洛茲集團 (L) 2006 Q2 法說會逐字稿

Good morning, my name is Jessica, and I will be your conference facilitator today. At this time I'd like to welcome everyone to the Loews second quarter 2006 earnings call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. If you would like to pose a question during this time, please press star then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. It is now my pleasure to turn the floor over to your host, Darren Daugherty, Director of Investor Relations. Sir, you may begin your conference.

Thank you, Jessica. Good morning everyone and welcome to Loews Corporation's second quarter of 2006 earnings conference call. I'm Darren Daugherty, the Investor Relations Director for Loews. If you have not yet received a copy of today's earnings releases for Loews Corporation and the Carolina Group, you may find it on our website Loews.com. Today's discussion will be led by Jim Tisch, the Chief Executive Officer of Loews and Peter Keegan, the Chief Financial Officer of Loews, and they will be joined by Marty Orlowsky, the Chief Executive Officer of our subsidiary Lorillard Tobacco.

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 defer materially from those projections made and any forward-looking statements. Forward-looking statements reflect circumstances at the time they are made, and the company expressly disclaims any obligations 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 10-K and 10-Q filings with the SEC. I'd also like to remind you that during this call today we will 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 measures.

After Jim, Peter, and Marty have discussed our results, we will have a question and answer session. If you would like to ask questions and are listening via the webcast, please use the dial-in number to participate, (877)692-2592. Now I'd like to turn the call over to our Chief Executive Officer, Jim Tisch.

Thank you, Darren and good morning everybody. The positive trends we saw last quarter have continued through the first half of '06 with each of our businesses delivering strong results. Operating income increased in all of our subsidiaries but earnings growth was primarily driven by record profits at Diamond Offshore and by increased investment income. CNA had an excellent quarter contributing $281 million to Loews' second quarter operating income. These results reflect increases in investment income as well as continued underwriting discipline that yielded a combined ratio for CNA's core P&C operation of 95.2% down from 99.9% in the second quarter of last year. In addition, CNA's customer retention ratios improved year-over-year while premium rates on average remained stable.

Lorillard saw earnings increase 25.6% versus the second quarter of last year driven by pricing strength and lower promotional spending. As usual Marty Orlowsky will provide details on key business trends, but I want to highlight the fact that Lorillard has been able to consistently find the right balance between its promotional spending and market-share performance. The strength of the Newport brand has allowed for steady improvements to profit margin as evidenced this quarter. Diamond Offshore posted a record quarter more than quadrupling earnings versus the second quarter of '05. Diamond has been able to keep its fleet at near full utilization while average day rates show no signs of receding other than limited weakness in the Gulf of Mexico jack-up market that has occurred for technical reasons. Healthy market fundamentals and higher spot rates generally led to increased rates for contract renewals. Meanwhile Diamond's backlog continues to grow. Approximately 95% of the fleet's available days are contracted or committed through the end of '06 and about 67% of available days are contracted or committed through the end of '07.

To keep up with market projections for drilling demand, we are investing in our fleet by performing upgrades on two deep water floaters, the Ocean Endeavor and the Ocean Monarch as well as constructing two new jack-up rates. I'm optimistic that current market conditions should remain robust and that these upgrades will provide excellent returns. Boardwalk Pipeline Partners also had another strong quarter. Earnings contributions for Loews includes 20% versus the second quarter of '05 driven by strength in gas transportation, park and loan services, and gas storage services. Boardwalk has declared a quarterly distribution of $0.38, a 2-cent increase over the prior quarter. It does maintain this unblemished record of raising its distribution every quarter since becoming a public company. Boardwalk subsidiary, Gulf South Pipeline, continues to make headway on its pipeline expansion from Carthage, Texas to Jackson, Mississippi and will provide $1.5 billion dollars a day of natural gas delivery capacity. Loews Hotels continue to benefit from favorable lodging market condition with notable performance at our New York and Florida properties. Both occupancy and room rates were up which translated into an 11.2% increase (inaudible) versus second quarter of '05. On the whole our properties are performing well and we are targeting an expansion of our already well-positioned portfolio of properties within the upper upscale segment. Our watch and clock company, Bulova continues to generate excellent performance and consistent profits for Loews. Sales were up 7.8% for the quarter and 9.1% for the first half versus comparable periods in '05 which was a record year for Bulova.

Other corporate actions taken during the quarter that are worthy of note include the completion of the three-for-one stock split which we expect will improve the trading liquidity of Loews' share. In coordination with this event, the Board of Directors raised the annual dividends by 25% to $0.25 per share post-split. Additionally, the company purchased over 5.5 million shares of Loews common stock at an average price of just over $34 dollars per share. And as a reminder, we do not discuss our future share repurchase plan. We think our actions fully express our position regarding the price of our stock and the strength of our balance sheet. In May Loews sold 15 million shares of Carolina Group stock which generated $751 million in cash for Loews. Despite these sales, we continue to have a significant economic interest in Lorillard. Our implied holdings of our Carolina Group share equivalence have a market value of approximately $4.6 billion. This is well in the excess of the market value of our holdings at the time of our Carolina Group [inaudible]. I'd now like to turn the call over to our Chief Financial Officer, Peter Keegan.

Thanks, Jim and good morning everyone. In the second quarter, Loews Corporation reported consolidated net income of $568.7 million versus $435.6 million in the prior year second quarter. Net income for Loews common stock was $474.9 million or $0.85 per share, a 25% increase over net income of $379.9 million or $0.68 per share in the second quarter 2005. The results for the second quarter of 2005 included a federal income tax settlement benefit of $109.2 million. Net income attributable to the Carolina Group stock was $93.8 million or $1.09 per share in the second quarter 2006 versus $55.7 million or $0.82 per share in the second quarter 2005. This increase was driven by pricing strength and reduced promotional expense. Net income for Carolina Group stock also reflected a higher weighted average number of Carolina Group shares outstanding, but the change in shares outstanding does not affect per-share results.

Lorillard contributed $110.5 million to net income for Loews common stock during the quarter versus $106.9 million in the prior year second quarter. Lorillard's contribution was impacted by the reduction of Loews' economic interest in Carolina Group. As of June 30, Loews Corporation owned 80.4 million share equivalents representing a 46.3% economic interest in the Carolina Group. Lorillard reported charges of $144 million and $139.8 million after taxes for the second quarter of 2006 and 2005 respectively to [inaudible] for obligations under the state settlement agreements. CNA contributed $281.4 million to Loews' operating income in the second quarter 2006 versus $251.3 million in the second quarter 2005. Business fundamentals were positive. Average premium rates for the company's property casualty operations remain stable versus the prior year second quarter while retention showed steady year-over-year improvement. Loews' interest in CNA's net realized investment gains and losses saw a decline from a $15.2 million profit in the second quarter 2005 to a $57.9 million loss in the second quarter 2006. This change was primarily driven by realized losses in fixed maturity securities that have declined in value in response to increasing interest rates.

Boardwalk Pipeline reported a contribution to Loews' second quarter net income of $16.5 million up from $13.7 million in the second quarters 2005. Operating revenues benefited from higher demand for park and land and storage services as well as strong basis differentials from supply areas in east and south Texas to key markets and delivery [inaudible]connects in Louisiana, Mississippi, and Florida. Boardwalk declared a distribution of $0.38 per unit for the first quarter 2006, an increase of $0.02 from the previous quarterly distribution of $0.36 per unit. Diamond Offshore's contribution to net profits rose to $87.6 million from $19.9 million in the second quarter 2005. This noteworthy improvement reflects higher day rates charged for (inaudible) as well as Diamond's significant operating leverage. Revenues for the quarter increased by $221 million over the prior year with the majority attributed to day rate increases for high specification floaters and intermediates semi-submersible rigs. Loews Hotels net income for the quarter was $12 million versus $15.8 million in the prior year second quarter. The year-over-year comparison was negatively affected by a one-time tax benefit of approximately $4 million in the second quarter of 2005. Favorable conditions in the lodging industry allowed for an 11.2% increase in room rates or $22.25 higher than last year's second quarter rates. Revenues increased to $101.9 million from $93.8 million yielding an increase in income before taxes of 7.1% versus the prior year second quarter.

Investment income and other which is comprised of Loews' investment income including investment gains and losses from a corporate trading portfolio, corporate interest expense, income from operations od Bulova, and other unallocated expenses increased to $24.4 million versus a $49 million loss in the prior-year second quarter. As of June 30, 2006, total cash and investments at Loews was $3.9 billion while Loews Corporation debt of $1.2 billion remained unchanged from the previous quarter. Lorillard ended the quarter with $1.7 billion in cash and investments. During the quarter the company purchased over 5.5 million shares of Loews common stock at an aggregate cost of $188.8 million. The Carolina Group (inaudible) debt was $1.46 billion at the end of the quarter. And now I'll turn things over to Marty Orlowsky at Lorillard, Marty?

Thanks, Peter. Good morning everyone. Revenues increased by $51.2 million and $123.8 million or 5.4% and 7.1% and net income increased by $41.6 million and $69.6 million or 35.6% and 23% in the three and six months ended June 30, 2006 as compared to the corresponding periods of a year ago. Operating income for the second quarter of 2006 was $315.9 million or up $59.1 million or 23% versus the second quarter of 2005. This includes a pretax charge of $15.5 million related to an early retirement program offered to eligible employees in Lorillard's field sales and market research units as part of a restructuring program involving these departments that began in April, 2006. The second quarter of 2005 operating income was positively affected, for the most part, by lower promotion expenses incurred during the quarter as compared to that spending during the second quarter of 2005.

Lorillard will continue to assess its promotional spending in any given quarter on the basis of attempting, as Jim said previously, to balance Newport's brand performance in terms of its trends and competitive factors and Lorillard's overall profitability. The total domestic industry wholesale shipments were down 3.2% for the second quarter of '06 versus the second quarter of '05. Lorillard's total wholesale unit volume and domestic units were each down by 2.7% for the second quarter of '06 as compared with Q2 '05. Newport was [off] 2.8% for the same period. For the six months ended June, 2006 versus the same period in 2005, Lorillard's domestic wholesale units were flat, and we achieved the 9.53% market share, up .16 of a share point. Newport's share of domestic shipments was flat for the second quarter of '06 versus the second quarter of '05 at 8.6% as well as for the six months ended June 30, 2006 compared to the comparable periods of a year ago. Based on Lorillard's retail data, Newport's market share was 8.93% again basically flat for the second quarter of '06 when compared with the second quarter of '05. For the six months ended June, 2006 Newport achieved a retail market share of 9.09% up .19 of a point compared to 8.89% for the same period a year ago. Thank you and now I'll turn it back to Darren.

Thank you, Marty.

We'd now like to open the call up for questions. [OPERATOR INSTRUCTIONS] Your first question comes from Bob Glasspiegel of Langen McAlenney, please go ahead.

Good morning. With Diamond Offshore having corrected, do have a rough calculation on where the stock trades relative to replacement value and if so is there a price where you might consider buying more or are you just sort of locked into where you are, semi permanent basis?

Well, in terms of us buying more, I say the same thing about our purchases of Diamond that I'd say about our purchases of Loews which is that we don't comment on it. With respect to the replacement value, let me give you a few benchmarks and then you can compute your own replacement value. If you want to build a new fifth generation rate today, it will cost you between 600 and $650 million. If you want to build a new 300 foot jack-up today, it will probably cost you about 170 or $180 million and both of those rigs would take about three to four years to actually get delivery of.

So you discount it back at some price I mean forward it at some price?

Yes, but additionally you wouldn't build a new second-generation rig today and second if you wanted to build a new second-generation rig it wouldn't cost you $600 million but since nobody's built a second-generation rig in the past 25 years, it's difficult to say what the replacement value of that is.

There's no used market where these things trade?

There is a used market but there haven't been many transactions recently so what you have to do is base it off of what they're earning and then figure out how to compute a price based on that.

My rough sense is that we're getting close, is that a fair statement?

Getting close to what?

The price of the stock verses replacement cost?

No, I haven't run the number recently so I can't really comment.

Okay. On the hotels, I'm surprised with that sort of [rapid fire] increase you take out the year ago one timer, there's not much of an increase, are you doing a lot of developmental spending or is there something else in the operating earnings to prevent a bigger increase?

No, there's really the one-time only taxes obviously adjusted somewhat, Bob, but there's no other big story other than that. It's just some other spending but nothing material.

Okay. So the overall hotel story is still pretty favorable and the prospects are for continued good results there?

While the markets as we said our pretty strong right now and we're enjoying the benefits of a strong marketplace.

Okay. thank you.

Your next question comes from David Adelman of Morgan Stanley, please go ahead.

Good morning.

Good morning.

Peter, what was the quarter end cash level and debt level of the holding company, please?

Sure.

It's $3.9 billion in cash and it was three and one hundred sixty five million in debt.

Okay. And then Marty, on the promotional spending level it was down sequentially from the first quarter to the second quarter on a per unit basis, is that correct?

Well, based on your calculation, I don't recall what it was versus the second quarter, but if that's what your calculations were --

Okay. And Marty, there was some anomalies and other manufacturers shipment patterns in the second quarter, one company was doing some SAP implementation that resulted in the trade loading and then and there was the July 4th holiday, and I was wondering were there any aberrations in your shipment?

Well, only to the extent that the way the fourth of July fell this year versus last second quarter it cost us some units on a tiny basis. And fundamentally we had fewer promotional units in our pipeline in the second quarter this year versus last year so even though we showed a decline on market share for Newport I think the underlying business is still pretty strong.

And the retirement charge that you mentioned, Marty in Q2, will that persist into the second half of the year or did the second quarter capture the entire cost of that program?

The second quarter captured the entire cost of that program and it's possible there could be other charges in subsequent quarters related to the restructuring, but it clearly will not be of the same magnitude as the second quarter.

Okay. And can you comment as to whether or not you intend to attempt ultimately to try to seek recovery of any or all of the $200 million non-refundable [inaudible]bonding payment that you previously made?

Well, any issues related to the outcome of the [Ingle] decision as it might affect Lorillard, we will consider how to handle those at some point in the future when the specifics of the legal status at those points in time warrant it so that's about all I can tell you on that.

Okay. Finally, Marty, could you comment on what you think of the current environment, the current legal environment, the appropriate level of sort of non-NSA cash at the Lorillard level?

No, I'm afraid I can't comment on the.

Okay. Thank you very much.

All right. Thanks, David.

Your next question comes from Bonnie Herzog of Citigroup, please go ahead.

This is actually April Scoggin for Bonnie Herzog. I actually wanted to build on David's comments on [Ingle]. Some of your competitors mentioned they may appeal several issues back to the third DCA, does management agree with these appeals and if they were going to join in the appeals, do you believe that would impact the timing on whether you release certain covenants of the [Ingle] agreement?

I'm a little puzzled as to the statement that other companies want to appeal back to the third DCA. I think that may be a misinterpretation of some comments made by RAI. As far as I know, as far as Lorillard's position is concerned, we have received an extension to refile for a rehearing motion before the Florida Supreme Court, it has nothing to do with the third DCA, and we have until next Monday really, August 7, with that extension to determine whether or not we will file for rehearing and that's being considered right now. Beyond filing for the rehearing, any other implications of which court does what is a matter for the Florida Supreme Court to decide so I don't think there's anything specifically automatic about anyone filing anything that has anything to do with the third DCA. With respect to any of -- my statement that I just made before really is relevant as to what I answered before to David's question and that is depending on the status of the legal situation as we go through this process, we will make a determination as to how to deal with these other issues that you're referring to.

Okay. And in dealing with those other issues, does that I guess extend the [Ingle] agreement?

Well, I don't think it's a matter of extending the [Ingle] agreement, it's a matter of at what point in time is it appropriate for us to make decisions relative to the [Ingle] agreement. I don't think it has anything to do with extending it unnecessarily.

All right. Thank you.

Okay.

I have one question for Marty. During the second quarter, Lorillard looked to have a slight decrease in the premium mix, is this a trend that you expect for us to see going forward?

No, I just think it was a byproduct of the shipment patterns and some of the activities that occurred at retail. And don't believe it will be a long-term trend of any kind.

All right. Thank you so much.

Okay.

Your next question comes from Christine Farkas of Merrill Lynch, please go ahead.

Thank you very. Good morning. I'm wondering if Marty, can you just comment a little bit about the restructuring cost, clearly this 15.5 million seems to be related to early retirement and pension- related benefits, is there a broader scope to the restructuring, should we be looking or anticipating some cost savings from this program?

I'm not going to really comment very specifically at this point but ultimately we would hope to have some, in the general sense, some savings from this.

Okay. Great. And if you could comment on the overall environment we see in terms of competitive activity within the segment, how would you say its compared to the first quarter?

I think it's pretty much the same. We haven't seen a great difference, it's essentially the same.

Okay. And just finally on some housekeeping. Would you have the grower payments for the quarter as well as the depreciation expense for the quarter?

Yes. The grower payments for the quarter in totality were $259.2 million -- I'm sorry, when you say grower, I'm sorry, you mean strictly the tobacco buyout?

Yes, yes.

Oh, I'm sorry. They were $22.7 million for the second quarter.

And the depreciation?

I have them, Marty if you don't.

Pardon me?

I have it if you don't.

All right. If you have it handy.

Yes, for Lorillard depreciation was 11.5 million for the quarter.

Thanks much.

Okay.

[OPERATOR INSTRUCTIONS]. Your next question comes from Nik Modi of UBS, please go ahead.

Good morning. I was wondering, Marty if you could comment on how maybe the shipment trends have come back in July or not come back in July now that the promotions are kind of on a normalized basis?

Well, we don't comment on anything other than the quarter we're reporting on so I'm afraid I'm not going to be able to give you any answer on that question.

Okay. Great. And just generally with [Ingle] all but done now, is there any guidance we can get in terms of the debt paydown in terms of notional debt as well as easier to understand when the dividends are going to start moving higher?

Well, I would have to defer that to Loews since this is a matter for the Loews Board determined.

I would just say that [Ingle] has not been concluded, there are still appeals going on so there's really nothing we can say at this point about that.

Thanks a lot.

Okay.

[OPERATOR INSTRUCTIONS]. Your next question comes from R.E.A. Cole (ph)of Eaton Bence (ph), please go ahead.

Good morning gentlemen. I'm not a lawyer, but can you give us a layperson's timeline if possible of the ongoing appeals process could be in terms of what courts, what judges, and the timeline for what could happen here and possibly the angle, decision that comes to a complete and total finality?

Well, I can give you a general outline. I don't think I can give you a timeline for final outcome but just to give you a quick insight, as I said the parties have an opportunity to file for a rehearing by the Florida Supreme Court, that deadline is August 7, if in fact any of the parties do there would be a response to that rehearing motion and that would be followed 10 days after that, and with an extension if there is any, it could go as long as September 1. For the Florida Supreme Court to determine whether or not if there is in fact a motion for rehearing, for the Florida Supreme Court to reach their decision, there is no timeline, there's no limit, no deadline so it would be very difficult to forecast the timing of that. One could assume possibly by the end of 2006, but as we saw with the basic decision that they ruled on with respect to [Ingle], it took them quite a while so I can't really give you a timing factor for that. Obviously, depending on whether or not there is a motion for rehearing, whether or not there is a rehearing granted, all of that would consume time, the next step depending on the circumstances could or might be a petition for either the parties for writ [inaudible] in the United audits States Supreme Court and that would take some time and then who knows with the timing would be relative to that if in fact it got to the U.S. Supreme Court and if they heard it so you're looking at a timeline, it's very difficult to project that other than the steps as I indicated.

Just to clarify. Let's say there is a motion for rehearing. On August 17 about you're saying in the Florida Supreme Court will determine if they're willing to hear --

No, I didn't say that. I said if there's a motion filed it would be by August 7.

Right.

There's 10 days following that and then another 15-day possible extension which would take it to September 1 for further comments by either party on the rehearing motion. Once it got back to that point, there's been no time factor that can be defined for how or when the Florida Supreme Court would rule on the rehearing motion so that could be any amount of time.

Understood. Thank you.

All right?

There appear to be no further questions at this time. I will turn the floor over to Darren Daugherty for closing remarks.

Thank you, Jessica. As a reminder a replay of this call will be available at our website in approximately two hours. The earnings conference call held earlier this morning by CNA Financial, our insurance subsidiary will also be archived for replay on its website CNAa.com.

[OPERATOR INSTRUCTIONS]