洛茲集團 (L) 2005 Q3 法說會逐字稿

Good morning. My name is Karen, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Loews Corporation Third Quarter 2005 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. [OPERATOR INSTRUCTIONS]

It is now my pleasure to turn the call over to your host, Josh Kahn, Director of Investor Relations. Sir, you may begin your conference.

Thank you, operator. Good morning, everyone, and welcome to Loews Corporation third quarter 2005 earnings conference call. As the operator mentioned, I'm Joshua Kahn, the Investor Relations Director for Loews. If you have not yet received a copy of today's Loews Corporation and Carolina Group Earnings Releases and would like either one, please go to our website, Loews.com.

Jim Tisch, the Chief Executive Officer of Loews and Peter Keegan, the Chief Financial Officer of Loews, will lead today's discussion and will be joined by Marty Orlowsky of Lorillard. Before we begin, I'd like to make a few brief disclosures concerning forward-looking statements. This conference call will include the use of statements that are forward-looking in nature. Actual results achieved by the Company may differ materially from those projections made in any forward-looking statement.

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. We urge you to read the full disclaimer, which is included in the Company's 10K and 10Q filings with the SEC.

I'd also like to remind you that during this call today, we may discuss certain non-GAAP financial measures such as operating income. With regards to such financial measures, please refer to our earnings release for reconciliation to the most comparable GAAP measures.

There will be time for questions after Jim, Peter and Marty have discussed the results. For those of you who have tuned in via our website, please call 877-692-2292 during the q and a session if you'd like to ask questions.

Now, I'd like to turn the call over to our CEO, Jim Tisch.

Thank you, Josh, and good morning, everyone.

The central theme for the third quarter of 2005, much like last year's third quarter, with hurricanes. This year, however, it was the Gulf of Mexico, instead of Florida, that bore the brunt of the season's storms. In particular, Hurricanes Katrina and Rita were disruptive for our subsidiaries that have exposure to the Gulf region, which includes Diamond Offshore, Boardwalk Pipeline, Loews Hotels, and CNA.

I am proud of the way that these businesses met the significant challenges posed by Katrina and Rita. All things considered, the financial impact was manageable. The Disaster Recovery Plan laid out by each of our businesses played an important part in mitigating the impact of the storms. Unfortunately, however, many employees of CNA, Diamond Offshore, Boardwalk and Loews Hotels, had to endure serious disruptions to their personal lives as a result of the hurricane. Loews established a matching program that enabled the employees to assist their affected colleagues in their time of need, which was met with great generosity. Here, too, I am proud of our response to these crises.

In spite of all that happened during the quarter, earnings to Loews' common share rose to $1.25 in the third quarter of '05, from $1.21 per share in the third quarter of '04. As usual, in just a moment, Pete Keegan will provide additional commentary to add clarity to Loews' financial performance.

I should point out that we will not be able to comment on Boardwalk Pipeline during today's call. As many of you have already seen, Loews announced in August that its wholly owned subsidiary, Boardwalk Pipelines Partners, LP, filed a registration statement with the SEC for an Initial Public Offering. The guidelines of the SEC restrict us from making any remarks about Boardwalk in anticipation of this IPO.

For an update on the impact of Hurricane Katrina on Boardwalk Pipelines, please refer to the 10-Q that Boardwalk filed with the SEC on October 21 of this year.

CNA's income before investment gains and losses fell quarter-over-quarter as a result of the $294 million [acid test] catastrophe loss that it recorded relating primarily to the recent hurricane. CNA's property [value] per unit again recorded a combined ratio before catastrophe losses of less than 100%; this time at 93.5 and the Company as a whole generally performed on target. A replay of CNA's third quarter conference call, which took place earlier this morning, is available on CNA's website if you'd like more detail on third quarter results.

Lorillard's earnings increased over the third quarter of '04 as sales volumes grew materially and promotional spending was lower. Newport's buyings improved more than 3%, resulting in better market share produced by the brand. Marty Orlowsky, the CEO of Lorillard, will join us in just a moment to provide his view of our tobacco operations this quarter.

Diamond Offshore continues to benefit from very robust market conditions in the offshore drilling sector, despite the interruptions from the hurricanes in the Gulf. Hurricane Katrina ripped one of Diamond Offshore's jackup rigs from its drilling location. The rig, the Ocean Warwick was later found off the coast of Alabama, some 66 miles away. The rig was declared a total loss, but was insured for $50 million, net of deductible. Its book value was about $14 million dollars, resulting in a gain reported in Diamond Offshore's third quarter earnings report.

Both Katrina and Rita also caused minor damage to several other Diamond Offshore rigs. Nevertheless, the Company's third quarter earnings contribution to Loews increased by almost $41 million dollars, reflecting a significant year-over-year improvement in day rates and utilization across all rig categories.

Loews Hotels were the beneficiary of continued strength in the lodging market during the quarter. Net income increased by $4.5 million and was (inaudible) , so all the Company's hotels improved by almost 19%. The Loews New Orleans Hotel, which Loews Hotels manages, but does not own, was forced to close for a few weeks as a result of Hurricane Katrina, but is again operating on a limited basis. The temporary closure of the Loews New Orleans does not have a material impact on the results of Loews Hotels.

Now, we'll turn the call over to our CFO, Pete Keegan, who will provide more details relating to the financial departments of Loews this past quarter.

Thanks, Jim, and good morning, everybody. Loews Corporation reported consolidated net income of $300 million in the third quarter of 2005, versus consolidated net income of $278.5 million in the third quarter of 2004. Net income for Loews common stock was $232.5 million, or $1.25 per share in the third quarter of 2005, compared to net income of $225.1 million or $1.21 per share in the third quarter of 2004.

Third quarter '05 results include catastrophe losses incurred by CNA of $268.3 million after taxes and minority interest relating to the third quarter hurricane versus loss from hurricanes of $158.8 million in the third quarter of 2004. Third quarter of 2005 results also include a gain of $8.9 million after taxes and minority interest recorded by Diamond Offshore relating to an insurance settlement for the Ocean Warwick which was destroyed by Hurricane Katrina.

The gain recorded by Diamond Offshore includes offsetting losses incurred from damage caused to other rigs by hurricanes during the third quarter of 2005. Third quarter 2005 hurricanes also resulted in $3.9 million in losses at Boardwalk Pipeline.

Net operating income for Loews common stock, determined by splitting net investment gains from net income was $198.5 million in the third quarter of '05, versus $255.3 million in the third quarter of '04. Third quarter of 2004 operating income includes income of $116.5 million after taxes relating to the sale of 4 crude oil tankers. Net investment gains for the third quarter of 2005 were $34 million versus losses of $30.2 million in the third quarter of 2004. The variance is primarily attributable to the more favorable performance in the third quarter of 2005 of derivative securities in CNA's investment portfolio.

Net income for Carolina Group stock was $67.5 million or $0.99 per Carolina Group share in the third quarter of 2005 versus $53.4 million or $0.92 per Carolina Group share in the third quarter of 2004. Income for Carolina Group stock increased in the third quarter of '05. Its total cigarette volume grew 3.3%. The increase in income for Carolina Group shareholders reflected improvement in Lorillard's operating performance, as well as the higher weighted average number of Carolina Group shares outstanding during the quarter. The weighted average CG shares outstanding increase from $57.97 million in the third quarter 2004, to $68.23 million in the third quarter 2005 as a result of the sale of 10 million shares of Carolina Group's stock by Loews in December of 2004.

Loews Group currently holds 60.7% of the total shares and share equivalents of Carolina Group. Lorillard contributed $125.3 million to net income for Loews common stock in the third quarter 2005 versus $133.5 million in the third quarter of 2004. The decline in Lorillard's contribution to Loews net income is a result of the decline in Loews common shareholders' interest in the earnings of Carolina Group. Lorillard reported charges of $140.8 million and $132.8 million after taxes for the third quarters of 2005 and 2004 respectively, to accrue its obligations under various state settlement agreements.

CNA contributed a loss of $31.2 million to Loews' net operating income in the third quarter 2005, versus income of $17.7 million in the third quarter 2004. The results of CNA reflect losses from the third quarter hurricanes. Loews' interest in CNA's net realized investment gains improved to $38.6 million in the third quarter 2005 from a loss of $38.2 million in the third quarter of 2004.

Boardwalk Pipelines contributed $4.5 million after taxes in the third quarter of 2005, versus $1 million after taxes in the third quarter 2004. This improvement is primarily due to the addition of Bell South Pipelines, which Boardwalk purchased in December of 2004. Boardwalk's third quarter 2005 results include losses of $3.9 million after taxes relating to damages cause by Hurricanes Katrina and Rita.

Diamond Offshore's contribution to net profits improved to $40.6 million in the third quarter of 2005, from $0.1 million in the third quarter of 2004. This improvement reflects the continued strength of the offshore drilling market. Day rates were significantly higher for all of Diamond Offshore's rig categories in the quarter. Utilization rates were also generally higher with the exception of the high specification rig category, which though utilizations declined slightly on account of hurricane and rig mobilization activity during the third quarter of 2005.

Loews Hotels continued to benefit from a strong travel and leisure market. Third quarter 2005 net income improved to $3.7 million, from a loss of $0.8 million in the third quarter 2004. The average room rate for all owned hotel improved to $190.15 in the third quarter of 2005, from $167.03 in last year's quarter, an increase of 13.9%. Occupancy for all owned hotels was 79.9%, up 3.3 percentage points from the third quarter of 2004.

Net investment income in other, which is comprised of Loews' investment income, corporate interest expense, income from operations of Bulova, equity earnings from Majestic Shipping Corporation and other unallocated expenses declined from $106.8 million in the third quarter of 2004, to $55.6 million in the third quarter of 2005. The third quarter 2004 figure includes income of $116.5 million after taxes relating to the sale of 4 crude oil tankers.

At September 30, 2005, total cash and investments of Loews was approximately $1.96 billion including the Carolina Group reserve of $100 million. There was $1.16 billion of long-term debt at the holding company level at the end of September.

And that concludes my remarks, and now I'll turn the call over to Marty Orlowsky of Lorillard.

Thanks. Good morning, everyone. Net sales revenue for third quarter of 2005 for Lorillard was up 4.9% versus the third quarter of '04, at about $1.2 billion. Operating income and net income were up 4/10 of a percent and 2% respectively for the same periods of comparison. Contributing to the sales growth was an increase, as already mentioned, of 3.3% in Lorillard's total wholesale unit volume shipments and a 2.8% increase for domestic shipments that were shipped in the third quarter of '05 as compared with the third quarter of '04. Newport's domestic units shipped reflected an increase of 3.3% for the same quarters of comparison.

Negatively impacting the third quarter of '05 operating income results were incremental expenses that occurred versus the third quarter of '04, related to state settlements and tobacco grower buyout assessments and surplus lease sell-off costs. State settlement expenses increased by 10.7%, or $21.6 million, as compared with the corresponding period a year ago, due to increased shipments and inflation and volume adjustment factors. Grower buyout costs were up $16.3 million, or 43.7%, versus the growers trust payments of a year ago, since the unit volume assessments and a $13 million charge taken in the third quarter of 2005 as part of Lorillard's share of the disposition of surplus lease by the Department of Agriculture.

Net income was also affected by these same expense factors. However, Lorillard's net investment income for the third quarter of 2005 benefited from a gain in investments, having a positive affect on net income, although this gain was not large enough to offset the effects of the incremental expenses just discussed.

Looking ahead to the fourth quarter of 2005, we believe several factors may not allow for a favorable comparison to the results achieved during the fourth quarter of 2004, nor would they be in line with the third quarter of 2005 performance. Wholesale shipments for the fourth quarter of this year may not benefit from large purchases by customers that occurred last year in the fourth quarter, primarily due to advanced buying by many wholesalers in anticipation of pricing changes that were to take effect at the end of the fourth quarter of '04 and early 2005.

This would lead us to believe that shipments could be adversely affected in the fourth quarter of this year, as compared with the fourth quarter of 2004. The brand mostly impacted by this potential shipment effect is Newport. Further, as we've often stated, our promotional spending strategies behind Newport are subject to change based on the brand's trends and competitive factors. As well, we continue to attempt to balance Lorillard profitability and Newport's share performance with the long-term perspective in mind. We do not manage the business on the basis of quarterly results, but view our spending options over the course of time consistent with this balanced approach. The relatively strong volumes achieved in the fourth quarter of 2004, and the highest cost associated with state settlement and grower buyout expenses in 2005 may result in an unfavorable comparison between this fourth quarter and that of last year.

Lorillard's domestic shipments increased by 2.8% as compared favorably with total industry shipment decline of 1.9% in the third quarter of '05, as compared with the third quarter of '04. Lorillard's share of shipments for the third quarter of '05 was 9.2%, up a half a share point from the third quarter of '04. Newport's domestic wholesale units market share for the third quarter of '05 was 8.4%, an increase of a half a share point over the third quarter of '04.

Lorillard's share of premium brand shipments in the third quarter of '05 was 11.8%, versus 11.4% for the third quarter of '04. Based on our retail database, Newport achieved an 8.8% share in the third quarter of '05, an improvement of 3/10 of a point over the third quarter of '04. The brand share of the menthol segment in the third quarter of '05 was 32.5%, as compared with the segment share for the third quarter of '04 of 31.4%, an increase of 1.1 segment share points. And now, I'll turn it back over to Josh.

Operator, we'd like to take questions at this point, please.

Thank you. [OPERATOR INSTRUCTIONS]

Our first question is coming from David Adelman of Morgan Stanley. Please go ahead.

Good morning, everyone. Marty, I wanted to ask you a few questions. One is that Newport's retail share was sequentially down a bit. Is that a concern at all to you?

No. It was down slightly and I believe that's a result of some heavy Marlboro Menthol promotional units that went into the market during the third quarter and tended to depress the retail share. But I don't think it truly has affected the underlying strength of the brand.

And I'm curious. Salem is essentially in a free-fall. Is that influencing your promotional spending? In other words, do you look at this as a unique window of time to convert that consumer's franchise to Newport?

I'm sorry; I didn't hear the first part of you.

The fact that Salem is currently in a free-fall, is that affecting your promotional spending tactics behind Newport?

No. We're not reacting specifically to Salem's performance in the market. As I said, we look at Newport's trend basically, and we look at the competitive --, more so to the competitive menthols promotional schemes that are out there and that more affects us than Salem's status in the marketplace.

And are you seeing Kool's retail presence increase as Reynolds has emphasized that brand? Is that visible?

I would say what we have seen reflects what I would call a marginal improvement, not anything significant or radical in nature.

Okay. And then lastly, Marty, have you fully now funded the tobacco pool buyout costs for the full year through the 9 months?

We have pretty much fully funded it. We anticipate, based on information we received from the government, that there might be a bit remaining in the fourth quarter and our best current estimate in terms of the impact was, would be negligible, but there may be a slight additional charge in the fourth quarter.

Okay, thank you very much.

Thank you. Our next question is coming from Patrick Goldwell of Goldman Sachs. Please go ahead.

Good morning. I just had one quick question, Marty, on the tobacco buyout charge. You mentioned that incrementally, the share was $60 million. What was the charge this quarter in total for the tobacco buyout?

For the buyout itself, it was $27.5 million.

Thank you.

And that includes the charge on the lease sell off.

Okay. And how much was that again? That was?

$27.6 million.

I mean the charge on the lease sell off.

Around $13 million.

Okay. And secondly, I noticed that your cash balance on a year-over-year basis has gone up slightly. Is there a reason why your debt buybacks have -- why your cash balance has gone up and perhaps why your debt buyback hasn't been as high as it could've been had you maintained the same cash balance?

Are you (inaudible) at the Carolina Group level?

That's correct.

I'll leave that to Mr. Keegan.

The Carolina Group cash really stays at $100 million. It only goes up when dividends have been declared that are unpaid. So that balance doesn't really move.

I meant the combination of short-term investments and cash balance.

I think he's refereeing to short-term investments and cash balance, which actually should be -- mostly short-term investments are in Lorillard and you may be seeing increased cash balances because for one reason or another, Lorillard itself, as opposed to Carolina Group, has those increased cash balances. But when dividends come from Lorillard up to Loews, then all of our cash is used to pay the dividends and pay down the balance of the debt, leaving Carolina Group with $100 million cash balance.

Are you referring to the Lorillard cash balances?

I was referring to the Lorillard.

The Lorillard cash balance fluctuates interim year because of the build up of the MSA accruals. That is, they are accrued throughout the year and that increases the cash retained at Lorillard and the payouts tend to be concentrated in the fourth quarter and at the end of the first quarter. So the high point in Lorillard cash is actually year-end, and the low paint is March 31 and you get a build up in other quarters throughout the year. And other than that, there aren't material changes in Lorillard that are creating cash differences.

Okay, Okay. And lastly, it seems that in your other items at close, you had a tax benefit this quarter. Can you explain that?

The only tax benefit is we had -- in the second quarter we had a settlement for all of Loews of the federal tax returns for the 1998 - 2001 period. In the third quarter, we just had a true up of deferred tax accounts following that settlement.

Thank you.

Thank you. Our next question is coming from Robert Siegel of Langan McGowan.

Good morning. It looks like your average share has actually declined for the first quarter and several years sequentially. Was there any buyback or was there an accounting figure that created that?

There was no buybacks, so I'm not entirely sure what you're seeing.

I thought it was down to 100, or 200,000, but maybe I --

Maybe it went up by that amount and that might have been a result of options that were exercised.

Okay. I'll hit that with (inaudible). On the core investment (inaudible) trading, which had a nice kicked-in positive, that actually also -- core parent went positive in the quarter after several quarters of being negative. Was there anything that you could highlight that (inaudible) that? Is that sustainable?

I think we very possibly could thank the United States Federal Reserve for raising interest over the past year from 1% to 4%. That makes an enormous difference when you're carrying around cash balances at the parent company level of $1.5 to $2 billion.

The $1.5 to $2 billion of cash is all in short-term Treasuries?

It's pretty much. We do have some equities and we do have -- we've tip-toed out the yield curve maybe to the 2-year assessment, but that's about it. And Bob, going back, we show on our --

Yeah, I see the weighted average went up -- is higher than the actual, which is where I got confused.

Okay.

Buyback, any general observations on where that stands?

The general observation is no comment.

Thank you.

Thank you. Our next question is coming from Fred Taylor of Lord Abbott.

Yes, I just jumped back on, and if it's a repeat, I'll get it later privately. But can you tell us where you are in terms of all your shelf registrations for CNA and Boardwalk, etc., and the timing of possible issuance of capital?

I think the lawyers (inaudible) us about answering any questions in respect to Boardwalk and I think what we should do is just let our filings speak for themselves.

Okay. And then CNA, I guess you just have a universal shelf and you can issue better equity from time to time?

That's correct and likewise, Loews has a shelf as well.

Thank you.

Thank you. Our next question is coming from Michael Millman of Folio [sic] Securities. Please go right ahead.

Thanks, that's Soleil Securities. Over the last year, you've modified some of your energy assets and I was kind of curious as why not Diamond and in fact, how do you think the credit agencies would respond to monetizing Diamond, particularly, what kind of favorable effect that could have on CNA and whether, in fact, that could offset any upside risk in monetizing Diamond.

We have no plans to modify Diamond. That business is doing very well. All we have to do is look at the analysts' reports to see what their expectations are with respect to earnings and that looks to be very, very strong. Additionally, Diamond has announced that its board will consider paying a special dividend in January, and possibly in future years, reflective of the earnings and financial position of Diamond for the prior year. So our anticipation is that we'll be able to -- as well as all shareholders, we'll be able to achieve significant cash flow from Diamond. Additionally, Diamond is in the process of trying to lengthen the term of its charter contract and has been doing that pretty well. So we are very happy with the performance of Diamond and our ownership of it.

Could you maybe talk a little bit about any updates that exist on you and CNA and the credit agencies?

There are definitely no updates. CNA, as you know, has a minus rating with negative outlooks from Moody's and Standard and Poors. We have an A rating from Best with a negative outlook. We are hopeful that at some point in time in the near future, that the negative outlook will come off and we're also hopeful that at some point beyond that, that CNA's ratings will be increased.

My understanding is that if you look statistically, you see that CNA's ratings are about two levels below where they would otherwise be and I think that's the result of the reserve strengthening that CNA did in both '01 and '03. The book of business at CNA has changed very dramatically over the past several years and we have a lot of confidence in the level of CNA's reserves and we believe that when the rating agencies get a similar level of confidence, which will hopefully not take too much longer, that they will see fit to begin the process of increasing CNA's rating.

What would it take for you to pay dividends out of CNA?

It would take approval of the Board of Directors and it will also take at least an improvement in the ratings profile of CNA.

Thank you.

Thank you. [OPERATOR INSTRUCTIONS]

Our next question will be coming from Sachin Shah of Cathay Financial.

Hi, good morning, guys. I was just wondering if there was any damage to the hotels in Florida due to the hurricanes and I just wanted to find out and go over why the drop in pre-tax income sequentially for Loews Hotels in the quarter.

First of all, with respect to the hotel in Miami, I think we closed for about a day or two.

Okay.

But it's open for business now. That will not have a major effect on our earnings. With respect to the hotels, are you comparing the third quarter to the second quarter?

Yes, sequentially. Is this seasonally related, is that --

Yeah, it's entirely seasonally related.

Okay, fair enough. Just wanted to maybe get an update because you did state your net cash position, which is pretty substantial. I just wanted to maybe find out your plans going forward to maybe utilize that net cash position on your balance sheet to make additional acquisitions in the energy sector?

We have no specific plans right now. We like to carry around a large cash position because it makes it so that we can take advantage of opportunities when they come up, but at the present time, we have nothing in particular that we're doing.

Okay. Is it because you feel that the valuation or the multiples in the sector have expanded too much?

No. It depends on the sector. We don't limit ourselves just to energy. But we just haven't happened to have found the thing that makes the most sense to us yet. We like to think of ourselves as very patient investors. Just because we have cash on the balance sheet, does not mean we feel that we have to use it and we've gone many times for a long period of time, sometimes a decade, before using that cash. So I would make nothing of the fact that we haven't done anything this quarter.

Okay. Since you created a tracking stock for CG, for Lorillard or CG, and your IPOing Boardwalk Pipeline, are there any current plans for maybe unlocking value or maybe monetizing the Loews Hotels asset?

I don't want to get into speculation about what we might do with any of our (inaudible) securities of those subsidiaries.

Okay, fair enough. Just one final question. I just wanted to maybe find out the D&A and interest expense at the hotels.

Hold on just a second. The hotels, depreciation and amortization was $7 million in the quarter.

Okay.

And interest expense (inaudible). We can get back to you.

We'll get back to you.

Okay, no problem. Thank you very much again.

Thank you.

Gentlemen, there appear to be no further questions at this time. I'll turn the call back over to you for any closing remarks you may have.

Great. Thank you for joining us this morning. As a reminder, a replay of this call is available on our website in just a little bit at Loews.com. The earnings conference call held earlier this morning by CNA, our PNC insurance subsidiary, is also archived for replay on its website, which is CNA.com. Thank you very much, see you next quarter.

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