洛茲集團 (L) 2007 Q4 法說會逐字稿

Good day, and welcome to the Loews Corporation fourth quarter 2007 year-end earnings conference call. At this time all lines have been placed in a listen-only mode. After the speakers remarks there will be a question and answer period. (OPERATOR INSTRUCTIONS)

It is now my pleasure to turn the call over to Darren Daugherty, Director of Investor Relations for Loews. Please go ahead.

Thank you, Operator. Good morning, everyone, and welcome to the Loews Corporation's fourth 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. On the call this morning are Jim Tisch, the Chief Executive Officer of Loews and Peter Keegan, the Chief Financial Officer of Loews. They will be joined by Marty Orlowsky, 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 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. This disclaimer is only a brief summary of the company's statutory forward-looking statements disclaimer. We urge you to read the full disclaimer, which is included in the company's 10K and 10Q filings with the SEC.

I'd also like to remind you during this call today we may discuss certain nonGAAP financial measures. 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. I'll now turn the call over to Loews Chief Executive Officer, Jim Tisch.

Thank you, Darren, and good morning. 2007 was a very good year for Loews. Despite encountering a few bumps in the proverbial quality road our annual consolidated net income of $2.5 billion was unchanged from last year. Diamond Offshore, Lorillard and Boardwalk Pipeline each delivered record earnings for the full year '07 and CNA reported solid operating income. Our fourth quarter earnings contained a number of nonrecurring items that unfavorably affected an otherwise good year for Loews. These items are outlined in our press release and in a few moments, Peter Keegan will discuss them in further details.

For two consecutive years, CNA has delivered strong consistent financial performance, while results have been helped by mild hurricane seasons in '06 and '07, CNA has benefited from its disciplined approach to pricing and risk selection as conditions in the insurance marketplace continue to soften. CNA has a highly diversified book of business, which it is willing to grow or to reduce depending upon market conditions in order to optimize underwriting returns on its insurance portfolio. CNA's quarterly dividend policy initiated during the past year currently pays $0.15 per share and generates more than $140 million of cash for Loews on an annual basis. Diamond Offshore recorded another year of record results as the Offshore Drilling market continued to surge. Midwater and deepwater rig demand remained healthy, especially in the international sector. Consequently, Diamond's revenue backlog grew from $7 billion at the beginning of '07 to $11 billion at year-end. Last week, Diamond's Board of Directors declared a special quarterly dividend of $1.25 per share, in addition to the regular quarterly dividend of $0.125 per share. These regular and special dividends represent a quarterly payment for Loews of almost $100 million.

Lorillard has posted another excellent year. In a few moments, Marty Orlowsky will discuss operating results, but I would first like to briefly update our previously announced plans to spin off Lorillard. At the time of the announcement, we outlined a few steps that need to be taken prior to completion of this transaction. The first step is for Loews to receive a favorable private letter ruling from the IRS, as well as an opinion of tax council regarding the tax-free nature of the transaction. We have submitted our application to the IRS and are expecting a favorable response within our planned time frame. Another step is the clearance of the registration statement by the SEC, and as you may have seen, we made the initial filing of the Form F4 this past week. And, finally, following receipt of these items, and assuming a decision to proceed by the Loews' Board of Directors, we continue to expect completion of the transaction in June or July of '08. Given that we are currently in registration, we will be unable to answer any further questions regarding the spin-off transaction.

Boardwalk finished '07 with another good quarter. Strong demand for gas transportation services on existing systems lead to increases in capacity reservation rates. However, the market for park-and-loan gas storage services weakened because of the decline in natural gas price spreads. We're more continued to make headway on numerous expansion projects during '07, including its most notable achievement, the commencement of service on the east Texas to Mississippi expansion. This line is effectively sold out with contracts having a weighted average term of almost seven years. Boardwalk has announced the cash distribution of $0.46 per unit, which represents the eighth consecutive quarterly increase since the Company went public. This payment will result in a quarterly cash flow to Loews of more than $40 million which includes the incentive distribution rights of the general partner.

HighMount exploration and production is off to a good start after completing its first full quarter of operations under the Loews umbrella. When we acquired HighMount, we talked about the factory nature of their drilling program. That comment has been [borne] out in the time that we have owned HighMount. Of the 242 wells drilled during '07, 236 produced commercial quantities of natural gas, yielding a 98% success rate. Loews Hotels also had a good year and continues to benefit from ongoing favorable market conditions in the lodging industry. Our hotels saw a revenue per available room increase to $184 in '07 from $168 in the prior year, reflecting improvements in room rates and occupancy. So, to sum up, at Loews we continue to do everything we can to build value for our shareholders and our core strategies continue to yield positive results. With that, I will now turn the call over to our CFO, Pete Keegan.

Thanks, Jim, and good morning, everyone. In the fourth quarter of 2007, Loews reported consolidated net income of $512 million versus $746 million in the prior year fourth quarter. Net income for Loews common stock was $384 million or $0.72 per share compared to $609 million or $1.11 per share in the fourth quarter of 2006. There are a number of significant and some nonrecurring items which negatively affected results for the quarter. The first of these is a decline in investment income, which decreased $22 million from $88 million net of tax in the prior year fourth quarter. I'll discuss the investment portfolio results in greater detail in a few moments.

The second item is a net realized investment loss at CNA and its fixed income portfolio. These losses were derived primarily from other than temporary impairment losses and securities for which CNA did not have an intent to hold until an anticipated recovery in value. The third item was a one-time $59 million tax expense that Diamond Offshore related to repatriation of previously untaxed earnings from one of its foreign subsidiaries. And the fourth item was a $46 million after-tax charge taken by Lorillard relating to litigation expense associated with the Scott Case in Louisiana.

Turning to results for the full year, net income attributable to Loews common stock was $3.65 per share, as compared to $3.75 per share in 2006. The decline in earnings per share partially is caused by the sale of Carolina Group's stock during May and August of 2006, which reduced Loews' economic interest in the Carolina Group. This had the effect of proportionately reducing the net income from Lorillard that is allocated to Loews' common stock and increasing the net income from Lorillard allocated to Carolina Group stock. In addition to the previously mentioned items, I would like to remind you of a few other factors affecting the year-end results. In the third quarter of 2007, CNA announced a settlement related to a run-off book of business that decreased Loews' net income by $96 million. Partially offsetting this event were investment gains of $93 million recorded during the first quarter of 2007, that related to a reduction in Loews ownership interest in Diamond Offshore.

CNA contributed $201 million to Loews' net operating income in the fourth quarter 2007 versus $224 million in the fourth quarter 2006. For the full year, CNA contributed income of $950 million to Loews net operating results versus $979 million in 2006. Loews' interest in CNA's net realized investment losses was $54 million in the fourth quarter of 2007 as compared to gains of $96 million in the fourth quarter 2006. For the full year, our interest in net realized losses was $180 million as compared to gains of $63 million in 2006.

For 2007, Loews recorded net realized investment losses of $67 million, which included investment results for CNA, as well as previously mentioned investment gains related to Diamond Offshore. In 2006, Loews recorded net realized investment gains of $69 million. Net investment income consisting primarily of gains in Loews' trading portfolio was $22 million for the quarter versus $88 million in the prior year fourth quarter.

For the full year, investment income was $194 million versus $228 million in 2006. These declines were primarily driven by a lower cash and investment balance during 2007 resulting primarily from the acquisition of HighMount, a decline in trading gains in government and equity securities as compared to last year, and we had lower realized interest rates on money-market instruments. In the quarter, net income attributable to Carolina Group stock decreased to $128 million or $1.18 per share, from $137 million or $1.26 per share in the fourth quarter 2006. For the full year, net income for Carolina Group stock increased to $533 million or $4.91 per share from $416 million or $4.46 per share in 2006. The main operational drivers are results for the year and for the quarter were higher effective unit pricing and a lower effective tax rate.

Lorillard contributed $84 million to net income for Loews common stock during the quarter versus $98 million in the prior year fourth quarter. For the full year, Lorillard contributed $363 million to net income versus $410 million in 2006. Again, I will point out that Lorillard's contribution was impacted by the previously mentioned legal expense in the reduction of Loews' economic interest in the Carolina Group resulting from the sale of Carolina Group stock during 2006. Diamond Offshore's contribution to net income decreased to $76 million from $110 million in the fourth quarter 2006. For the full year 2007, Diamond's net income contribution increased to $396 million from $352 million in 2006. Results for both the quarter and the year reflect a one-time tax expense as well as Loews' decreased ownership stake.

HighMount reported net income of $38 million for the fourth quarter and 58 -- $57 million for 2007, which consisted of five months of operation. Production volumes for the quarter are as follows: natural gas production was 20.3 billion cubic feet equivalent at an average realized price of $6.47 per 1,000 cubic feet; natural gas liquids production was [930.800] barrels at an average realized price of $47.71 per barrel; and oil production was [75.900] barrels at an average price of $88.63 per barrel. Revenue for the quarter was $174 million. At year-end, HighMount had hedges in place for 42% of 2008 production and 22% of 2009 production. At year-end, total proved reserves were 2.474 trillion cubic feet equivalent.

Boardwalk Pipelines contribution to Loews' fourth quarter net income was $32 million versus $35 million in the fourth quarter of 2006. For the full year, Boardwalk contributed $106 million to Loews' net income versus $103 million in 2006. Comparison of results between 2007 and 2006 is effected by secondary equity offerings by Boardwalk during the first and fourth quarters of 2007. The increase in outstanding limited partner units produced Loews' total ownership from 80% down to 70% at year-end and proportionately decreases Loews' share of net income. Our ownership of the general partner remains 100%.

Loews Hotels recorded net income of $7 million in the fourth quarter 2007 versus $3 million in the fourth quarter 2006. Net income for the full year was $36 million versus net income of $29 million in 2006. At year-end 2007, holding company cash and investments totaled $3.8 billion. During the year, we spent $2.4 billion in conjunction with the acquisition of HighMount. We paid $331 million of dividends to our shareholders and we repurchased 14.8 million shares of common stock for $672 million. Offsetting these uses of cash were $1.844 billion of dividends received from our subsidiaries.

In January of this year we completed the sale of Bulova to Citizen's Watch Company for $255 million subject to closing adjustments. We expect to record a pre-tax gain of approximately $105 million, which will result in an increase in cash of more than $200 million. Holding company debt of $875 million remains unchanged from the previous quarter. Lorillard ended the year with $1.5 billion in cash and investments, while the Carolina Group notional debt balance as of year-end stood at $424 million. And now I'll turn the call over to Marty Orlowsky of Lorillard. Marty?

Thank you, Peter, good morning, everyone. Lorillard's operating income for the fourth quarter of '07 was $280.2 million and net income was $213.1 million, as compared with $346 million and $234.4 million respectively in the fourth quarter of 2006. The decreases in operating and net income were due primarily to a litigation-related charge of $66 million before taxes and $46 million after taxes. Partially offsetting the effect of the charge on net income is a lower effective tax rate in the fourth quarter of '07 than in the fourth quarter of 2006, due primarily to the statutory increase in the tax benefit related to the manufacturer's deduction and resolution of certain state tax uncertainties. Net sales for Lorillard were $957 million in the fourth quarter of '07 compared to $937 million in the fourth quarter of '06. Domestic unit volume decreased 4.3% in Q4 '07 versus Q4 '06.

The fourth quarter of 2006 was favorably impacted by increased wholesale unit purchases in the fourth quarter of '06 in anticipation of an industry price increase. For the full year of 2007, Lorillard's net income was $898 million as compared with $826 million in 2006 reflecting an 8.6% increase. This increase -- these increases are primarily due to higher effective unit prices resulting from price increases taken in December of '06 and January of '07 and lower sales promotion expenses and a lower effective tax rate, partially offset by an increase in expenses for the state settlement agreements and a charge related to the litigation. The effective tax rate was lower in '07 as compared to '06, due to the statutory increase in the tax benefit related to the manufacturer's deduction and as I said resolution of certain state tax uncertainties.

Total Lorillard wholesale units and domestic United States units shipped in 2007 were down slightly at about .8% as compared with an industry decrease of approximately 5%. Lorillard's 2007 domestic shipment share of market was slightly over 10% representing a plus [.42] of a share point as compared with '06, the full year. This incremental change in share points was larger than Lorillard's major competitors in '07. Lorillard believes that the unfavorable comparison of fourth quarter of 2007 domestic units, the decrease of 4.3% versus the fourth quarter of '0,6 and the full year of '07, and its flat shipment performance, was the same with the full year of '06 is primarily a result of a wholesale unit -- of wholesale unit inventory adjustments made in early 2007 as a consequence of increased purchases made in late 2006 in anticipation of an industry price increase.

The menthol segment accounted for 27.9% of total domestic industry shipments in 2007, an increase of .5 of a sharepoint compared with the same period for '06. Newport achieved a 9.19% share of domestic market wholesale units shipped in 2007, an increase of .39 of a share point over 2006. And Newport share of the menthol segment shipments for the full year of '07 was 32.9%, an increase increase of .7 of share point as compared to the full year of 2006. According to Lorillard's retail shipment database for 2007, Newport achieved a $9.55 per share of domestic retail shipments, up .4 of a point versus 2006. Lorillard's key business strategy of attempting to balance promotion spending behind Newport and overall profit results remains the same as stated in the past. We will continue to assess the Newport brands performance, relative to competitive factors and trends, to determine appropriate levels of support at any given point in time with a long-term goal of sustaining and/or increasing Newport's position in the marketplace. Thank you, and I'll turn it back to Darren.

Thank you, Marty. Operator? At this time we'll take questions.

Thank you. (OPERATOR INSTRUCTIONS) Your first question comes from David Adelman with Morgan Stanley. Please go ahead.

Good morning, everyone.

Good morning.

Jim, first two questions for you. Am I correct, Loews did not repurchase any of its stock in the fourth quarter?

You are correct.

Okay/ And then secondly, Jim, with all of the turmoil in the financial markets, could you scale for us where you see the biggest opportunities for the Company? Is it to buy a new business? Is it for the existing subsidiaries to be more acquisitive? Is it opportunities on the investment portfolios at CNA and Loews?

It's all of the above I would say. Number one, in terms of the securities markets, especially the fixed income markets, while on the one hand we've seen a significant rally in treasuries, we have seen just about the opposite reaction in all other securities. So that bank loans are down 10 points from where they were a year ago, which is an enormous amount. You see what's going on in the mortgage market, and likewise there's also been significant declines of securities in the high yield and other markets. So we think that this is a time of opportunity, not stress for us, to make investments for our portfolio, that over the intermediate to long term will be very, very attractive. With respect to "acquisitions," we continue to look and for sure, prices are down today compared to where they were six months and a year ago, but also the outlook for the future is much cloudier now. So we are -- we look at a lot of things, we look very carefully, and for sure, we don't want to put ourselves in a position where we buy something one day and then two weeks later we find it's worth half of what we paid for it. So we're being very careful and -- in our search and we feel there's no need to be in a rush.

Okay, and then if I can transition, I had some questions for Marty. Firstly, Marty, you mentioned what your databases indicated Newport's share was at retail for the year. What was it in the discrete fourth quarter?

Our retail share in the fourth quarter was -- for Newport was 9.55% and it was up .4 of a point.

Okay. And then taking out the, or can you quantify whether it was in the fourth quarter last year and in the fourth quarter of '07, Marty, what the impact on shipments overall might have been year on year from the inventory moves?

Yes. From '06 to '07, we've calculated the effect at around -- this is relative to Newport, specifically, roughly virtually all Newport, somewhere in the 300 million unit range. And then at the end of December of '07, we had a hit. I don't know the number off hand, but we started to have a deloading effect from a build up of inventory that began to occur in the earlier part of third -- of the fourth quarter. So the combination of the comparison quarter-over-quarter because of the, with we were down 300 million coming into the year essentially in '07, and then a further exacerbating effect of the deloading that the took place from the build up at the end of December, were primarily the reasons that Newport's poor fourth quarter shipmentwise.

And is the December dynamic, Marty, do you think that's less trade speculation on the FET increase or could it be a reflection of their own tightening working capital at a tough economic environment?

I think I would attribute it to anticipation of the FET increase. Actually, the loading probably began in the latter part of the third quarter, and that was all in anticipation of the FET increase, and as that became -- that dragged on as you well know, for several months into the fourth quarter. Once it became clear that wasn't going to occur, we started to see the deload effect.

And then on the MSA cost, Marty, I think it was up year-on-year in terms of the accrual, about $0.10 per pack. Is that principally that there was an anomaly last year in the fourth quarter that it was particularly low then?

No. We've had a -- it was a step up this year in the payment structure of the MSA, and in the fourth quarter, it was actually -- the fourth quarter, it was higher because of the increase in the base payment inflation which was over 4%, and other adjustments that were made, and partially offset by lower income -- lower volume, net-net it was up.

And then lastly, Marty on the Scott charge, it strikes me, it seems like relative to your peer companies, you took a relatively larger charge, and I'm curious, can you triangulate for us at all on that and also? How are you coming up with an estimate because my understanding is there s sort of a high watermark of what the potential damages may be in that case but you really can't know its precision, how much the existing judgment will be downwardly adjusted.

Well, that's true. We don't know, and so in our judgment, we looked at the assumptions that were built into the model to begin with, and made some other -- and whatever transpired in terms of the interest factor that went away, we made a judgment that the $66 million pre-tax was a prudent number to deal with. It -- obviously it could be lower, it could be higher, but we felt that that was the appropriate number to -- for us to deal with , and I can't triangulate, because I can't speak for the other

Lastly, Marty, can you give us an indication of where you think the consolidated tax rate will be for 2008?

No, I can't. We will certainly have the effect of the manufacturer's deduction. I don't know what will occur with results that we still have some pending state issues, state tax issues, so it's very difficult right now to forecast what effect that all of those variables will have.

Okay, thank you.

Thank you.

Thank you. Our next question is coming from Bob Glasspiegel with Langen McAlenney. Please go ahead.

Good morning, I'm going to follow up on the top level questions that were just asked. Are you able to buy back Loews shares with the tobacco transaction?

Bob, you know that we don't comment on our share repurchases, so I just won't say anything about that now.

I just wanted to know if because of this transaction, you're impeded from buying back stock, no comment is still your answer to that question?

That's still my answer.

Okay. CNA commented on their call they were digging around on subprime opportunistically in short duration subprime. So could you comment on what the we'll see purchases from Loews that happened in the fourth quarter?

Loews was not invested in the subprime space, and we have not traded in it, leaving that opportunity entirely to CNA.

Okay, where have you been picking off opportunities?

The Loews portfolio, we invest primarily in treasury securities and we also maintain a relatively small equity portfolio.

Okay. Over the last five years for the most part, on your subsidiaries, understandably you've looked for dividends from the subs versus buying back stock or having the Company buy back stock with their capital, which is obviously the decisions they've made and their independent boards have made. You -- other than your helping CNA out, you've been more in the selling mode of your subsidiaries rather than the buying mode. With a much more fluid market here, in some of these stocks potentially selling below what you think might be their asset values, is there any reason why you shouldn't be able to buyback shares in some of the subsidiaries?

No, there is no reason, but I'd just like to challenge your premise a bit.

Okay.

You said that we've been in the selling mode rather than in the buying mode. In '03, we bought Texas Gas Transmission, in late '04 we bought Gulf South Pipeline, and just six months ago, we bought HighMount for a total consideration of $4 billion. So --

You've been buying total companies. I was talking about buying or selling shares of existing properties.

Oh, okay.

That was more my point that you've sold some Carolina Group and there was one other --

Actually, we actually took back shares of CNA in return for our CNA preferred shares.

Right. Right. That was by helping CNA out, yes. But in any event, so is buy back of any of these subs on the table an option?

Bob, you know us. Our goal is to increase value for Loews' shareholders, and we will do that if we think it creates value for us.

Even CNA, I mean, where they were concerned about liquidity and having felt like buyback was a viable option?

I don't want to go into any specifics about what we might do in terms of buying back shares of any of our subsidiaries.

But it is a possibility. You did throw that bone to me.

You know me, I never rule anything out.

Thank you, Jim.

My pleasure.

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

Yes, good morning, everyone. Just a couple quick questions for Marty. On the SG&A for the fourth quarter any perspective on why the increase, at least kind of relative to where I was and I think a lot of other folks on the street were? And second thing is, have you noticed anything in terms of the consumption environment? It seems like a lot of the volume weakness was inventory-related, but just wanted to get your thoughts on any change in the consumer environment. Thanks.

Well the SG&A is essentially Scott, the charge for the Scott litigation. Other than that there was no unusual impacts on our SG&A expenses. In fact, it was probably either flat or maybe even about flat with last year in the fourth quarter, so I don't know, that's the only thing that changed, the SG&A expense line. I can't speak to consumption. We don't have a very -- we don't really follow it. We don't try to calculate it. It's a very difficult number to come up with and I can only -- I know other companies have forecast or making statements they think it's going to be down. I don't know. Obviously, smoking -- increased smoking restrictions have some impact on the consumption side, but I can't quantify it.

Okay, thanks a lot, Marty.

Thank you.

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

Hi. I also had a few questions for Marty. Marty? I know you don't really talk about consumption trend, but to the extent that we are entering a period where consumption decline accelerates for the industry going forward, and that it's more difficult for you guys to show top-line growth, what other avenues are you looking at in terms of increasing shareholder value in that context?

Oh, I'm sorry, you're making a -- reaching a conclusion I'm not sure I agree with. You're saying, Judy, that consumption is going to decline in the future. I think you're implying to a greater extent than it did historically, and I don't know that. So I'm not sure I understand the premise of the question.

Well, I mean, I understand the '07 numbers are really difficult to understand, because of a lot of things that happened, but it does appear that the underlying consumption decline was more exaggerated in 2007. And to the extent that trend continues going forward I was just wondering if to the extent that it's more difficult to show top-line growth for Newport, would you look at acquisitions outside of cigarettes more aggressively? Would you think about cost restructuring more aggressively? I'm just wondering how we think about --

Judy, let me -- I'm sorry I'm going to interrupt you. I can't speak -- as Jim pointed out initially, I'm not going to speak to what Lorillard may or may not the do in the future. I will gladly answer that when we're in a position to do so, and we're in a position to articulate whatever appropriate and relevant business strategies we develop. So I'm not going to speak to the future. All I'm going to say is our strategy has been -- our core strategy has been to optimize profitability and Newport's market performance and that's what the we've been committed to. And anything relative to the future, I'd be more than happy to offer you a discourse on in some time in the distant -- not too distant future.

Okay.

Judy, I would just say that if you take a long-term view of history, meaning over the past five or 10 years, I don't think that '07 was outside the norm at all. There are times when our volumes are up a bit. There are times when they're down a bit. For '07 our volumes were down less than 1%, so I don't know that that calls for a whole sale change in strategy.

Okay. Marty, just looking at the menthol segment, to what extent do you think Newport is benefiting from Kool taking a bit more aggressive stands on pricing? They've talked about they thought that Kool was being overly promoted in the past and it looks like they scale back to some extent on that front. Do you think you're seeing benefit on Newport's side from that trend?

That Newport experiencing an advantage because Kool is not promoting as aggressively?

Yes, are you -- first of all, are you seeing that, and, secondly, do you think that's the case in terms of helping Newport?

Well, I don't know if I could attribute Newport's position or performance one way or the other to any given brand. Obviously, if -- and Kool has lessened their level of promotion over the last year or so, but it's hard to say. I mean, the growth for Newport historically anyway, and our share growth certainly on a relative basis, we're outperforming the other -- Kool. It comes from multi-sources, so yes, if the competitive environment is less intense promotionally it's a positive for Newport, sure.

Okay, thanks.

Thank you.

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

Yes, good morning. If I may start off with a question for Pete, perhaps. The -- investment income was it a little bit more down than we would have thought. Does that kind of mirror the comments, Pete, you made about the Loews overall portfolio as well in terms of the portfolio income?

You're referring to the $22 million investment income number in the fourth quarter?

Correct, Pete. Yes.

That was the reasons I gave you, one our cash balances are lower because we bought HighMount so they were down about approximately $1.4 billion on a year-end to year-end basis, so there's less cash. Then as I mentioned, we had lower trading gains in government and equity securities, and there were lower interest rates on a quarter-to-quarter basis. So those are the factors

Okay. Okay. And then my question for Marty. Marty, as it relates to the MSA step up that we experienced in 2007, what should we expect for 2008? Is there still going to be a flow through or we can pretty much for our own models kind of flat line that right now?

No, it's been reset in effect for the future. The step up was the one-time step up, but it will continue through in the future. And I'll point out, Filippe, that inflation adjustment there's a minimum 3% increase annually or an adjustment in inflation whichever is higher, and inflation has been running higher than 3%, so you really have to take a look at the inflationary impact of the MSA payments.

Okay.

But other than that, the variable of the step-up will not occur again that way.

Okay, yes, that's what I thought it was kind of the last final step up there. Okay, and then I think following up on the question from Nik earlier. Obviously, people like ourselves who cover the consumer space, a big question that the alway comes up is with regards to consumers trading down. Now, if we were to ask that same question to you, Marty, if your specific demographics were to be looking at trading down, do they really have an option in the menthol category today to trade down, or you are more insulated than some of your peers, let's say?

Well, I wouldn't say we're more insulated, and I really -- it would be difficult for me to conclude to the extent to which our smokers or the smokers in Newport would trade up -- would trade down. All I can say is historically, Newport does have a unique taste signature as a menthol product in the marketplace. And historically, when there was more active trading down if you will, when the pricing dynamic was more forceful in the past, Newport did relatively well under the circumstances. So I think the product itself, the quality of the product, the taste characteristic of the product, helps. Does that mean that it would be insulated from anything? I don't know about that.

Okay. Then any initial read on the triumph, Marty, on the smokeless side?

No, Filippe, it just went into the marketplace. We have good distribution on it, and I really don't have anything to report on that.

Okay. And then final question, Marty. And maybe also to some extent to Jim here. If I kind of read the answer you gave Judy with regard to the trend line, what it has -- whether '07 or 08 is going to be a trend line in terms of consumption, and I think this might be very helpful for investors out there that are trying to take advantage of the opportunity today with the stock being down as it is. Marty, can you just kind of say or explain to us again the opportunities you see for Newport going forward, is it going to come largely from entering new geographies where today you're under benchmark, or where you don't have a presence, or it's still going to come largely more from increasing the market share in those demographics -- or those geographies where you have already good or strong position?

Well, I would have to say that the primary source of share performance will be derived from markets where Newport -- and this has been the case historically, there's nothing new here -- from markets where we have traditional strength. As to new markets, I think I've spoken to that point in the past. We can generate incremental business in markets that are relatively underdeveloped for a menthol brand or Newport for that matter, but it's a costly process. You're really paying a fair premium in a sense on the profit side, on the margin side, to achieve that. Now -- so I think we would still have to conclude that the primary source of Newport's share performance in the market will be in markets where it has basic strength.

Okay, great. Thanks a lot, Marty.

Thank you. Our next question is coming from Andy Baker with Jefferies. Please go ahead.

Thanks a lot for taking the question. I was wondering if you could give us anymore granularity on the reserves? I think can you give us a break down of what the [permian] base is versus Michigan versus Alabama, what your probables reserves are as well.

You talking about --

HighMount.

This is HighMount, Marty.

Okay.

Yes, Andy, we haven't released those yet, so I don't want to put them out now. Chances are they will come out in our 10K.

All right, fair enough. Could you talk about your sort of outlook on your stake in Boardwalk Pipeline? I mean you're at the point now where you're getting some extra benefit from having the general partnership interest, and this is I think one of those sort of the less understood assets. I wonder if you could give us your thoughts on the general partnership interest and how you expect that to play to your benefit and cash flow and valuation over time?

Yes. We've always thought that having the -- owning 100% of the general partnership was very attractive because we get the incentive distribution rights which is starting to kick in now as the returns to the limited partners goes higher. So it's a long-term asset that we believe we're holding and we think that it's going to be very valuable for all Loews' shareholders.

Do you think that having the general partnership even though it doesn't bring you technically over 80% does that help you retain all financial flexibility to do tax return transactions with this business?

Well, I haven't even thought about tax return transactions. This is an MLP is just totally different than a C-Corp, and in an MLP, the general partner has total control over the enterprise, just as in any partnership the general partner has total control and the limited partners are there as filing investors. Now, we take very -- we take a lot of consideration into account for the welfare of the limited partners, because we know that the valuation of their shares affects the valuation of Loews. So on the one hand, we're trying to gain good value for the general partner, but we know that Loews has an awful lot of shares of the limited partnership interest, and we are doing everything we can to improve the valuation of those limited partnership shares.

Alright. Great. Thanks a lot.

Thank you. Our next question is coming from Carol [Lynch], of Pioneer Investment. Please go ahead

Thank you. First of all, in the Scott case, was this a cash charge? And also, relative to a large, one of your competitors, Altria Group, they took a -- I think it was $26 million in the quarter. Yours is so much higher. Is this based on market share or why would there be such a huge disparity?

No, it's not based on market share. The ultimate award is joint and several among the defendants, so everyone will pay an equal amount of whatever the total is. It is a -- we have -- we took a charge in, it's in reserve in the event that we have to make the pay-out to that amount or whatever it may ultimately be. I can't speak to the difference between Lorillard's number and anyone else -- any other Company. All I can say is, our experts in this area, our legal experts and accounting experts, have looked at the case and it obviously is a judgment, that we would reserve and take the charge of the $66 million pre-tax. I don't know, you'll have to ask (inaudible) or Altria what their rationale is, but that was our best judgment, and it could be less than that and if it's less, then we will have a gain on that charge, but right now, that's the most prudent number we could deal with.

And at the end of the day, we anticipate that Lorillard will pay the same amount that Altria and Reynolds American pays, so at some point in the future, you would expect the accounting for each of these three companies to be the same. The problem now is that each management has to make an estimate of what they think the actual liability will be, or whether in fact there is any liability at all. So, you see -- what you see are three different estimates from three different companies.

What's the time frame on a final decision here do you think?

It's difficult to say. There are any number of issues that remain to be adjudicated, notwithstanding, it just went back from the Louisiana State Supreme Court. It was on appeal, the Louisiana State Supreme Court did not deny the appeal or review of the decision that was made by the Middle Court in Tennessee -- in Louisiana, so it the goes back to the trial court and there are a number of issues there. Definition of the class being one of them, size of the class being another. It's a very complex situation, and so it could take quite a while before it gets resolved, and I really can't give you a fair estimate of the timing.

Carol, let me make just one clarification, which is that we have a similar share to Phillip Morris, USA, and RAI, Reynolds American has two shares because they have both American -- RJR and [BAT].

I see. Thank you for that. Now, my next question, you talked about the balance sheet, the cash, and the debt that are in the Carolina Group balance sheet, such as it is. Can -- and for my purposes of modeling, can I then say that the cash that is sitting there at Carolina Group will be transformed onto the balance sheet at Lorillard when that's a publicly traded Company?

Well, Lorillard -- the Carolina Group balance sheet includes the Lorillard balance sheet and the lions share of the assets are all Lorillard, except for, I believe, about $150 million, sorry, $100 million of cash that's held at the Carolina Group level. So, yes. What you -- most of what you see will remain with Lorillard, and in fact, if you look at the S4, I think you'll be able to see that more clearly.

Thank you, and one last question. Do you have visibility into the level of wholesaler inventories, the levels at this point?

Yes.

First quarter? Yes? How do the inventories levels look for the wholesalers?

Truly, I'm not going to comment on that. I'm sorry. We'll only comment on performance for 2007, and I'm afraid I'm not going to be able to answer you at this point.

All right, thank you very much. That's all I have.

Okay.

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

Thank you. Just to clarify, I think you suggested at lease in the current quarter, and I was wondering if we could project that through quarterly this year that you expect the dividend cash flow excluding Lorillard to be about $175 million. Is that something that we can project?

Which dividend cash flow?

Adding up from DO and CNR -- CNA and --

Diamond Offshore is playing close to $100 million on a quarterly basis. CNA, I said, is the sum of the quarterly dividends which is $140 million.

So that would be $35 million a quarter.

Right.

And $40 million from Boardwalk, which would be where I got my $175 million.

No, no, no, the Diamond -- oh, okay, so that's a quarterly number. Is the $175 million a quarterly number you're talking about?

Well, I'm asking. That's the question. Is the $175 million per quarter something that's projectable on a quarterly basis through this year?

I can't tell you what the Board of Directors of these companies are going to do from quarter-to-quarter, but you do have a sense of what the quarterly numbers are, and you can make your own assumptions as to whether or not those are going to continue for the next four quarters.

Okay. But the fourth quarter was $175 million?

I think that sounds about right.

And in regard to your comment that the acquisition outlook is cloudy, were you talking about the economy, or were you talking about the political, or both, or something in addition?

I was talking about the economy. The economic outlook is very, very difficult to discern in the next quarter or for the next year. I think you ask a lot of different people, you get a lot of different answers. And now maybe a year ago, we thought there was more clarity. Truth be told, the clarity lead you to the wrong answer. But now at least we're wiser and understand that there's a lot more volatility to the economic outlook than we've anticipated at any time in the recent past.

And so is that more likely to keep you out, or is that more likely for you to say, the market is totally overdiscounted, the -- what's out there, and make something more attractive?

It's -- I don't know what it's going to do. It's just the state of affairs though.

Okay, thank you.

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

Thank you for joining us on the call today. A replay will be available on our website, loews.com, in approximately two hours. That concludes today's call.

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