洛茲集團 (L) 2006 Q4 法說會逐字稿

At this time, I would like to welcome everyone to the Loews fourth quarter 2006 earnings conference call. [OPERATOR INSTRUCTIONS] Thank you.

It is now my pleasure to turn the floor over to Mr. Darren Daugherty, Investor Relations Director.

Thank you, good morning, everyone, and welcome to Loews Corporation fourth quarter 2006 earnings Conference Call. I'm Darren Daugherty, the Investor Relations Director for Loews. A copy of the Earnings Releases for Loews Corporation and Carolina Group may be found 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 also be joined by Marty Orlowski, Chief Executive Officer 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 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 leaking 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 may discuss certain non-GAAP financial measures, with regard to such, please refer to our security filings for reconciliation to the most comparable GAAP measures. After Jim, Peter, and Marty have discussed our results we'll 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 CEO, Jim Tisch.

Thank you, Darren and good morning, everyone. As you probably read by now, Loews' fourth quarter results were exceptional and provided a nice book end for 2006. Full year consolidated net income of $2.5 billion was double that of '05. Our results reflect those of our subsidiary companies which are all performing very well within their respective sectors.

CNA has made great progress over the past few years in improving the efficiency of its insurance operations and the consistency of its results. '06 results benefited from the Company's hard work to reduce risk and to strengthen the book of business through underwriting discipline. The Company will continue its focus on initiatives such as cross selling, customer retention, and aggressive pursuit of expense reductions.

Lorillard posted excellent results for the quarter and for the year, with Newport continuing to grow in the menthol segment. While the overall domestic tobacco industry exhibits a volume decline, Lorillard has successfully been able to increase market share while maintaining industry leading profitability per unit. Lorillard's CEO, Marty Orlowski will join us in a few moments to provide additional detail on operating results.

Diamond Offshore posted another year of record results as strength in the offshore drilling markets continued during 2006. We are optimistic about the vitality of the industry. At the beginning of '06, Diamond's backlog was approximately $4 billion and 63 rig years. Currently, this backlog has grown to approximately $7.5 billion and 75 rig years. Stretching out to the end of the decade in some cases. Diamond remains focused on the deepwater and midwater segments where it has a major presence and where contract opportunities are greatest.

Boardwalk had a successful first full year as a public master limited partnership. The stock outperformed all other MLP's in its industry and the Company committed to build billions of dollars of new expansion projects. These projects illustrate the Company's focus on organic growth and they will leverage the existing Boardwalk infrastructure to help achieve Boardwalk's long term growth plan. Boardwalk has recently declared a distribution of $0.415 per unit for this quarter. This represents an annualized rate of $1.66, a 19% increase since the original cash distribution declared at the IPO a year ago. The distribution to unit holders has been increased each quarter since the Company went public in '05. Loews hotels also had a good year and continues to benefit from ongoing favorable market conditions in the lodging industry. In the fourth quarter Loews hotels entered into a joint venture with a single investor to acquire and develop hotel properties. The first such property is the newly upgraded Loews Lake Las Vegas hotel resort.

Over the past year, Loews Corporation has succeeded in building upon the financial strength of the holding Company balance sheet. Loews ended the year with holding company cash and investments of approximately $5.3 billion and only $865 million in debt. During the quarter, Loews brought in 6.4 million shares of its own stock. This brings total repurchases for '06 to nearly 14 million shares which we purchased at an average price of less than $37 per share. We have been comfortable creating shareholder value by repurchasing shares and retaining a large holding of company cash position. Of course, we are always on the look out for value creating acquisitions but until the right opportunity arises, we will continue with our strategy of selectively buying our own stock and growing our cash. I'd now like to turn the call over to our CFO, Pete Keegan.

Thanks, Jim, and good morning, everyone. For the fourth quarter 2006, Loews reported earnings per diluted share of $1.11 as compared to $0.08 per share in 2005. For the full year, earnings per share was $3.75, up from $1.72 per share in 2005. Net investment gains were were 96.5 million for the quarter and $68.6 million for the full year 2006, versus a loss of 49 million in the fourth quarter and a loss of 10.3 million for the full year in 2005. These increases were primarily driven by improved results in fixed maturity securities.

Carolina Group earnings per share in the quarter was $1.26 up from $1.11 in last year's fourth quarter. For the full year, Carolina Group reported $4.46 per share, a 23% increase from $3.62 per share in 2005. During 2006, Loews sold an additional 30 million shares of Carolina Group's stock, increasing the public flow to 62.3% and reducing Loews Group's economic interest in Carolina Group to 37.7%. These share sales do not influence earnings per share figures but proportionately increase the net income allocated to Carolina Group. This should be taken into account when analyzing net income on a year-over-year basis. To accrue for its obligations under various state settlement agreements, Lorillard recorded charges of 133.8 million and $135.7 million after-taxes in the fourth quarter of 2006 and 2005 respectively. For the full year, Lorillard's after-tax settlement charges were 560.2 million as compared to to 537.7 million in 2005.

At year-end, the Carolina Group notional debt balance stood at $1.23 billion. CNA contributed 222.8 to Loews' net operating income in the fourth quarter 2006 versus a loss of of 153.4 million in the fourth quarter 2005. For the full year, CNA contributed income of of 978.3 million to Loews' net operating results versus 246.7 million in 2005. Comparison for both the quarter and the year include the impact of significant commutation of reinsurance finite contracts and non-commutation adverse net development recognized in 2005.

Diamond Offshore's strong performance continued with a contribution to net income of of 110.3 million in the fourth quarter 2006 versus versus 52.6 million in the fourth quarter 2005. Diamond's net income contribution for the year more than doubled to 352 million for the full year 2006 from from 127.3 million in 2005. Day rates were significantly higher for all of Diamond Offshore's rig categories in the quarter. Between the fourth quarter 2006 and the fourth quarter 2005, the average day rate for the high specification rig category increased to $253,000 from $181,000. The semisubmersibles increased to 155,000 from 81,000 and for jackup rates it increased to 113,000 from 69,000.

Boardwalk Pipeline Partner's contribution to Loews' fourth quarter net income was 35.1 million down slightly from 36 million in last year's fourth quarter. For the full year, Boardwalk contributed 103.2 million to Loews net income, a 12.1% increase over last year's 92.1 million, primarily attributable to strength in park and land and gas storage businesses. Loews hotels reported net income of 3.8 million in the fourth quarter 2006 versus a loss of 1.5 million in the fourth quarter 2005. Net income for the full year was 29.4 million versus net income of 31.2 million in 2005 which included a 2.8 million after-tax benefit from the early repayment of a note in connection with the past sale of a hotel property.

Occupancy for all hotels increased to 76.3% in 2006 versus 75.8% in 2005, while average room rates for the year increased 10.2% to 220.79. Net investment income and other, which is comprised of Loews' investment income from a corporate trading portfolio, corporate interest expense, income from operations with Bulova and other unallocated items improved from 24.2 million in the fourth quarter 2005 to 67.4 million in the fourth quarter 2006, an increase from a loss of 1.2 million for the full year 2005 to a gain of 159.2 million for the full year 2006.

As Jim noted earlier, Loews ended the year with 5.3 billion in cash and investments at the holding company level which does not include cash in our operating subsidiaries. Repurchases of Loews common stock totaling 255 million during the fourth quarter as well as the retirement of 300 million in debt in December were the main driver's behind the slight decrease from 5.6 billion at the end of the third quarter. Over the full year, cash and investments increased substantially from 2.9 billion at the end of 2005. In addition to dividends from our subsidiaries totaling 1.1 billion, we received proceeds of 1.6 billion from the sale of Carolina Group stock and 729 million from the redemption of CNA Series H preferred stock. Not reflected is the 280 million that Loews will receive from Diamond Offshores recently declared $4 special dividend. During the year, Loews repurchases of common stock totaled 510 million. I'll now turn things over to Marty. Marty?

Thank you, Peter. Good morning, everyone. Comparison of fourth quarter 2006 and full year 2006 financial results for Lorillard, with those from the same periods a year ago, reveal positive gains for operating income and net income of 8.4% and 11.4% respectively for the fourth quarter of '06 and for the full year '06 plus 14.5% and up 17% respectively. Influencing this positive performance comparison for both the fourth quarter and full year of '06 were the following--Total Lorillard wholesale unit volume shipments were up 5.2% over the fourth quarter of '05 and up 2.6% for the full year 2006 versus 2005. In part, the increased shipments in the fourth quarter of '06 were affected by advanced purchases made by some distributors in anticipation of pricing changes. Total Newport units shipped were up 2.9% for the full year '06 versus '05 and 5.7% for the fourth quarter of '06 as compared with the fourth quarter of '05, and net investment income for 2006 increased by 37 million to $103 million resulting from higher interest rate and higher returns from other investments.

In December of 2006, Lorillard announced wholesale price increases for Newport of $5 per thousand and for all other brands except Maverick and Old Gold of $3.75 per thousand increase. Lorillard was the only major tobacco Company to increase both market share and shipments for the full year of '06 versus '05. Newport's domestic wholesale market share for the full year of '06 was up -- was over -- was at, sorry, 8.89%, up a little less than a half a share point over '05. Overall, Lorillard's wholesale share of the industry was 9.7 %, up a little under half a share point versus '05.

According to Lorillard's database, overall retail market share for the year 2006 was 9.99%, a gain of 0.39 of a share point over 2005. Newport's retail share was 9.17%, up 0.38 of a share point versus 2005. Newport achieved a 33.1% share of the menthol segment in 2006, up 6/10 of a segment share point over 2005. Menthol's 2006 retail share of the domestic market was 27.7% versus 27.1%, a difference of 6/10 of a segment share point. Throughout 2006, Lorillard has continued implementing its strategy of balancing profitability and Newport market share performance. Promotional spending in support of this approach is subject to change based on Newport and competitive brand performance trends. Thank you, and now I'll turn it back to Darren.

Thanks, Marty. Operator? We would like to take questions at this time.

Thank you. [OPERATOR INSTRUCTIONS] Our first question is coming from David Adelman with Morgan Stanley. Please go ahead.

Good morning, everyone.

Good morning.

Jim, two questions for you. First, has there been any material changes in the makeup of the holding companies cash/investment portfolio of late?

No. It's primarily cash and government bonds.

Okay, and then secondly, I had seen in some of your filings in the last quarter disclosure about this single investor that on a joint venture, investment basis with Loews hotel. Is there anything further you can enlighten us about that, who it is, what the economic splits are intended to be, how that might change the pace of development?

I would just tell you that it's a large institutional investor that wants to have exposure to not only Real Estate but the hotel market, but I don't want to go into what the economics of the transaction are.

Okay.

Those are between the two parties.

And then if I could ask Marty a few things. In the fourth quarter, Marty, what was Newport's or what do you estimate Newport's retail share to have been?

In the fourth quarter, Newport's retail share was 9.14%.

Okay. And given, Marty, that the brand share sort of in the second half of '06 has pretty much been at record levels, does that change at all how you think about or calibrate the dual goals of market share versus profitability? In other words, is that on the margin allow you to be a little more profit focused than would otherwise be the case?

Well, it's not -- obviously it helps us to focus more on a profit side while we see that kind of strength on the share basis, but also, as I've said often, the other factor is brand, the competitive brand picture in terms of what they 're doing, so it's obviously, we have to take both of those factors into consideration. We have, as you know, lowered our promotional spending on an annualized basis over the last couple of years and that's obviously a byproduct of the brands underlying strength in a number of ways.

And can you quantify your estimate of the increase in trade inventory levels during the quarter?

Yes, for us, it was probably in the range of 200 million units, in terms of advanced purchases.

Okay, that's on a top of, am I correct, coming into the quarter, they were a little bit above normal as well?

Yes.

Okay, and then Marty, any initial thoughts of Imperial coming into the market through the purchase of Commonwealth?

About the only thing I can say is I find it somewhat odd, puzzling, other than that I really have no comment.

And the oddness is?

Well, I mean, from the standpoint of Commonwealth's market performance, which was not, I don't think it was in the growth mode in 2006, it's comprised -- their portfolio is comprised essentially of low margin discount brands susceptible and has been susceptible to ligate vectors pricing -- competitive pricing position last year. I just find it a little, you know?

Okay, and then lastly just on the cost side, Marty. Sequentially, both your MSA, costa accruals, and your SG&A, both of those metrics as you look at them on a per pack basis came down into the fourth quarter. Can you speak to those two issues? Is there anything structurally that had changed and on the SG&A side, was that in part the benefit of some of the layoffs you had had earlier in the year?

Well I prefer to call it a restructuring. To some extent, yes. We had lower legal expense in the fourth quarter which obviously contributed to lower SG&A, but to a lesser extent, the restructuring of the sales organization, and on the settlement side, there's nothing structurally different. Just in the fourth quarter and we've experienced a lower volume adjustment offset to the four state settlement, so that lowered our expense a little bit there. On the full year basis, we were lower on grower buy-out payments because of the difference in '05, we incurred additional expense to purchase excess or surplus lease and we didn't have that this year; however, since it's a volume assessment on our per pack basis, it actually, we're paying more due to the volumes, however it was offset by the lack of the surplus payout.

Okay, thank you very much.

Okay.

Thank you. Our next question is coming from Bonnie Herzog with Citigroup. Please go ahead.

Thank you very much. I think I'm going to have several follow-on questions based on the last few questions that David was asking both Jim and Marty, but let me start off with Jim. Just as it's related to your cash balance, there's no doubt it's quite impressive, so I guess what I'm curious to hear from you, Jim, is if the right acquisition does not present itself, what will your strategy be for this cash? In other words, would you become more aggressive with your cash investments and if so, when would you be prepared to make a change from your very conservative investment strategy for your cash?

Our intention is to always maintain our conservative investment strategy. That's just the way we invest, and we're always looking for something to acquire, but if the right thing doesn't turn up, then we'll just continue, we're happy to continue holding our cash and doing what we've been doing.

Okay, and then Marty, certainly just talk about the decline in SG&A expense with I believe it was down 20% in the quarter and you had talked about many reasons why. So if I'm hearing you correctly, it wasn't necessarily reduced promotional spending; is that correct?

No. Well, we don't--.

I mean primarily?

Yes, there was reduced promotional spending as well.

Okay.

Most of that is really accounted for in the reduction of net sales.

Fair.

So I don't consider that is SG&A per se, but yes, clearly, it was down in '06 versus '05.

And then on that point because that's sort of what I wanted to get to is to try to understand from you how realistic that would be, your promotional spending in the future, given Phillip Morris's new menthol brand, Marlboro smooth which is apparently being positioned to go against Newport?

Well, I don't know where the motion that it's being positioned to go up against Newport. Anything Phillip Morris does on Marlboro menthol clearly, without question is positioned to go against Newport. I don't know why smooth particularly would be any different.

Okay.

Frankly, we've been confronted with line extensions on the Marlboro menthol side for the last three or four years, so the introduction to smooth is not necessarily a unique event and therefore, I don't think it's going to have any more or less unique impact than past introductions have had which have been really negligible in terms of their overall affect on our business.

Yes, I mean, it's quite fascinating because Newport continues to hold quite well to compliment you, there's no doubt, but if you think about the current competitive environment, specifically in the menthol segment, both Reynolds, Phillip Morris, everyone is trying to introduce new brands, line extensions. Do you expect that to continue and is there some point where you're concerned?

Well, I would expect it to continue in terms of their introducing these line extensions. It's really a pattern of the historical way they've managed their brands. At what point? Well, hard to say. As I've said all along on an overall basis, we will continue to monitor our market performance and depending on competitive trends and Newport trends, we'll make adjustments, but I certainly wouldn't conclude today necessarily because of those line extension introductions that automatically, it's going to result in our having to spend more money. We may, but at this point, I can't say one way or the other.

Okay, that's helpful and then just one final question regarding your joint venture with Swedish Match, I don't know how much you can talk about, but I'd love to hear any update on timeline in terms of when we can expect possibly a final product and maybe even how accretive this eventually will be to Lorillard? Just anything you can share with us would be quite helpful.

Well, there's really nothing new for me to offer. We're still working on developing the proposition with Swedish Match, that continues, and as I said I think on the last call when we mentioned this joint venture that we don't expect the results of the joint venture to have any significant material impact for some time. It's really a very long term proposition as far as we're concerned, so, but that's about all I can really say.

But it's a finalized deal just to verify that; correct?

Pardon me?

It's a signed finalized deal?

Yes. We're operating with them on a [Inaudible].

Thank you so much.

Thank you.

Thank you. Our next question is coming from --

Was that me?

You're live, Bob.

Okay, the Operator went dead when they did the name. A couple questions on investment income and other.

By the way, this is Bob Glasspiegel of Langen McAlenney. I think I'm the first Operator who got the name right.

Yes, there's been an epidemic flaw of both my name and my firm's name which you definitely broke, Jim, thank you.

My pleasure.

On the investment income and other line, remind me how big the portfolio that is associated with the 69 million in the quarter, was that the entire portfolio or was that a sub segment?

Well, this is the Loews portfolio?

Right.

It's the 5.3 billion.

Okay, all of that 5.3 billion has been designated as a--?

There's a small piece that isn't but virtually all of it is there.

Okay, other swung negative, is that just lower cash balances, average cash balances or was there something else for the -- in the quarter in the other other?

No. It's nothing it's just normal fluctuation. There's nothing unusual.

Jim, more substantively, Loews management loves cash, and you highlight the cash flow and the dividends out of Lorillard and Boardwalk and Diamond and I think there's been hinting of CNA's level in some of your commentary that CNA could have a dividend but your most important personal investment, Loews, does not pay much of a cash dividend. What is your thought process or the Board's thought process in not stepping up the yield in a meaningful way?

Loews has what I would call a long and very glorious history of share repurchases. That's been a way that we have created a lot of value for our shareholders. We recently did a study and found that in current share equivalents, there were 1.3 billion shares outstanding in Loews in 1970. Today, that share count is down to 544 million, and we also saw that in every decade, we repurchased between 25 and 35% of our outstanding shares at the beginning of the decade. The reason I mention this is because share repurchases is from a corporation perspective, almost the equivalent of a dividend, and what we have found out over time is that maintaining share balances allows us, number one, to take advantage of corporate opportunities as they present them and number two, allows us to repurchase our shares at a opportune time. And so the Board has taken -- subscribes the review that it's good for the Company to hold these large cash balances to create value for shareholders and if a shareholder is looking to Loews as a dividend vehicle, then chances are that that shareholder has selected the wrong stock.

And the Loews family members are all 100% happy with that philosophy and it does mean they have to sell stock to do things rather than that, and you're comfortable with that? The family is comfortable with that perspective?

This is not up to the family. This is up to the Board.

I understand that. Very thoughtful answer, thank you.

Thank you. Our next question is coming from Christine Farkas with Merrill Lynch. Please go ahead.

Thank you very much and good morning. A question, Marty, if I could can on operating expenses. Could you quantify at all the legal expense reduction or was this just timing in the quarter?

No. The legal expense reduction, we experienced for the full year as well as in the fourth quarter, and really, it's attributable to the timing of trials and the number of trials that occur at a given point in time, and so we've been fortunate in terms of '06 not having a great deal of activity in terms of the number of cases and therefore, our legal expenses correlate in that manner and went down. I'd rather not specifically get into the actual change, but it was obviously somewhat substantial.

Okay, great. And still on operating expenses, were there any cost or charges related to the restructuring taken in the quarter?

No. We pretty much took all of the charges through the fourth quarter -- or through the third quarter.

Through the third? Okay. Following up on a comment you made last quarter about Puerto Rico, it looked like the Puerto Rico volumes or possession volumes fell 19% due to a distributor related decline.

Well, no. There was a change of ownership of the distributor in Puerto Rico, and the new owner made an inventory adjustment which was not necessarily a reflection of negative business circumstances, so there was -- that change implied the adjustment. For the fourth quarter, for example, our Puerto Rico shipments were up almost 18% versus -- for the quarter versus '05, and for the full year, we're about flat. So, that temporary adjustment that was made at the point of time of assuming ownership was just a temporary situation and it looks like we're back on a more positive performance basis.

Okay so that up 18% is not inventory related or inventory building?

Not that I'm aware of, no.

Okay, great. And then just a couple of housekeeping. Would you have the growers expense, depreciation expense for the quarter, Marty?

Yes. Depreciation for the quarter was about 10 million, $11 million, and the grower expense, when you say grower, you mean the buyout expense?

Yes.

The buyout expense was $23 million.

Great. And my final question, I guess for Marty or for Jim, while I realize obviously this is contingent on key court factors, are there any comments you can make about the timing of Carolina Group debt repayment or move to higher dividends ultimately?

Well, from the Loews perspective, as you know, we repay the debt, the notional debt as dividends coming to us and our strategy is to continue paying down that notional debt as rapidly as possible so that the Company can -- so that Loews can pay out to CG shareholders as soon as possible basically all of the cash that it receives from Lorillard.

And from a Lorillard standpoint, we're still holding to our net worth covenant and we will continue to hold to that until all appellate actions are completed in the Engel case, so we're still observing that agreement in terms of the net worth covenant.

And that net worth covenant is to maintain net worth of at least $921 million.

Yes, certainly is at least that.

Yes.

Thank you so much.

You're welcome.

Thank you. Our next question is coming from Judy Hong with Goldman Sachs. Please go ahead.

Hi. I had a few questions for Marty as well. Marty, just following up on the last question about the net worth requirement. When you say all appellate actions were completed, does that also include the industry of Killiant to the third to BCA on some of the issues that happened?

Yes, it could.

Okay, and then Marty, just looking at Lorillard's performance this year, volume being up 2.6%, revenue per unit being up nearly 3%, operating profit per unit up 9%, I mean, would you characterize this year as sort of an unusual year where you're very -- you had a lot of ability to maintain or grow share growth share as well as build profit more effectively than maybe in the years in the past. How do we think about your ability to continue to deliver this kind of performance if the competitive environment stays relatively static?

Well, Marty, I want to translate that question. What have you done for me lately.

Well, what I've done for you late it is what you've seen, and Judy, I think '06 our performance was pretty strong on a comparative basis on '06 versus -- I'm sorry '05 versus '04, so we've had a pretty good 2-year period in terms of Newport's obviously its growth and our ability to maintain costs, controls, and generate increased profit. Since you know, Judy, we don't speak to the future, whether it's in words or in numbers all I can say is we will attempt to do whatever we can to be as competitive as we can at all times.

Okay. Marty, do you have any views in terms of how much industry consumption may be affected this year with higher retail prices?

I honestly don't know. We really don't track consumption. I mean, the standard sort of view is that consumption is declining somewhere between 1 and 2%. I don't really know. I can't tell you. Obviously, the industry was down in terms of overall shipments so that speaks to some consumption effect but I don't know what the number is.

Okay, and then just in terms of the menthol segment, any change in terms of the competitive dynamics, whether it's an increase or decrease in some of the promotional volume out there in the marketplace?

We did not necessarily a substantial change in '06 or in the fourth quarter with respect to promotional activity, so I would say, for the year and for the quarter, it's been pretty much, pretty constant, pretty consistent.

Okay, and then finally, I may have missed this, but what is the cash balance at the Lorillard level?

Cash balance at the Lorillard level?

I've got it. At year-end, it was somewhat over 1.7 billion, but keep in mind that year-end is the high point for Lorillard's cash balances because the MSA payments are made at the end of March.

Right, okay.

Thank you. Thanks.

Thank you. Our next question is coming from Fillippe Goossens with Credit Suisse. Please go ahead.

Yes, good morning, gentlemen. A couple of questions first for Jim if I may and then a few for Marty as well. Jim, if you could just kind of refresh our minds, if I recall correctly at least, you've done now five secondaries for Carolina Group. I think what would be useful for myself as well as I guess other people on the call is one, what was the rationale again for using a sale through a secondary offering? And secondly, whether you, as an organization, have set like a target level below which you seek not to reduce your stake further in Carolina Group?

The rationale for each of those transactions was different for each individual transaction, based on the time that the transaction was done. When we first went public, for example, the reason for the transaction was to highlight for all Loews shareholders just what the value of our Lorillard investment was and I remember when we took Carolina Group public, actually when we filed the papers to take it public, there was a very significant increase in the price of Loews stock as investors started to understand what the value was of Carolina Group, and then over the past close to four and a half years that CG has been public, you're right. There has been a number of sales that have taken place. Sometimes they were to increase carbon the Loews balance sheet but all-times, I would say they were done with the idea in mind of creating value for all of our Loews shareholders. In terms of our target ownership, all I can tell you is that we have no plans now to any shares of CG. We're very comfortable with where our holdings are.

Okay, so Jim, then the past sales of stock should not be viewed as a reflection on your side that the value of Lorillard has peaked; correct?

That's right. We've had lots and lots of different reasons for doing these transactions.

And then my final question for you, Jim, if I may. Just kind of one more time on the angle and the dividend case. Any expectation on your side and I know this is a very tough question to answer, but any expectation when the appeals with the district of appeals may have run their course? Is that still an '07 type business as per your expectation?

I'm hopeful that it will be in '07, but I have no way of knowing.

Okay.

Sometimes the wheels of justice move very slowly.

Okay. And then a few questions for Marty as well on the business, if I may. Marty, with regard to the inventory build both in third and fourth quarters, any expectation when that will have run its course, is that the end of Q1 or end of Q2?

Well, I would expect that it would run its course pretty much in the first quarter of this year.

And you would not expect, well, that's fine, never mind on that one. But then the second question with regard to Imperial's acquisition or at least the announcement last week. Do you expect them as they broaden their portfolio over time to enter the menthol category at some point in time or you really believe that if they pursue the value strategy of commonwealth that there really is no place for a menthol discount brand?

Well, there have been attempts at menthol discount brands and they've to date have been unsuccessful. There have been a couple of attempts for freestanding low priced menthol discount brands that have not succeeded. I don't know, obviously I don't know what imperial is going to do or thinking. Imperial did make some announcements that they were entering the U.S. market prior to their acquisition of Commonwealth. What the addition of having Commonwealth's portfolio as part of their overall mix will, what it will have -- what impact it will have in their future marketing, I don't know. They may or may not, I don't know what they are going to view as opportunities for themselves.

And then my final question, Marty, if I may for you. With Marlboro now about to rollout the smooth, your friends in -- your other friends in North Carolina also stepping up their activities on the menthol side. In terms of your own kind of competitive strategies and move into adjacent categories, aside from the Swedish Match joint venture, is there anything else that you can see on the near to medium term horizon where you can expand critical mass and perhaps broaden the portfolio as well?

Well, from an adjacency strategy, we've been pretty consistent in saying that our focus has been on obviously on the cigarette category and most recently now with this joint venture opportunity with Swedish Match. Other than that I can't really comment on any other plans.

Fair enough. Thank you so much, Marty.

Thank you.

Thank you. Our next question is coming from Angelo Liberatore with Credit Suisse. Please go ahead.

Good morning, gentlemen. I just wanted to get some more color regarding the current investment environment. Jim, perhaps you could talk a little bit more about identifying the value creating opportunities you mentioned earlier on the call given the large number of new private equity funds that have come to market or have been funded, would you concede hat this task has become more challenging in recent quarters?

Definitely. It's definitely a lot more challenging, we're seeing lots of lookers, But we have a belief that the world is cyclical, and at times, there are a lot of people looking. At times, there aren't, and so there's an old saying, just because you're on a diet doesn't mean you can't read the menu, so we continue to kick tires and look around and hope that we're going to find something, but we also understand that this is a very competitive environment and we're not going to rush into anything that doesn't make 100% sense for us and doesn't really fit fully within our investment parameters of how we want to invest.

All right, thank you.

Thank you. Our next question is coming from Nik Modi with UBS. Please go ahead had.

Good morning, everyone. One quick question for Marty. Marty, can you provide some perspective on how much growth I guess this year has come from outside of same-store sales kind of geographic expansion? If you could just give some perspective on that?

Are you referring to growth for Newport?

Yes.

Most of the growth in Newport has come out of what -- I'm sorry, did you say -- most of our growth has come from our traditional areas, geographic areas of strength.

Okay.

And also the trade, class of trade that's been historically a strength for us.

And are you seeing benefit or lift from just expanding Newport's reach into other areas of the country?

We have operated on the assumption that we're going to fish where the fish are and we've been reasonably successful in doing that and that's basically what we've done.

Thank you so much.

Okay.

Thank you. Our next question is coming from Erik Bloomquist with JPMorgan. Please go ahead.

I was wondering if you could help me understand the factors that you would attribute the continued growth of menthol to in 2006? And then as a follow-on to that, do you think those factors will again be present in 2007 so we might expect to see continued segment growth in that category?

Well, I would attribute most of the growth in terms of the overall share of the menthol segment of the industry itself to a fair amount of promotional activity that's taking place for menthol brands. Phillip Morris and Reynolds have been very active and this is not a recent development. They've been active for several years now and placing emphasis on their menthol side of the business, and as a result, have been fairly aggressive in offering free goods promotions, et cetera, And I think that part of the growth, if not all of the growth, well, some of the growth anyway, not all, of the segment itself can be traced to the higher degree of promotional activity for menthol brands versus non-menthol and I think that's a big influence there.

And so to follow-up then, do you see then the category being able to keep its overall share as a percentage of the overall market if that level of promotional activity were to decline or perhaps better for 2007, do you see a continued high level of promotional activity in 2007 and hence, one could infer that we might see continued menthol category growth?

Well, keep in mind that the actual, the increment of growth isn't huge. It's been steady over the last few years somewhere between 26 and 27%, so even if the intensity of the promotional support for menthol as a category diminishes, at this point in time I don't see a huge shift. It's not going to go from 27% to 22%, so there would be a modest change if there was a lesser amount of promotional support. As far as this year, well, what we've seen so far this year is the introduction or the pending introduction of a couple of line extensions and that just adds to the promotional noise, if you will, that exists in the marketplace. Where that goes for the rest of the year is difficult to say, but again, I emphasize that there's -- most of the incremental growth attributable to promotional activity if it went away, it would be a modest change or marginal change.

Okay. And then switching to just circle back on the legal expenses. Could you give us a little more detail on the outlook for the number of legal cases in 2007 versus the number in 2006 that you'll be litigating so we can gauge how that might change?

It's hard to say, to be very honest. There were a number of cases scheduled for '06. They didn't happen for any number of reasons. There are a number of cases scheduled for this year, '07, they may or may not happen. They generally don't happen quite the way we think it will from a scheduling standpoint, so it's hard for me to characterize that. It really depends on a lot of the issues that occurs or that occur from the courts in terms of motions and how much time people take to make decisions about different things, so it's a very difficult thing to forecast.

Okay. So if I were to be talking to you a year ago, would you say the pipeline in '07 of pending legal cases is bigger or smaller than the pipeline in '06?

Keep in mind, the legal landscape has become less -- not as intense as it has on an overall basis.

Right.

We're talking year to year now in terms of trials. I would say it's about the same.

Okay, thank you.

Okay.

Thank you. Our next question is coming from Michael Millman with Soleil Securities. Please go ahead.

Thank you, I have a couple questions. What is the tax on the special dividend?

From Diamond to Loews?

Yes.

Yes, that is at a 7% rate to Loews. We get the benefit of the intercompany -- or the corporate dividends receipt deduction.

Okay, and regarding hotels, you've typically been a good seller of properties and here, the industry is saying occupancy declining, yet, you're growing faster, so are you seeing cap rates actually remaining where they are or in fact, even declining more?

We see cap rates remaining about the same. We like all of the properties that we own, and we have no intention of selling any of them, but this is also a good opportunity for me to put it in an advertisement for something that we are aggressively pursuing in Washington, which is that even if we wanted to sell some hotels, chances are, it would not be economic to do so, and the reason for that is that corporations unlike individuals have to pay long term capital gains tax rates of 35%, so that if we wanted to sell our hotel, the wedge between the pre-tax and after-tax proceeds would be so great so that it would make the pre-tax, it would make the after-tax deal uneconomic. So we have started a coalition of like minded companies and we're hopeful to be able to get this heard before Congress and actually enacted into law. I think if it is enacted into law, what they will see is that in fact long term corporate tax gains collections by the Treasury will increase over where they are today. So we're hopeful that we may be able to get some traction in getting this approved.

So I get a dollar for being a straight man on this?

Say again?

Do I get a dollar for being a straight man?

No. Then I'd have to pay you a lobbying fee.

And also, could you talk about the tax of consequences would be of spending assets to shareholders?

All you have to do is consult your commerce clearinghouse book. I think you know it as well as we do.

Okay, thank you.

Thank you. Our next question is coming from Ann Gurkin with Davenport. Please go ahead.

Good afternoon. Just wanted to follow-up to see if you would comment on the likelihood of potential FDA regulation of tobacco products? It's my understanding a Bill might get introduced at the end of February and we'll see heightened discussion around that issue. Do you have any commentary?

I really don't have any comment to make. It is possible that legislation will be introduced, but at this point, I have no comment.

Okay. And then secondly, as you look out to 2007, and the heightened competition around the menthol segment, are you going to -- have you forecast increasing promotional spending or support of the Newport brand or are you going to hold that spending? Have you forecasted holding that spending relatively flat as we move through the year?

Well, let me just step back for a second. When you say heightened competition, in basic terms, we don't view the competition that we're aware of, at least to this point so far in '07 to be any different than it was last year. The fact that a couple of line extensions are being introduced in the marketplace at this point in time does not necessarily in our minds change the equation with respect to how we deal with things. As I've said, we will evaluate the progress of our brand and the competitive brands and make decisions accordingly at appropriate times.

Okay, thank you.

Okay.

Thank you. There appear to be no further questions at this time. I'll turn the floor back over to you for any further or final remarks.

Thank you for joining us on the call today. As a reminder, a replay of this call as well as the downloadable podcast will be available on our website, Loews.Com, in approximately two hours. Thank you, again.

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