洛茲集團 (L) 2007 Q1 法說會逐字稿

Good morning. My name is Henry, and I will be your conference operator today. At this time, I would like to welcome everyone to the Loews' first quarter 2007 earnings conference 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.

(OPERATOR INSTRUCTIONS)

Thank you. It is now my pleasure to turn the floor over to your host, Mr. Darren Daugherty, Director of Investor Relations. Please go ahead.

Thank you, Henry. Good morning, everyone, and welcome to Loews Corporation's first quarter 2007 earnings conference call. A copy of the earnings releases for Loews Corporation and Carolina Group may be found on our website, loews.com.

Also on the call this morning are 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, Chief Executive Officer of Lorillard.

Before we begin, I would like to make a few brief disclosures concerning forward-looking statements. This conference call will include the use of forward-looking statements. Actual results achieved by the Company may differ materially from those projections made in any forward-looking statements.

Forward-looking statements reflect circumstances at the time they are made, and the Company expressly disclaims any obligation to update or revise any forward-looking statements made during this call. This disclaimer is only a brief summary of the Company's Statutory Forward-Looking Statement's disclaimer. We urge you to read the full disclaimer which is included in the Company's 10K and 10Q filings with the SEC.

I would 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 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.

And with that, I will now turn the call over to Loews Chief Executive Officer, Jim Tisch.

Thank you, Darren, and good morning, everyone, and thank you for joining us today.

The first quarter marked the continuation of good business conditions for Loews. Earnings per Loews common share were $1.20, up from $0.85 in the first quarter of last year. Included in our results was the gain of $89 million relating to a reduction in our proportionate ownership in Diamond Offshore, due to the exercise of the Diamond Offshore 1.5% convertible bond.

Peter will provide more details in a few minutes, but this one time non-cash gain should not outshine the strong results by our subsidiaries. Earnings per share of Carolina Group were $1.08, as compared to $0.86 in last year's first quarter.

CNA delivered an excellent first quarter performance maintaining a steady trend of consistent quarterly earnings results stemming from ongoing underwriting discipline and expense reduction efforts. Highlighting the progress that CNA has made over the past few years, last week the Company inaugurated a $0.10 per share quarterly dividend.

This action will deliver value and cash to shareholders. While conditions in the property casualty insurance market place are softening, CNA remains focused on maintaining a strong book of business through its rigorous attention to risks selections and pricing strategy.

Diamond Offshore posted a quarter of record revenues and earnings. Worldwide demand from mid-water and high-spec semi-submersibles remained strong during the first quarter. And spot rates in all Florida markets remains quite healthy with a leading edge day rates for high-spec floaters surpassing $500,000 for terms sometimes stretching past the end of the decade.

Since the same period last year, Diamond Offshore's average day rates have increased across all rate categories. While the Gulf of Mexico jack-up market has experienced excess supply resulting in downward pricing pressure, international jack-up markets remain strong and continue to draw rigs from the US Gulf. While it is difficult to predict whether rates for mid-water and high-spec rigs will continue to climb, we are optimistic about the Company's growth as existing customer contracts continue to roll into new contracts at increased rates.

As is customary, Marty Orlowsky will discuss operating results for Lorillard. But I would like to emphasize a few successes for the quarter. Though total volume decreased by just under 1% year over year, the Company was able to grow revenue and market share while maintaining industry leading profitability. The strength of the Newport brand has enabled Lorillard to increase market share and to increase unit profitability by 15.7% since the first quarter of last year.

Boardwalk Pipeline Partners continues to perform well, benefiting from strong market fundamentals in gas transportation services. Boardwalk's Pipeline expansion project between Carthage, Texas and Keatchie, Louisiana was put into service at the end of 2006, and was a primary driver of revenue increases over the first quarter of last year.

To continue with organic growth, Boardwalk is also making progress on other previously announced expansion projects. And in March, the Company issued an additional 8 million common units, raising $288 million to fund a portion of these projects.

Boardwalk recently declared a distribution of $0.43 per unit, which represents a 19% increase over the comparable period from last year and keeps intact its record of the increasing distributions every quarter since going public. As the General Partner of Boardwalk Pipeline, Loews has begun to receive intensive distributions. That, while modest today, could turn into a significant source of cash as Boardwalk is able to increase distributions in the future.

Loews Hotels had another good quarter. Revenue for available room increased by 7.1%, reflecting ongoing market strength in the luxury and upper upscale hotel segments. Since the end of '06 we have increased our cash position by $300 million to $5.6 billion.

And while we continue to seek value creating acquisitions to redeploy this capital, we have so far found share repurchases to be the best value investment available to us. In that regard, Loews repurchased nearly 7.3 million shares of its common stock during the first quarter at an aggregate cost of $314 million.

Finally, I would like to announce that we will hold our Loews Investor Meeting on Thursday, June the 14th here in New York City. It will be an opportunity to learn about Loews and how we think about our businesses.

At the meeting, Pete Keegan and I will present a review and vision for Loews, and you will also be able to hear brief presentations by the senior executives of our four largest subsidiaries, CNA, Diamond, Lorillard and Boardwalk.

Now, I would like to hand things over to our CFO, Pete Keegan, who will provide additional detail on our financial results. Pete?

Thanks, Jim and good morning, everyone.

In the first quarter of 2007, Loews' consolidated net income increased to $768.3 million, from $541 million in the first quarter of 2006, mainly reflecting the strong results from CNA, Lorillard and Diamond Offshore. Investment gains for the quarter were $75 million versus a loss of $3.6 million in the prior-year first quarter.

These investment gains included an $89.2 million gain related to a reduction in Loews' ownership interest in Diamond Offshore from 54% down to 51%. Our change in percentage of ownership resulted from an increase in the total number of shares outstanding upon conversion of Diamond's 1.5% debentures due in 2031 into an additional 8.9 million shares. This is a non-cash event and for applicable SEC accounting rules, Loews recognized a gain on the issuance of shares by subsidiary.

Carolina Group net income was $188.7 million for the quarter versus $150.1 million in last year's first quarter. Net income for Carolina Group stock was $117.6 million in the quarter versus $67.6 million in the first quarter of last year. Net income allocated to Carolina Group's stock is proportional to the weighted average number of Carolina Group shares outstanding.

Between the first quarter of 2006 and the first quarter of 2007, Loews sold 30 million shares of CG common stock, increasing the public flow to 62.3% and reducing Loews' economic interest in Carolina Group to 37.7%. This should be taken into account when analyzing net income on a year-over-year basis.

Accordingly, Lorillard contributed $84.3 million to net income for Loews's common stock during the quarter versus $101 million in the prior year's first quarter. To accrue for obligations under the state settlement agreements, Lorillard recorded after-tax charges of $157.8 million during the quarter versus $133.1 million in the first quarter of 2006.

As of March 31, 2007, the Carolina Group notional debt balance stood at $1.088 billion. In a few moments, Marty Orlowsky will provide further details on Lorillard's operational results.

CNA contributed $275 million to Loews' net operating income in the first quarter of 2007 versus $217.1 million in the first quarter of 2006, primarily due to strong investment income and solid operations.

Diamond Offshore's record quarter resulted in a contribution to net income of $107.2 million versus $72.3 million in the first quarter of 2006. Comparisons of this quarter's net income to prior periods will reflect a decrease in Loews' percentage of ownership.

Boardwalk Pipeline's contribution to Loews' first quarter net income increased to $39.1 million from $35.7 million in the first quarter of last year.

Net income for Loews Hotels increased to $10.9 million from $8.5 million in the first quarter of last year. Occupancy for all owned hotels decreased slightly from 75.7% in the first quarter of 2006 to 73.4% for the first quarter of 2007. But average room rates increased from $219.33 to $242.07 during the same period.

Net investment income and other, which is comprised of Loews' investment income from a corporate trading portfolio, corporate interest expense, income from operations of Bulova and other unallocated items improved from $47.4 million in the first quarter of 2006 to $57 million in the first quarter of 2007.

As of March 31st, our cash and investments at the Holding Company level was $5.6 billion, which does not include Loews Hotels, Lorillard or our publicly traded subsidiaries. Sources of cash during the quarter were $581.1 million in dividends from our subsidiaries, including $280 million from the Diamond Offshore special dividend. Loews made dividend payments totaling $83.2 million and repurchased an aggregate 314 million in the Loews common stock.

And that concludes my comments, and I will now turn things over to Marty.

Thank you, Peter. Good morning, everyone.

As you have heard, our operating and net income for the first quarter of '07 as compared with the first quarter of '06 increased by 14.6% and 19.9%, respectively. Contributing to these results were higher effective unit prices, a result of a December 2006 price increase, and lower promotional expenses. Partially offsetting the increases were a 0.9% reduction in total Lorillard units shipped and a 14.8% increase in settlement expenses for the first quarter of 2007 versus the first quarter of '06.

The decline in wholesale units shipped during the first quarter of '07 was related to advance purchases by wholesalers made during the fourth quarter of 2006 in anticipation of a price increase that resulted in offsetting inventory adjustments affecting Lorillard shipments during the first quarter of 2007.

The increase in settlement payments reflects a step up in the amount of annual based MSA payments beginning in 2007. Lorillard's domestic US wholesale shipments declined by 1% in the first quarter of '07 versus the first quarter of '06.

However, Lorillard out performed the domestic industry decline of 4.2% for the same period. As a result, Lorillard's domestic share of market for the first quarter of '07 was 9.95%, an increase of 0.33% over the first quarter of '06.

Newport's domestic wholesale shipments for the first quarter of '07 were down 0.6% as compared with the first quarter of '06, again, attributable to the inventory adjustments that occurred during the first quarter of 2007 -- of 2007. Newport achieved a 9.18% share of domestic market in the first quarter of 2007, an increase of 0.34 share -- of a share point over the first quarter of '06.

At the retail shipment level, Newport's shipments -- at the retail shipment level, sorry, Newport's share of 9.56% in the first quarter of '07 was up 0.31% versus the first quarter of '06, and increased a little over 0.4% sequentially over the fourth quarter of 2006.

The brand share of the menthol segment was 33.6% in the first quarter of 2007, up 0.6 of a percentage point over the first quarter of '06. The total menthol segment was up 0.4 for the same period, achieving a 28.5% segment share of the industry.

The financial and market performance results for the first quarter of 2007 reflects Lorillards continuing strategy to balance profitability with Newport performance. Specifically, higher effective unit pricing and lower promotional spending in the first quarter of '07, compared with the first quarter of 2006 more than offset the affects of higher settlement expenses and slightly lower volumes.

However, the level of promotional spending in support of Newport is subject to change based on the brand's trends and competitive factors. And as such, future quarterly comparisons may not reflect the same set of positive dynamics as experienced during the first quarter of 2007.

Thank you, and I will turn it back over to Darren.

Thanks, Marty. Operator, at this time we would like to start the question-and-answer session.

Thank you.

(OPERATOR INSTRUCTIONS)

We will pause for a few moments to compile the Q&A roster.

Thank you. Your first question is coming from Bonnie Herzog of Citigroup. Please go ahead.

Hi. Good morning, everyone.

Good morning.

I just have a couple of quick questions. First, I guess for Marty. You know, in talking about Newport and you walk through, sort of, the business and the retail market share.

Marty, what are you seeing in the overall menthol category? I mean, certainly the competition, I would think, has increased as some of the new brands entering. Do you think that has caused some pressure on your brand, because you did mention you are not necessarily promoting as much.

Do you think you're going to have to step that up in the future?

Well, I am not going to comment on what we will do in the future, as I typically don't.

Okay.

I don't think -- for a fact, virtually every year, for the last, I guess, three or four years, particularly in the first quarter of the year or the second quarter, some of our competitors have introduced line extensions in the Philip Morris case of Marlboro menthol brand, most recently, Kool, and last year, I guess, it was Camel menthol and this year it's Kool, a line extension of KOOL.

So this is not a new event, and our reaction to it will be predicated as I continue to express the view that based on what we see is the trends taking place we will respond accordingly. To date, none of those line extensions have had what I consider to be appreciable impact on our business. That does not necessarily mean the future will be the same, and we will be watchful for whatever may occur in the future.

I will add though, if you look at the first quarter -- and the KOOL line brand extension and Marlboro began their introduction in the first quarter, yet the Newport share of the segment increase was greater than the total segment increase as compared to the first quarter of '06. So we have out performed -- on a segment basis, our share is up to a disproportionate level.

So I can't imagine based on that alone, that those line extensions had -- on an immediate basis had any negative impact.

Okay. Fair enough.

And then maybe a bigger picture question, in terms of the notional debt. Obviously, you have mentioned before that that is a priority, I believe, to pay that down once you have an opportunity to do so.

In terms of the timing of the Engle trial and the appeals being exhausted. How long do you think it will take to pay down that notional debt.

Well, let me -- I am not going to comment on specifically on the debt per se, because that's a Loews issue. But let me clarify something with respect to the covenant that we have as part of the Engle agreement that effects Lorillard specifically and in a similar manner, effects Philip Morris.

And it is different than the, than what recently occurred with R J Reynolds, where they had a literal bond payment that was in effect and they -- there was a court action taken and that bond money was returned to Reynolds. We are not dealing with a bond money factor here. We are dealing with an amount of money that was part of an agreement to enable us to carry on appeals all the way up through the Supreme Court, if necessary.

And that agreement is still in effect since we are still in the process of appealing in the not to distance future to the Supreme Court. So until we complete all aspects of the appellate process, then we will not make any decisions in terms of the moneys or in terms of the balance sheet agreement, the net worth agreement.

Now, assuming the Supreme Court considers this thing, we are probably looking somewhere for a decision, one way or the other, coming out of the Supreme Court toward the latter part of this year. I would be surprised, since the term is going to end in the next month or two for the Supreme Court, that anything would materialize sooner.

It is possible. But I would say it is more likely that any decision relative to our net worth agreement will not occur until later this year. And, again, our money is not bond money. Right now success of those dollars and it is to the class -- the Engle Class to be decided in terms of how to dispose of it by the judge, the presiding judge.

Okay. And then I have a question for Jim.

Jim, as you look at your stock for Loews, certainly on a parts basis, it is trading below what you could argue the individual pieces are worth. What is the market missing? And then, do you feel that in each of the businesses there might be opportunities for cost cutting by chance? Is it more top line driven?

Let me go to the cost cutting first. We leave it up to each of our business to manage themselves, but we monitor very closely what is going on. I don't think there is an opportunity for a wholesale cost cutting across each -- all of our companies. Rather, they each monitor that all the time. They know that we are looking at it. So, I don't think so you will see any extraordinary cost cutting going on.

With respect to the valuation of Loews, it has historically traded at a discount. And as you know, the Company has used that as opportunity to repurchase shares, and, in fact, that's what we did to the tune of $300 million in the first quarter of the year. My goal is that the stock will not trade at a discount to its net asset value.

So far, I can't say that I have been any good at delivering on my goal. But it is a goal that we have. And hopefully one day the market will recognize the value that those of us here at the Holding Company at Loews have created and that they will reward us with a PE multiple that is greater than a 30% or 40% discount to the market.

And that the market will recognize that over the past 10 years, 20 years, 30, 40, and even 50 years, that shareholders of Loews have achieved rates of return in excess of 15% a year.

Okay. And I think one of the other things, Jim, that I don't know if the broader market appreciates or understands, is that historically or in the most recent history in the last several of years. You are much more dependent on the free cash flow generated by Lorillard. And if I understand correctly, going forward that will be less so. So therefore, there could be an opportunity, if I am understanding correctly, for a multiple expansion.

Let me just restate it if I could. If you go back five years, virtually all of our free cash flow came from Lorillard. Now, we have significant sources of cash flow coming to Loews. We have, first of all, the dividend coming from CNA which should be -- based on the $0.10 a quarter dividend, should be about $100 million a year. We received a special dividend from Diamond Offshore and anticipate receiving regular dividends for the rest of the year, so that should be about, I think, $300 million or so.

We have dividends or distributions coming from Boardwalk, which on a pre-tax basis should probably be between $150 and $200 million a year, based on the current dividends, distributions that they are paying. And then we also have the distributions from Lorillard, but we also have the investment income on our cash balances, which if you use just a money market rate of return, should be, on a pre-tax basis, in excess of $250 million a year.

So, there is very significant cash flow that is coming up to the parent that has been dramatically diversified over the years and our goal is to continue diversifying that the cash flow.

Okay. I appreciate that and I think you said it much better than I. So thank you for your time.

Thank you. Your next question is coming from Judy Hong of Goldman Sachs. Please go ahead.

Hi. My first question is for Jim.

Jim, are there any factors that the Board would be looking in terms of what could prompt them to convert the tracking stock of Carolina Group to a common stock structure?

That's something that we haven't looked at.

Would there be any tax implications in terms of converting the tracking stock to common stock and potentially spinning that off to shareholders.

There are always tax implications. I do not know, though, what the specific implications would be. Obviously, any time you go to do something like that, you call in the tax lawyers and there is lots and lots of talk, but we haven't done that.

Okay.

And then, just a few questions for Marty. Marty, can you quantify what was the inventory adjustment in the first quarter.

Well, it was somewhere probably around 300 million units. That was what we estimated the advance buying quantity to be in the fourth quarter of last year, so it had to be roughly in that same range.

Okay. And by end of the first quarter, your estimation is that basically all of the inventory load now has been taken out.

That's correct.

Okay. And then your expectation for consumption decline for the industry this year.

I don't do consumption declines. It is an extremely difficult number to come up with, and we really don't look at it. So I really can't comment on that.

Okay. And then secondly, in terms of SG&A expenses being down in the first quarter, are there any factors that may have contributed to it.

Yes. There are two, probably two key factors. One, our selling expense, cost of the sales force is down and that's a byproduct of the restructuring we did last year, and our legal expenses were down given the fact that we have had, fortunately, very limited activity so far this year in terms of trials.

So, between the legal and the selling expense, that pretty much accounts for the major part of it.

Okay. And do you have any guidance in terms of full-year tax rate.

No, I don't have any guidance.

If you are referring to our lower tax rate for the first quarter, which I suspect you are, it is a result of a manufacturers tax deduction that we have on qualifying income, and it increased from a 3% factor last year to a 6% factor this year. It accounted for about a $6 million benefit to us in the first quarter. And we would presume that that effective rate and the effect of the manufacturer's deduction should prevail for the balance of the year.

Great. Thank you.

Okay.

Thank you. Your next question is coming from David Adelman of Morgan Stanley. Please go ahead.

Good morning, everyone.

Good morning.

Jim, I had a question first for you. An outsider looking at Loews a few years ago would have rattled off a number of important tactical objectives. I will mention some.

It was to get a credit rating upgrade to fix CNA, hope that you get pricing in the offshore drilling market, manage the tobacco litigation from Lorillard, refinance the preferred stock in CNA, and restart share repurchases, and I could go on. Those all obviously have been achieved.

Sitting where you are now, can you share with us what the principal tactical objectives that you have for either the overall corporation or the individual operating subsidiaries at this point in time?

Well the individual operating subsidiaries are all doing very well. So the goal right there is for them to continue doing well and for them to maximize their opportunities within the context of their markets. And I think they are all doing that well. CNA has embarked on generating strong consistent earnings, good return on equity and generating excess cash flow so that they can return it to the parent.

Diamond Offshore is looking to extend its contracts so that it will have a strong backlog of revenues and earnings for Loews for years to come. At Lorillard, Marty is doing what he has always been doing, which is managing the business with an eye to both the current year and also an eye to maintaining the business in a strong mode for the intermediate to long term. And at Boardwalk, they are managing the business which we thought was going to be a quiet and staid business.

They are managing the business for significant organic growth that should be visible over -- and come on to our books over the next two years as the projects are developed. So, from the Loews perspective, what we are doing is, number one, we are monitoring very carefully what goes on at the subsidiaries. We are very active and involved in their capital structure, capital raising, and they're strategic plans. So those all have been, in essence, ratified by us, as have their capital plans.

And then the other thing that we are doing at Loews is trying to figure out how to allocate the $5.5 billion that we have in our corporate treasury. We bought in $300 million worth of stock during the quarter on the theory that this -- we were able to purchase the stock at a significant discount to the sum of the part's value. We continue to look for other businesses to buy, but as you can see from the lack of press releases coming from us, we haven't found anything yet.

But we do continue to look, and figure that at some point in time we will be able to buy something that would be value additive to the Company.

Okay. And then, Marty, if I can ask you a few things.

Firstly, with the dollar increase in the state tax excise in Texas where you are obviously under represented, do you think that you are benefiting from some extent from competitors SKUing their national promotional spending to that state?

Not really. I am not specifically aware of everything the competition is doing. I am not certain that they are making that much of an effort to SKU their spending into Texas. I don't think that's a real factor.

And then, secondly, Marty, not just in this quarter, the last year or the year before, it is readily apparent that the performance gap between Lorillard and its principle competition is widening. You know, the profit growth rate differentials are larger than it has been over the very long term. I'm curious, what do you at attribute that to?

Well, I don't know if I can attribute -- in our case, it has been a reflection of the very consistent -- the strategy with that and the consistent execution of that strategy and also the fact that we have been in a position, even though our competition has -- and, I think you have to recognize the competitors, and I think you do. Our competitors have decreased their spending and promotion.

It has been overall a relatively declining cost component factor in the mix. So that has enabled us to really continue to be where we have always been which is, if they decreased their spending, we can decrease it more given the strength at Newport and the way we spend the money. So, I think that -- and, obviously, on a comparative basis over quarter over quarter, year-over-year, for the past few years, that has been a positive result.

Okay. And then one last question, Marty, about the net worth requirement and when Lorillard would feel comfortable avoiding the agreement or having it expire.

You know, whether the U.S. Supreme Court grants review or elects not to, even under the circumstances where they elect to grant review, there are in theory, residual issues, the so-called orphan issues that may or may not be ultimately evaluated within the Florida Court system if individual class member claims proceed.

I am curious, does that residual -- would you be comfortable voiding the net worth requirement once there is finality with respect to the U.S. Supreme Court? Is that a sufficient condition?

It may be. I am not going to sit here today and give you a categorical answer, yes or no, but the way the agreement is structured, it will come to an end, it is completed once every aspect of the appellate process is completed. The orphan issues, the way one might look at it today, are really not an intrinsic part of the case per se.

The orphan issues may allow for future appeals on a different basis than the fundamental case itself, which is what we are dealing with right now. So without giving you -- and anything in the legal arena is subject to change because lawyers are constantly re-evaluating the implications of what we deal with.

So I would tend to think the orphan issues are not necessarily, as I said, a part of the primary fundamental appeal factor that we are dealing with that's relative to the Engle findings. So under those circumstances, they may not have any effect with continuing the agreement.

Okay. Thank you, very much.

okay.

Thank you. Your next question comes from Bob Glasspiegel of Langen McAlenney. Please go ahead.

Wow, they have them both right. Congratulations.

Jim, I was wondering if you could drill a little deeper into the trading gains. What was behind that and what sort of investment posture were you taking.

At Loews?

Yes.

It is where -- we -- I would describe our trading style as aggressively conservative. We keep a lot of cash on the balance sheet, but we do, from time to time. make foray into the, primarily into the U.S. Treasury market where we may buy securities as long as 10 years. When you own something like a 10 year note, not only are we able to earn the interest of close to 5.75%, But we do take advantage when we can finance them at an attractive yield and pick up yet more yield.

There is also some capital gains on those transactions, as well as we have a portfolio of common stocks of about 5 to $600 million during the course of the quarter.

Those wouldn't be. Let me just cut you off on that. That wouldn't be the operating trading gain item, would they? Or the capital gains on equities?

No. Those just go straight into our income. We treat those as trading securities and we mark them to market every quarter.

Okay. So if common stock goes up that would be a trading gain in the operating earnings, not a realized gain?

That's correct.

Okay. So, it was mainly treasury gains, in that sort of trading line.

Treasury and common stocks.

Okay. Appreciation.

And also investment income. Interest income on our cash balances.

Okay. Parent debt didn't change in the quarter, you didn't give that?

No.

Okay. Boardwalk, now that your general partnership stake is going to get increasing cash flow prospectively, how should we think of that piece in valuation?

The general partnership interest?

Right.

All I can say to you is do the best you can.

Are you going to talk about that. You typically do a sum of the parts at your annual meeting. Are you going to address that in greater detail?

I don't know. But what I would say, is that if you look at the world of MLPs, there are a number of general partnerships that do trade, so that you can look at the valuations of those general partnerships and the multiple that those general partnerships trade at, and then you can get some sense of what you think the general partnership interest that Loews has in Boardwalk Pipelines is worth.

Okay. And finally, just reading your letter in the annual report--

I am glad you did.

Yes, it was well done. But I did sense a greater sense of discouragement at where values are and your potential to do deals in the current world.

Maybe I was misreading what your intent was but while you did boy back stock, you lost ground on your cash position with the enviable position of generating a lot more free cash than you are consuming. Was I misreading the tea leaves in what you were saying?

Maybe, a little bit. We are frustrated that prices for businesses seem, to us, relatively high, but I would say that all we have to do is find one and that's what we are doing, we are looking for one, not a whole bunch.

So we are constantly sorting through all the different opportunities and looking for the one transaction that will make sense for us.

I read of it as a message of don't look for us to do anything in the current environment.

Bob, you know I say that all the time. And in that environment, we were still able to buy two natural gas pipelines and put them together.

Yes, very fair point. Thank you, very much.

Thank you. Your next question is coming from Christine Farkas of Merrill Lynch. Please go ahead.

Thank you, very much. A couple of questions for you, Marty, if I could. Back to SG&A, just based on the reduction, I guess, of SG&A as a percentage of sales, I want to understand what is ongoing and recurring. There were no charges or anything aside from reduced cost of selling and legal expenses in the quarter?

I am sorry. You mean, what effected it?

Well, just a year ago, you had embedded some charges, for example, for restructuring. I want to make sure there is nothing else one time.

No, we don't have any of those.

So this current SG&A as a percentage of sales rate, is something you would consider as ongoing and reasonable?

Not necessarily, because the legal expense is -- directly correlates to the activity that may take place. So if we, for example, have increased trial activity or discovery activity in the rest of the year, it will effect what we spend on the local side. So I don't think -- it is a variable factor.

So I don't think you could straight line project that.

And the cost of selling portion then --

The cost of selling -- I don't -- there will be a more -- it should effect future quarters by varying degrees, but I don't -- in fact, it will effect it to some extent, maybe not to the same order of dollars that the first quarter was effected.

Okay. But there was a step down in terms of the cost of selling?

Yes.

Okay. Moving on to, I guess, your performance relative to peers. I'm wondering if you have seen any impact or change to their whole wholesale programs or trade activity, if you will, or wholesale programs I mentioned. Did any distractions perhaps related to that, help you in the quarter? Did you see anything like that in your business?

Well, the only major shift or change that occurred in the first quarter was RJ Reynolds merchandising program that effected retail. Nothing of major consequence that I can't recall would affect the wholesale side that would effect shipment flow.

There were differences in Reynolds merchandising program at retail and, in fact, we came out slightly on a net basis ahead.

But like you said, on the wholesalers side, doesn't seem to impact your business in terms of their changes?

No, nothing of great significance.

Okay. Great. And my last question, with respect to grower payments just so I can fully appreciate your pricing increases net to Carolina Group. Do you have the number of the grower payments for the quarter?

Yes, I do. It was -- for the quarter, we paid 20.7 million. $20.7 million.

That's perfect. Thanks a lot, Marty.

Okay.

Thank you. Your next question is coming from Nik Modi of UBS. Please go ahead.

Yes. Good morning, everyone. Just a quick question on the MPM adjustments, an update there. And how much really at stake for your organization for 2003 and what you would do for the cash if it was returned.

I am sorry. What cash returned?

Well, if the offset to the MSA payments you would be making from the MPM adjustments?

You mean the disputed amounts?

Yes.

Well, I don't know. I don't--I don't think it would be very constructive to speculate on how much money it may or may not imply. Obviously, there is a number that is in dispute. Whether or not all of that will come back is questionable. I don't know at this point.

So, I would not look at that today as tangible sort of factor to consider, frankly.

Okay. That was it for me. Thank you.

Thank you. Your next question is coming from Filippe Goossens of Credit Suisse. Please go ahead.

Yes. Good morning, gentlemen and congratulations to Marty for the eighth consecutive time of out performing consensus estimates by a wide margin. So, again, congrats, Marty. Great job.

Wish you wouldn't keep a score card.

Couple of questions here on my part as well. Peter, just housekeeping question. On the notional debt, was there any payment subsequent to the end of the first quarter?

No, that usually happens at the time dividends are declared and we will announce that when that happens. Our next Board meeting is a week from tomorrow. That's when the Board normally considers dividends.

Okay. And then, just one final question on Engle. Both Jim and Marty, many thanks for all the clarification this morning, that was helpful for all of us here.

But a final clarification, the entire $200 million That is completely at a discretion of the judge ultimately, what to do with the amount, is that correct?

That's correct.

Okay.

It is not the same as the Reynolds money.

Yes. That's what I understood, I just wanted to make sure.

Okay. And then some operational-type question for Marty. First one, obviously your competitors are working on strategy or are working on product line extensions in order to deal with the declines we are seeing in the industry. You have done very well with menthol. You have done very well with Newport.

Are you looking at product line extension as well or other strategies for some time in the future when menthol might not show the same strength as it is doing today.

We are not necessarily -- We are always looking at line extensions, obviously, in terms of any potential future opportunity. Are we focused particularly on any specific type of line extension, the answer is no. It is not a matter of -- we can't look at the market place base basis our needs or our interest. The market has to be viewed as to what is the opportunity from the consumer side.

So depending on what we see as we go through time, we will take advantage of any potential opportunity to market something that the consumers want. Whether we are focused on menthol or non-menthol is really immaterial here.

And I certainly -- and I don't necessarily look at our current strength in menthol as necessarily being, and I know you are not implying this, as any kind of negative. But future market opportunity has to be defined by what we are able to determine the market wants.

Okay. Then next, Marty, obviously with people kind of speculating whether PMESA will enter the smokeless category how and when, is that potentially having any impact in terms of your timing with regard to your Swedish Match joint venture.

I can give you a real simple, quick answer, Filippe, no. It does not affect our timing.

Okay.

We will proceed not on what -- on the basis of what Philip Morris may or may not do. It is the same point I just made. We are going to proceed-- that is what our overall approach to the business is.

We will proceed on the basis of where we think we can develop opportunities that will be profitable for us and it is an as simple as that. And our timing would be dictated by careful approach to assessing what that opportunity may be.

Okay. Next question, Marty, obviously it is a very small percentage of your portfolio, but if you could just talk a little bit about the non-Newport brands, particularly, what is your longer term strategy with Kent in light of the volume declines we are seeing there and then some of the very small brands like Satin, Old Gold and Maverick.

We saw major swings there. Perhaps a couple of comments from you on the other non-Newport brands.

Maverick, obviously, is our price brand, it is priced very low. We had about a 21% increase in volume in the first quarter of '07 versus '06. Unfortunately, that 21% was on a very low base. But nonetheless, it is trending fairly positively with respect to growth. It is a small factor.

And we have put it out there as a low priced alternative. We don't lose money on it. We are not making a huge amount of money on it. But for us it is a place holder in that discount segment of the market.

As far as the rest of the brands are concerned, and, obviously, Old Gold is our other price brand, but we are not supporting it as aggressively on a price discount basis, so this year it is showing some declines. Kent, True, Max, Satin -- well, Satin, we have discontinued Satin, but Kent True and Max. Our brands -- brands in long-term states of decline and we don't actively support them and, we basically harvest the brands and have no-- and that's been our strategy for many, many years.

Okay.

The final two questions, Marty, first, following up on Nick's earlier question, how much has been put in escrow account for the last two years as regards the disputed amount?

To be honest, I don't know the number. We could get it to you later if you like.

Yes. That's fine. And then the final question, in terms of the sales force restructuring benefits on the SG&A line. When is that is that going to anniversary, Marty? Is that in Q2 or in Q3?

I believe, it will be probably the third or fourth quarter.

Okay. All right. Thank you so much, gentlemen.

Thank you.

Thank you.

(OPERATOR INSTRUCTIONS)

Your next question is coming from Michael [McMillian] of Soleil Securities. Please go ahead.

Well, that was close. It is Michael Millman of Soleil Securities. Two questions. On the $5.6 billion cash, is that net of debt and if not, what is debt? And secondly, following up on someone else's question asking -- suggesting that you have achieved a lot of your goals. With the businesses all looking like they are in high gear, what kind of hedging are you considering or thinking about in terms of protecting this high state.

Well, with respect to hedging, there isn't that much we can do, and to the extent that we can do it, we do it operationally through the subsidiaries. So, for example, Diamond Offshore is trying to get the longest contracts it can in order to hedge and maintain its book of business. In the pipeline business, the growth is coming with long-term contracts for the use of these pipelines so that there is some hedge there as well.

As you know, it is difficult to hedge both the insurance business and the tobacco business. So, there is not so much hedging we can do. With respect to our cash and debt. We have $5.6 billion of cash. That's a gross number.

We have, at the Holding Company $865 million in debt.

Okay. And That cash number does not include the $1.1 billion of notional.

No, it doesn't.

I guess another way of hedging is to take more profits off the table?

I don't fully understand what you mean.

Sell more of the Lorillard, sell some of the--

That's not a hedge then. That's a sale.

Okay. I hear you.

Any comment?

No.

Thank you.

Thank you.

Thank you.

There are no further questions at this time. I will now turn the floor become over to management for any closing statements.

Thank you for joining us on the call today. A replay as well as a downloadable podcast will be available on our website, at loews.com in approximately two hours.

That concludes today's call.

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