolds American is committed to the same principles stated by R.J. Reynolds a year or so ago, almost a year ago, we would expect nothing significant to change in the course of time. I know there's been a lot of speculation about how Reynolds America will manage the two menthol brands now in their portfolio. I really can't personally speculate on what they'll do. I don't know, obviously. But I -- we don't foresee any significant competitive affect on Newport as we go down the line. But, that remains to be seen.

Okay. Last question, Marty: It looks like some of the other cigarette companies are focused more on the reduced risk products, Philip Morris talked about coming up with a product and in the latter part of this year, R.J. already has a Eclipse and BMW has Advance. Really haven't heard you talk about kind of what you -- what you're reduced risk strategy is and if this is actually a segment of the market that you think can have some growth opportunity in the future? Or you think it's -- it's -- it's something that really depends on -- oh, what kind of technology is there to come up with a viable product?

Well, we, as a matter of course, do not publicly comment on whatever product development activities we're engaged in. So, we're at some others tend to talk about it. I think our silence on the subject doesn't necessarily imply that we're not looking at that category as a potential opportunity. I think that, you know, if you look at the products that are out and brands out on the market today, clearly they've not enjoyed very much success. The BMW entry advance although they're expanding to another test market or have expanded it to another test market really hasn't shown dynamic growth and the Reynolds's products been around a long time, we all know if we're familiar with the tobacco market it really hasn't done anything. That's not to suggest that there may not be an opportunity in the future. And clearly we are always working on developing a product and technologies that may and will keep us competitive in the future depending on what market categories emerge. The fact we haven't said anything doesn't mean we don't have an interest in that particular area.

Okay. Thanks.

Okay.

Thank you our next question is coming from Kurt Fuerman of Packston go ahead.

I would like to shift the focus from the results of Carolina Group to the shareholder value of Carolina Group. And I just have a few comments and a question. Every Loews conference call is dominated by Marty's comments on Carolina Group. The fact is, Loews, you know, has done extremely well and CG shareholders have not. Loews, obviously, pulled $1 billion out of 28, pulled more out of the 23. Obviously pulled money out of the debt repayment and what Loews has not pulled out it charges an onerous 8% to CG. Since the IPO CG is down 14% the best comparable is RJR 100% domestic and RJR having been dealt a much worse hand than CG is up 18%, and they're -- it's up 18% because of shareholder value proactive of movements by management, and no other reason. So, in light of that, my question is: Does Loews management care at all about CG shareholders? Or is the focus simply on pulling out cash?

Loews management cares a lot about CG shareholders and in fact, the last time I looked, Loews was the largest CG shareholder that there is. You talk about RJR, and a big part of the reason why RJR is up so much is because of the cost cutting that they did. CG doesn't have those kinds of costs to cut. If you look on a profit per thousand bases, and if you look on total volume basis, I think you would see that CG has dramatically outperformed RJR over the years. And I think that you selected, as you're base in RJR, the stock that's performed the best in large part because it had really been the worst for so long. I think if you compare CG to Philip Morris, for example, you'd find we performed pretty much in line since CG has gone public. Our goal is to provide good, strong returns for the CG shareholders. I think when you analyze the returns to the CG share holders, though, you should not just look at share price. CG plays a hefty dividend. Right now shall the dividend yield, I think, is over 8%. That's 8% that shareholders are getting each year and CG has been public now for over three years and that's probably 24-25% that they've taken in as well. So, overall, I'm not pleased with the performance of CG. I think, however, that a lot of it has been the result of what's going on in the tobacco markets. I think Lorillard has performed very well in the context of the tobacco markets, and I'm hopeful that shareholders in the stock markets in general will realize and appreciate the outstanding performance Lorillard and the team have turned in year after year.

Have you looked, specifically, at, in light of the -- I -- just compared to Philip Morris, it's also underperformed Philip Morris, but, Philip Morris has other issues, namely Kraft, which is -- you know, if you just looked at the pure tobacco -- pure U.S. tobacco.

But, before you finish, underperformed Philip Morris. Don't just look on the price basis.

Right.

You have to include the dividends, because of CG, outyields Philip Morris.

Right.

by a significant amount.

Have you looked at the possibility of refining the balance of the debt that CG owes to Loews?

Have we looked at the possibility of what?

refiling it. Basically, taking a public debt and giving Loews back the money and if that could improve the interest rate on the debt? Do you understand what I'm saying?

Completely. My guess is, that even in today's market of lower interest rates, that bondholders can demand a higher rate than 8% on that debt.

Okay.

And I think that still today is well within the context of the market.

Thank you.

Thank you. Our next question is coming from Rob Medway of Royal Capital. Please go ahead.

Hi. Nice quarter. I had a question about Moody's and the rating agencies to the extent you can say anything. I was just curious because you had nice performance, again, this quarter, C&A came through in a boring quarter. How's the progress in kind of converting them to a positive tone on the holding company and C&A?

With respect to CNA, we're hopeful that some of the negative outlooks will soon come off. CNA has performed at least as well as we have told the rating agencies that it would perform. CNA has delivered on everything that it had promised the rating agencies going back nine months to a year now. And in the context of CNA boring is very, very good. And I think they will take some time, take their time with respect to upgrading CNA because they want to have confidence that CNA is not going to have another reserve charge and so we're going to have to be patient on that. As I said, I think that sooner, rather than later, we'll see the negative outlooks come off. With respect to Loews, for the life of me, I don't understand some of the ratings that we're getting, especially from Moody's which I think has us rated as BW-1 and we already have more cash than we do debt. We have over $500 million a year of cash-free, free, free-cash-flow, totally uncommitted coming into Loews each year and we have less than 2 1/2 billion dollars of debt. And that 500 million is after all of the debt service. And we have a diversified book of business and in my mind no reason Loews should have such a low rating.

Is your sensitivity to Moody's one of the things that as a governor on the ability for Loews to once again potentially think about buying back stock, is that one of the problems that--

Well.

You face?

-- the Loews rating is directly and indirectly connected to the CNA rating. So, we do have to be very protective of the Loews' ratings until CNA gets breathing room in its own ratings. So, yes, it is a factor.

Okay. Thank you very much.

Thank you our next question is from Michael Millman of Millman Research.

I wanted to follow-up on that, and was wondering with CNA paying back the 300 million and so now the holding company of 2.4 billion of cash, if that didn't clearly suggest that CNA financials were at least stabilized and would permit you to buy back, at least, some shares. In fact, looks like the last quarter shall the actual number of shares increased, and also, had a question regarding the book value. And that is: the book value declined in the quarter, because of the effect of interest rates rising on, I guess, CNA's portfolio and if you could talk about what, if anything, you can do about that, or to what ex-- what's the sensitivity? In other words, if we see another hundred basis point increase by the Fed over some quarters, what affect might that have on their portfolio and you're book value and could you tell us what is CNA's current book value and what was that at the end of the year?

At the end of the quarter, CNA's book value was about, 28 1/2. And the -- what happens is, that, if the fed raises interest rates by 100 basis points that will not necessarily have an affect on CNA's and Loews' book value. What has an affect is what happens in the intermediate sector of the of the bond market, say the 10 year as it goes up CNA investments go down and while those investments changes currently do not go through the income statement, they are reflected in the balance sheet through shareholder equity in the unrealized gain and loss section of the shareholder equity account.

Jim, the CNA book value was 2925.

I'm sorry, 2925. But, so, if intermediate rates were to go up you could expect a decline in CNA's book value and Loews' book value.

Are you doing anything to try and offset that?

You know, you know -- there are -- there's no free lunch in this world. 10 year rates on government securities are close to 460. And the rate on cash is 1 and a quarter. If we want it to be completely risk-free we could move 20 million, 25 million dollars from earning 5% down to earning 1%. It would totally kill earnings. So, the balance that we have to strike is between risking a book value on the one hand, and earnings on the other hand. I would submit to you that it is totally unfeasible to operate a property causality insurance company, though, with a portfolio with a duration of less than a year.

To the extend that intermediate end of the market continues to decline, prices decline, rates go up, you're going to continue to take a hit at the book value and; secondly, it sounds as though that you're -- the repurchase of Loews' shares are totally dependent upon getting an improved credit rating?

No. No. The first answer is yes. That CNA, Loews' book value will move inversely with the price of bonds. It will also be affected, though, by our earnings that we have throughout the course of the year, obviously. And no, CNA is not solely reliant - Loews' decision to repurchase it's shares is not relying solely on the rating agencies but it is a factor in it.

Could you give some idea of what other factors are? And can we expect some repurchasing in the current quarter?

You know, I really want to refrain from talking about share repurchases. As we said for a long time now, Loews takes -- Loews' management takes a very proprietary interest in that and don't want to lay out exactly what the plans are for those share repurchases and what drives them.

Thank you.

Our next question is coming from Jim Keffer of Artists & Partners. Please go ahead.

I don't think I'm alone when I express frustration with your share repurchase policy. Rather than harp on that, I'd like to take it a different direction and ask you to share with the philosophy as spin-outs to boost shareholder value. You all had experience in arbitrage and I would respectively submit to you that an hour of opportunity has persisted for a long period of time and you have not acted upon that.

We believe that -- I guess what you're talking about is the discount that Loews trades to shareholder value? Or the Loews trades to the value of the sum of the parts? And my comment there is that we believe over time, that Loews will close that discount and if not, possibly through share repurchases or other actions, we can take advantage of that for the benefit of all of the shareholders.

How about a little more direct elaboration on the spin-out concept and the thoughts and pros and cons of using that tool?

Well, first of all, it's difficult to spin-off Carolina Group. Because that's a letter stock. And Loews currently owns about two-thirds of that. With respect to CNA, it's a company that is, I think, strongly on the mend and is going to turn in solid results and I wouldn't think of spinning that off. With respect to Diamond Offshore because we own less than 80%, any spin-off of that would be taxable to shareholders. So, that overall, I think, right now, a spin-off for any of these pieces just doesn't make sense. Additionally, in spinning off any one of these companies, that would be a significant affect on the debt ratings which we would have to take seriously into account.

Thank you.

Thank you our next question is coming from Rob Campagnino of Prudential Equities.

I don't want to repeat anything. As a matter of housekeeping, Pete, go through the components of cash and debt at the corporate parent?

Just the numbers, again?

Yes.

Sure. Hold on just a second. We have -- what I said in the 2.3 billion, approximately, at Loews and excluding Lorillard and excluding CNA and Diamond. But, including Carolina Group.

Okay.

1.4 billion, approximately, at Lorillard.

Perfect. One quick question for Marty. Have you been seeing any change in the level of counterfeiting around Newport say in the last six months?

Actually, we've seen, as far as we can tell, a -- no -- no dramatic increase. It's been pretty quiet, fortunately.

I was actually thinking more along the lines of a decrease. Is that something--

Well it's difficult, we can't quantify it. I think the only way we can sort of -- the only indicator we can use as a measure of that is what we discover and we've discovered a lot less in the last few months, than we did last year.

Okay. Thank you very much.

Operator, I think we'd like to make this the last question.

Thank you our final question is coming from Brad Smith of Merrill Lynch please go ahead.

Thanks very much. Good morning, gentlemen. I was wondering, with respect to the investment in CNA, I understood I hopped on a little bit late but I understood there was a payment of 300 million made in the quarter and I'm just wondering, do you anticipate being able to repay any additional amounts of capital through the balance of the year and just indicate what the expectations are?

You know, that's really going to be up to the CNA board and those are decisions that they have to make and I think I'd leave it to them, for the time being, I would say, simply say, that Loews is in a very liquid position and we're very comfortable with our level of liquidity now.

Thank you very much.

My pleasure.

Thank you, Operator. We'd like to end the questions there.

I'd like to turn the floor back over to you for any further remarks.

That's it. Thank you for joining us this morning. As a reminder, in about two hours the replay will be available on our website, Loews.com and CNA calls are archived on the website for replay, CNA.com. Thank you very much.

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