洛茲集團 (L) 2008 Q1 法說會逐字稿

Good day. I will be your conference operator today. At this time I would like to welcome everyone to the Loews first quarter 2008 earnings conference call. 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 Darren Daugherty, Director of Investor Relations. Sir, you may begin your conference.

Thank you. Good morning everyone and welcome to Loews Corporation's first quarter 2008 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. 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 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 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. 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 to dial-in number to participate, 877-692-2592. I'd now like to turn the call over to Loews Chief Executive Officer, Jim Tisch.

Thank you, Darren and good morning and thank you for joining us today. Before reviewing our first quarter results, I'd like to give you an update on the progress we are making on our plans to spin off of our ownership in Lorillard to holders of Carolina Group stock and Loews common stock. We are progressing well on this complex transaction. As completion of this proposed transaction is subject to a number of conditions including receipt of a favorable ruling from the Internal Revenue Service, which I'm pleased to report has been received. We also need an opinion of tax counsel, SEC clearance, final approval by the Loews Board and favorable market conditions in order to complete this transaction. We continue to expect that the transaction will be completed in mid-'08.

With respect to our first quarter results, as you have seen by now, there were a number of significant items highlighted in the press release that affected the quarter, some positive and some negative. Overall, however, declines in investment income at the parent Company, at Carolina Group and at CNA outweighed the otherwise solid performances of our operating subsidiaries. In the case of Carolina Group, there was a $14 million after tax shortfall in investment income, compared to the prior year, that resulted in a reduction in CG's investment -- that resulted from a reduction in CG's investment partnership interest, a lower average invested asset balance and lower interest rates. This reduction in investment income, along with one-time spinoff expenses, which totaled $8 million after tax, more than makes up for CG's $11 million shortfall in net income compared to last year.

In a few moments, Marty Orlowsky will discuss operating results for Lorillard in greater detail but I would just like to briefly note that Lorillard increased its domestic market share from 10.1% to 10.5%. While CNA's net operating income for the quarter comes as a disappointment, the Company is weathering well in a challenging price environment by maintaining its focus on underwriting discipline and expense management. The Company's decline in net operating income resulted primarily from reduced limited partnership investment income compared to last year's first quarter. Peter Keegan will provide some additional details in a few moments.

During the quarter, CNA bought in 2.6 million shares of its common stock at an average price of $26.53 per share. This action, along with the payment of a $0.15 quarterly dividend, was possible because of CNA's strong capital position and solid insurance operations. The Company is well-positioned operationally and financially to maintain its strength, despite tough market conditions.

Diamond Offshore posted another quarter of record revenues and earnings, reflecting the ongoing worldwide demand for mid-water and deepwater semi-submersible rings. Last week, Diamond took delivery of its new-build jackup rig, the Ocean Shield, which will go to work under contract commitments spanning 17 months. Its sister unit, the Ocean Scepter, is scheduled for completion in approximately five weeks. While a contract has not been announced, Diamond is in the advanced stages of negotiations for an international term job for that rig. The final rig in our new-build and upgrade program is the Ocean Monarch, which is already contracted for four years at an attractive day rate upon its completion later on this year.

We are quite pleased with the success of the new-build and upgrade program and its contribution to Diamond's revenue backlog, which currently stands at approximately $10.7 billion. Last week Diamond's Board of Directors declared another special quarterly dividend of $1.25 per share, in addition to the regular quarterly dividend of $0.125 per share. Together, these dividends represent a cash payment to Loews of almost $100 million per quarter.

HighMount Exploration & Production reported good production volumes and increased realized prices. To manage commodity price risk, HighMount had hedges in place at the end of the quarter for 70% of its remaining 2008 projected sales volume and 33% of its '09 projected sales volume. This still allows some latitude to realize value based on the strength in natural gas prices that we have recently seen. The lifeblood of a successful E&P Company is its drilling program. HighMount's drilling program focuses on low risk, long lived natural gas reserves, which we refer to as factory drilling. In the first quarter, HighMount completed 131 gas wells at a 100% success rate.

Boardwalk Pipeline had a good first quarter as the Company began to see earnings contributions from the projects such as its East Texas to Mississippi pipeline expansion and the Western Kentucky storage expansion. Earnings for the quarter benefited from strength in gas transportation pricing, higher throughput and a favorable contract settlement gain. The park and loan market however continues to be challenging.

Boardwalk has several pipeline expansion projects underway that will be placed into service over the next several quarters and that are expected to contribute to the Company's growth. To finance these projects, Boardwalk has successfully raised capital through a number of debt and equity offerings and also has available $1 billion revolving line of credit. Additionally, Loews has agreed to invest $700 million in Boardwalk, primarily through newly created Class B limited partnership units. We expect the transaction to be completed in June. Boardwalk has declared a distribution for the first quarter of $0.465 per unit, a $0.005 increase from the prior quarter and its ninth consecutive dividend increase since going public in '05.

Loews hotels had another solid quarter, matching last year's first quarter net income. RevPar, or revenue per available room, increased by 3.5% driven by increases in room rates. As I said at the outset, Loews' overall results were somewhat marred by the actions of the financial markets in the first quarter. Nevertheless, for us, the financial markets present a time of opportunity rather than a time of stress.

And finally, as many of this will probably be Marty Orlowsky's last Loews earnings call. Hopefully, in July or August, Marty will be hosting his own earnings conference call for a publicly traded Lorillard. However, I cannot let this moment pass without making mention of how stellar Marty has been as a member of the Loews team. He has been the most extraordinary and successful tobacco executive in recent memory, building enormous value for Loews and for Carolina Group shareholders. But success has not gone to Marty's head. He's been a pleasure to work with and always approaches issues with a can-do attitude. Marty's good nature, work ethic and good humor will certainly be missed by all of us in the Loews family.

And with that, I'd now like to hand things over to Loews' CFO, Peter Keegan. Pete?

Thanks, Jim and good morning everyone. Loews reported consolidated net income of $662 million in the first quarter of 2008, versus $768 million in the first quarter of last year. Net income for Loews' common stock was $555 million, or $1.05 per share, compared to $650 million or $1.20 per share in the first quarter 2007. Net investment losses for the quarter of $29 million, primarily consisted of other than temporary impairment losses in CNA's portfolio, derived from securities for which CNA did not have an intent to hold until an anticipated recovery in value.

Investment gains of $75 million in the prior year first quarter included after tax gains of $89 million related to a reduction in ownership of Diamond Offshore. Net income for Carolina Group's stock totaled $107 million or $0.98 per share, compared to $118 million or $1.08 per share in the first quarter of 2007. Gross profit was essentially unchanged, versus the prior year first quarter, as the increase in net sales was offset by higher costs related to the state's settlement agreements. Administrative expenses related to the spinoff of Lorillard were $6 million after tax and a management -- for a management bonus and $2 million after tax for financial and legal fees associated with the transaction. Additionally, legal expenses increased by $4 million after tax versus the first quarter of 2007.

Lorillard's contribution to net income for Loews common stock was $67 million during the quarter, versus $84 million in the prior year first quarter. CNA's contribution to net income decreased to $200 million, from $275 million in the prior year's first quarter. CNA's results were negatively affected by reduced investment income, largely attributable to a reduction in limited partnership income of approximately $91 million before taxes, versus the first quarter of 2007. Diamond Offshore's contribution to net income rose to $136 million, from $107 million in the first quarter of 2007, and was driven by increased day rates for high specification floaters in midwater semi-submersible rigs. Year over year comparison of first quarter results is affected by a reduction in Loews' ownership interest from 54% to 51% during the first quarter of 2008.

HighMount reported revenue of $189 million and net income of $47 million for the first quarter of 2008. Production volumes during the quarter were as follows. Natural gas production was 19.7 billion cubic fee, at an average realized price of $7.43 per 1,000 cubic feet. Natural gas liquids production was 911.7 thousand barrels at an average realized price of $46.92 per barrel and oil production was 84.5 thousand barrels at an average price of $94.85 per barrel.

Boardwalk Pipeline's contribution to net income of $39 million was unchanged versus the prior year first quarter. Comparison of results between the first quarters of 2008 and 2007 is affected by secondary equity offerings by Boardwalk during 2007, which has resulted -- which has reduced Loews' total ownership interest to 70% from 75%, and proportionately decreased Loews' share of net income. Loews Hotels net income of $11 million for the quarter was unchanged from the first quarter of last year. Average room rates for the quarter increased to $261.90 from $248.70 and occupancy for the quarter decreased to 70.8% from 72% in 2007.

As of March 31, 2008, holding Company cash and investments totaled $4.4 billion. During the quarter, we received $501 million of dividends from our subsidiaries and paid $82 million of dividends to shareholders. In January, we completed the sale of Bulova for approximately $250million, which is subject to adjustment and recorded a gain of approximately $126 million pretax or $82 million after tax. At the end of the quarter, Lorillard's cash and investments totaled $1.7 billion. During April of 2008, Lorillard made a payment of $865 million related to the state's settlement agreements, including $72 million that was deposited into a disputed payments account. In the first quarter of 2007, Lorillard paid $579 million under the state's settlement agreements and in April of 2007 an additional $111 million was deposited into the disputed payments account.

Carolina Group notional debt was $218 million at the end of the quarter. We expect that as a result of Lorillard's recent dividend to Carolina Group, sufficient cash will be available at Carolina Group, including the use of the $100 million Carolina Group reserve, to pay the regular Carolina Group dividend of $0.455 per share in May, as well as to pay essentially all of the remaining notional debt balance. These possible actions are subject to approval by the Loews Board. And now, I'll turn the call over to Marty Orlowsky at Lorillard. Marty?

Thank you, Peter and thank you Jim for those very nice words. Maybe I should just quit while I'm ahead.

Don't do that. Too many people will be disappointed.

Okay. Then I'll read my comments. We believe that Lorillard's first quarter of 2008 performance was reasonably positive when taking into consideration some of the factors affecting our results. A comparison of the first quarter of '08 with the first quarter of '07 reveals the following differences. Wholesale shipments were negatively impacted by downward wholesale inventory adjustments taken during the first quarter of this year, as well as 200 million fewer promotion related units shipped in the first quarter of 2008 versus the same quarter a year ago. Excluding these effects, the first quarter of '08 shipments would have compared favorably with the first quarter of 2007.

Additional factors impacting our financial results, as mentioned by both Jim and Peter in the first quarter of '08 versus the first quarter of '07, included, to repeat again, increased operating expenses related to the separation of Lorillard from Loews, investment income declined due to lower average invested cash balance and lower yields on investment income. On the positive side, average unit pricing was slightly higher in the first quarter of '08 compared with the first quarter of '07. This only partially offset the effects of the other factors mentioned. Lorillard's gross profit for the first quarter of '08 was essentially flat when compared with the gross profit achieved in the first quarter of '07. Lorillard's operating and net incomes for the first quarter of '08 were $267 million and $174 million, as compared with $287 million and $202 million respectively, as compared with the first quarter of '07. Reflecting declines of 7% and 14% respectively.

Lorillard's domestic wholesale units shipped in the first quarter of '08 resulted in a slight increase of 0.3% versus the first quarter of '07, outpacing the domestic industry's overall decline rate of 3.3% for the same periods. Total Lorillard's wholesale units shipped in the first quarter of this year were almost flat, posting a modest 0.2% decrease comparing the first quarter of '08 with the first quarter of '07. Again, due to the factors I mentioned earlier. Lorillard's domestic shipment market share for the first quarter of '08 was 10.47%, an improvement 0.38 of a share point over the first quarter of '07.

Newport's domestic units shipped reflected a decrease of 120 million units or 1.1% in the first quarter of '08, as compared with with the first quarter of '07. Again, due to the factors I mentioned before. Newport's domestic shipment market share for the first quarter of '08 was 9.52%, an increase of 0.22 over the same quarter last year. Sequentially, Newport improved its domestic shipment market share in the first quarter of 2008 versus the fourth quarter of 2007 by almost 0.6 share point.

According to Lorillard's retail shipment database, Newport's market share for the first quarter of '08 was 9.85%, an increase of 0.28 over the first quarter of '07. Newport's share of the menthol segment was 33.5% in quarter one '08, an increase of 0.6 of a point over quarter one '07. The overall menthol segment for the industry was up slightly for in first quarter of 2008 at 28.4%, compared with the same quarter last year.

Lorillard's core strategy of balancing profitability with Newport market share performance remains unchanged. We will continue to monitor market trends of Newport and its principle competitive brands to determine what, if any, promotion spending adjustments may be appropriate, consistent with our stated strategic objective. We will also closely monitor general economic conditions, as they may impact consumer spending patterns and make appropriate adjustments to our promotional activity. Thank you. Back to Darren.

Thank you, Marty. Operator, at this time, we'll open it up for questions.

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

Good morning everyone.

Good morning.

Marty, I wanted to ask you several questions. First, I think your net pricing in the quarter was only up about 1%. Could you speak to the overall competitive environment and why, at least in the short term, you've seen a decline in the rate of net pricing you're generating?

Well, the net -- it's obviously being affected by promotional spending, although I will say that our promotional spending in the first quarter of 2008 was about flat with the first quarter of 2007. But we did yield fewer shipment units and so that had some effect.

And are you -- at this point in time, were you pushing a little harder on share than you had been over the last 12 or 18 months and if so, why?

No, we were not consciously trying to generate improved share. We were really consistent with what I -- with what I'veed said on a number of occasions, just said this morning about how to -- just to maintain our positions competitively in the marketplace. So our -- the fact of -- the most critical factor that guided our spending in the first quarter of this year, as it has in past quarters, was looking at the overall nature of the competitive picture and the market itself.

And Marty, as part of the pending transaction, three questions. When are you going to articulate capital structure plans, the amount of debt you intend to take on, the scale of a buyback? Are you going to share with outsiders formal financial goals?

Well, I'm not going to -- David, I'm not going to comment right now on anything pertaining to the separation, other than to say that at the appropriate time in the filings and other commentary that we might make in the future, we will obviously be more specific.

And Marty, can you quantify, given the tax increase in the State of New York, either your market share in the state of New York or the percentage of your total volume?

Yes. Our total volume, based on our retail shipments into New York State, is about 13% versus the industry of about 5%. But I will say this, over the three years ending 2007, if you go back to '05, '6 and '7, even in the high tax environment that existed pre this pretax increase, we did pretty well. Newport actually managed to increase share, either modestly in the last couple of years and in '05 pretty substantially. So, we've remained pretty competitive on the share side and the volume side in New York State. In fact, I believe we've outperformed on the share side, outperformed the other menthol brands in New York State. Obviously, that's not a guarantee or an indication of what will happen in the future with an additional increase, but we've more than held our own in the past. And that's about all I can say about it.

And then two last things, Marty. One is on the legal expense being higher, is that tied in principally to the Engle progeny cases and if so, are some of those sort of one-time in nature, dealing with them as they came in?

Yes, the $6 million increase in legal expense for the quarter, if you take it out of that -- that's distinct from the separation related expense is due to two factors. One, you're correct, the Engle progeny cases, we're in the midst of starting that process of discovery and various hearings related to it. As well, we were affected in the first quarter by some increased legal expense related to the MSA dispute issue. And so to what extent either of those will affect the future is hard to say. It will obviously depend on the timing of different elements that are either a part of the Engle progeny process, the litigation process, and/or the factors that will relate to what the next steps will be relative to dealing with the MSA dispute issue.

And then Jim, just one question for you, actually, related to Lorillard. What was the thought process in awarding the a) the one-time management bonus in cash as opposed to stock? And what's your general reaction to the fact that at Loews there's some particular reasons why perhaps the non -- certain members of the management team don't have large equity holdings, but that at Lorillard coming out of the box it appears as if the equity ownership by the management and the Board will be relatively thin?

Well, first of all, the view of cash versus stock was simply that Loews owns 100% of Lorillard and it will be up to the Lorillard Board, we believe when Lorillard is public, in order to give out cash or equity awards. That's number one. Number two, with respect to the ownership, the Lorillard management team does have a significant number of options and SAR's in Carolina Group that will convert over to Lorillard shares. So the Lorillard management team has performed phenomenally under Loews leadership with their ownership. And I have no doubt that the incentives that they have when they are a part of a public Company will be similar.

Okay. Thank you.

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

Good morning. You teased us Jim, in your intro, that there's some investment opportunities here and in today's market and I'm going to probe on the one that we know that you're digging into, which is subprime, relative at least to the CNA portfolio. I'm not sure whether you've done more of that at the Loews level as well. But a) what is the case that you see in that asset class today? What sort of yields are you getting on them and what other sort of areas of opportunity can we know that you've taken advantage of?

The case for -- first of all, like they say on TV, do not try this at home. If you're going to invest in the subprime market, you have to have on your staff people who are highly trained in analyzing mortgage-backed securities. It is not for the faint of heart and it is not nor the computer illiterate. It is a very difficult and meticulous craft. And what we have been doing is making very selective investments in specific tranches of subprime CDO's and structured product, with the belief that these investments, which we're making at, say, $0.60 or $0.70 on the dollar, will return our purchase price in full, very possibly will return us par over time. And where, in the meantime, we are collecting close to a double-digit current return, based on interest payments. So --.

The double-digits at market or cost or -- at your cost?

The double-digits are based on cost. Market prices will vary and from one quarter to the other, we may have a loss in these securities. I told you, they are not for the faint of heart. But we believe that we've done our analysis and we believe that based on our ability to hold these securities, that they will generate very attractive returns for us. I know that the term subprime is a word that causes fear in the hearts of the most hardened investors. But you can be sure that we've done our work and our analysis in going into these securities.

Well, the yield will come in through operating earnings. And this is all at the CNA level or do you have some additional ones at the Loews level?

It's primarily at the CNA level.

But there are some modest positions at Loews, as well, you're saying?

Yes, very modest.

So the 10% yield will be in the operating earnings and the difference between the $0.60 to $0.70 in par, if you get it at par and you do a really good job, those will be capital gains?

That's right.

Or losses if you're off the mark. But there's room for --?

But the other thing I should say is that we are buying these, but we are not going whole hog into them. We've bought a goodly amount but we're always careful to avoid too much concentration and too much risk to our capital.

What other sort of significant opportunities have you dipped into here that you could comment on?

We participated in -- we've bought some bank loans, some high yield bank loans, loans that have gone from par a year ago to 85 just a few weeks ago. We've made purchases in those securities from time to time. We've been dabbling in the corporate bond market, as well as the municipal bond market. These are all markets where we see plenty of opportunities amid the stress that most of the market is feeling.

What's the general size of the portfolio that we're talking about?

CNA portfolio is about $41 billion.

It's within CNA that you've done all this.

Yes.

Okay, I can dig through there. And I missed, what was the dividend you expect from Lorillard to Loews before the deal?

We didn't say exactly what it was. But we said it was sufficient -- we thought it would be sufficient to pay the normal dividend plus essentially all of the remaining notional debt, Bob.

From -- so Lorillard's balance sheet will -- post the deal, will be pretty similar to before? I missed it, there's no --?

The only point we made in the call was that the timing of the MSA payments were in April versus March of last year. So at the end of the first quarter, Lorillard had an unusually high cash balance. But we're not -- there are no unusual dividends being made from Lorillard to CG. These are normal quarterly dividends but that dividend, including the $100 million in the Carolina Group reserve will be sufficient, we believe, to pay the normal CD dividend this quarter plus retire the remaining notional debt balance.

Thank you very much.

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

Thank you very much. Going back to Marty, if I could. You've commented about looking at the overall nature of the competition and the promotional environment, as well as monitoring the general economic conditions. How would you categorize the current promotional environment here, on the back of your results as well as what we saw from one of your competitors?

Well, in a certain sense, it's relatively stable, in looking at the totality of what some of the competition has done, as well as us. As I said, we were flat per pack spending-wise in the first quarter of this year versus last year. And there were some changes by some of our competitors, one of them in particular but it was not in a sharply upward direction. So it's just a matter in one sense of maintaining almost a status quo kind of position with respect to the spending levels and the nature of the spending. So, I wouldn't say it was sort of a wholesale change in any real sense. But it's still pretty active and I think, as over the last few years the menthol segment has been more than active in terms of promotional activity than the rest of the industry.

And when looking at the promotional activity in the menthol against the broader market, would you say there's marked differences there as well emerging or no?

Well, there has been. This is not new. Over the last three or four years, the menthol segment -- menthol brands were receiving a greater amount of promotional activity or there was greater degree of promotional support than there were for the -- what I'll call the nonmenthol side of the business. It's not new, though. It's been like that for the last, as I said, three or four years.

Yes, certainly, it's been promotional. Just a question on the other, the non-Newport part of your business, looking at the growth in Maverick, as well as the big declines in Puerto Rico. Can you just discuss a couple of those factors?

Sure. Let me go to Puerto Rico first. Puerto Rico, there was about a 45 or some million unit adjustment by the distributor we use in Puerto Rico and that was to rebalance their inventories and it really had nothing to do with demand, per se, as far as we know. So that had, obviously, a fairly large impact on the Puerto Rico shipments. We were down about 23% as a result of that quarter-over-quarter. Maverick was up about 58% in wholesale shipments in the first quarter of '08 or 162 million units. And we haven't done anything unusual there. In fact, we took a price increase, a modest one, not too long ago on Maverick. But Maverick competes in the higher end of the lower end of the marketplace. And I think Maverick was benefited from some degree of price attractiveness, if you will, vis-a-vis the other discount brands, particularly the discount brands of the two major companies, Phillip Morris and Reynolds, because it is lower price. So there's nothing new there, other than probably a shift in purchase interest to Maverick from some of the higher priced discount brands.

Okay. That's great. And then just a final question, Jim, if I could. In your comments, you've mentioned the spend going ahead unless there were some market conditions that you didn't like. What would categorize those unfavorable market conditions?

Christine, I'd prefer to leave that a mystery and not answer that question.

All right. Thank you very much.

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

Hi, everyone. Jim, I just wanted to go back and just go back to Christine's question and clearly when you announced a spinoff in December, Carolina Group stock prices at around $88, Loews stock prices at $48. I'm just wondering just given the stock prices today, whether that has changed sort of your propensity to go ahead and do the spinoff at this point?

What I want to do is I want to treat spinoff questions and split-off questions the same way we treat share repurchase questions. And that is, I don't want to give you a sense of what we're doing for the simple reason that if we do, there's a good possibility that people on the Street will shoot against whatever it is we're trying to accomplish. So at this point in time, I think it's better for us just to remain silent on what the ultimate plans are.

Okay. And then a few questions for you, Marty. First, in terms of the industry volume, you said it was down 3.3% in the first quarter. Do you think that's representative of the underlying consumption trends?

Yes, I would -- well, to some extent, yes. We had, as I explained, some inventory adjustments that occurred and some shipment related to the promotional volumes from the first quarter of '07 versus this year. So to some extent, I think the industry was affected by some degree of inventory factors. But I think clearly, it does reflect in principle the consumption sort of trends that are taking place.

Okay. And then on that note, in terms of your inventory adjustment, because if I look back in the first quarter of last year, I think you actually had some inventory deload that depressed the Q1 '06 numbers -- '07 numbers. So, I'm wondering in this quarter, you actually saw additional destocking on top of what we saw?

Yes, and principally it was attributable to early shipments that we made, mainly for Newport, because several states are coming online for the Fire-Safe cigarette regulations. And so wholesalers apparently -- because we shipped early in the first quarter for the effective date, which would be more in the second quarter time frame, we saw more of a cutback on the conventional product to make room for taking on additional product that was being shipped in to meet the Fire-Safe requirements. So there was a bit of an aberration there that affected our inventories.

Can you quantify how much that was?

Yes, it was about -- something about like 65 million units.

Okay. And then Marty, just taking a step back, clearly in the last few years the industry has really enjoyed pretty healthy -- and I'm just wondering if you sort of look at the environment going forward, you've got pretty high prices of cigarettes with tax increases and et cetera. Do you feel that the ability to continue to take healthy price increases going forward is in some way limited just because of the low price points or the economic conditions or whatever the competitive situation that sort of warrants that number to be a bit more limited?

Well, to be very honest with you, Judy, I think it would be premature for me to reach any kind of conclusion regarding the general nature of the economic situation as it might affect cigarette purchases. Obviously, gas prices are going up and so there are a number of factors out there, which is one of the reasons I added the comment in my prepared remarks about the fact that we will obviously be monitoring the nature of the general economy as it might affect the industry or our business. So, to what extent it may or may not affect pricing remains to be seen. And I really can't answer that today because I honestly don't know.

Okay. And then just final question, the investment in the limited partnership, should we just assume that you really have now gone -- come out of all of these investments and going forward, Lorillard post the spinoff, you wouldn't get any of these income from the limited partnership?

We've pretty much unwound from all of the limited partnership investments but clearly, the future in terms of our investment income will depend on cash available to be invested. So there may be,obviously, some factors that would affect that. But yes, we are essentially out of the limited partnerships.

Your next question is from Filippe Goossens with Credit Suisse. Please go ahead.

Good morning, Marty. And just as a follow-up on Judy's question here, what would you view your minimum cash that you would need to operate the business, aside from the accruals from MSA? Would it be $100 million? Would it be $200 million that you kind of see as the necessary amount.

I really would rather not say that at this point. I don't think there's going to be any -- there's no change in terms of our cash requirements versus the past, so I don't see it's really a particularly significant factor.

Okay. And then in terms of the Fire-Safe cigarettes, is that going to be all at once for all the states or only a select group of states that are kicking it off in Q2, Marty?

No, Filippe, it's only a limited number of states that are coming online with effective dates for their legislation to put it in motion. No, it's not going to be at every state. It's a limited number.

Okay. Then with your history in the industry, Marty, you're probably one of the best people to comment on this.

I'm not invincible anymore.

Sorry?

I said I'm not invincible any more.

You're still one of the best, if not the best. So it just --.

Thank you.

In terms of down trading, Marty, obviously a question on everybody's mind. Should we make a distinct difference in terms of the question about down trading menthol versus nonmenthol cigarettes? In other words, would you say given the available competition, obviously there's two big brands out there, including yourself, that there are fewer options for people within the menthol category to down trade? Therefore, if we look at Lorillard, we should be less concerned as compared to let's say a general cigarette type question?

Well, I'll answer that very cautiously. I don't want to mislead anyone. I will say that you're correct in your statement that there are fewer options available particularly for stand-alone menthol brands the lower end of the market. So that, while in the past when there has been a shift in the dynamic between premium priced and low priced brands, we have tended to historically be less effective. That doesn't mean we're impervious to the effects of that type of dynamic change but I would say that menthol tends to be, generally speaking, a little less affected. But it still can be affected, obviously.

Okay. Then the other question I had was you made reference, when you talked about promotional activities by the industry, you made reference to one particular player stepping up promotional activities. I have my own idea who it might be, but didn't one other player last year say, or early this year commenting about fourth quarter results, that they would actually lower their promotional activities for their menthol product? In other words, are we seeing two diverging paths taken by players or am I reading that wrong.

No, you're basically correct but I don't know the degree to which one of the companies actually in fact lowered their promotional spending. But clearly, yes, one company did announce that they were going to cut back on certain types of promotions and one of our other competitors stepped it up slightly. So -- but I don't know the degree to which the other one decreased their spending. But that's correct, yes.

Okay. And then just a last point on this particular topic, the other player who stepped up their promotional spending, would you view that more as offensive in nature, Marty or more defensive?

I take it offensively, yes (Laughter). I would say -- you would categorize it to some degree as being more offensive, more aggressive than it has been. But it's been like that off and on for the last few years. So -- either through the form of line extending or spending additional dollars on a per pack basis. It's been a combination of the two.

And then my final question, Marty, in terms of the amounts that have been deposited in the escrow amounts, what's the total amount so far? And number two, any idea -- I know it is always very tough to even try to guesstimate this, but any idea whether in 2008 we might see some beginnings of the arbitration proceedings or at this moment, it's very fluid?

It's very fluid. It's hard to say, Filippe. We go up and down on this issue. And so, I really don't -- I can't tell you anything specific about it. As far as how much we've held back, I don't really know. I think maybe a $200 million, somewhere in that range, what -- in the held that we paid into the disputed account.

Correct. That's what I meant., yes. Wonderful. Well, thanks so much, Marty and we look very much forward to talking with you as part of the new Lorillard Company.

Thank you, Filippe.

Your next question is Andy Baker with Jefferies & Company. Please go ahead.

Thanks for taking my question. A couple questions here. First, on HighMount, any chance you're going to give us any detail on the reserves there and how they're looking?

Yes, the reserves are -- total reserves are about 2 billion -- sorry, 2.520 trillion cubic feet.

Okay. And in terms of the HighMount, you've had this now since last summer. Things seem to be going very well. A couple of questions. One, how much capital does it take to run this business in terms of CapEx? And two, the cash flow that's been generated from the business, is that just going into general corporate cash or do you see using this to expand this business, now that you've gotten your -- had some time, got gotten your feet wet and as properties do come up, you'll look to get bigger?

Well, this year we're using the capital to reinvest in the business, drilling puds and other wells and we expect some modest cash flow to Loews.

Can you tell us what with the CapEx was in the quarter for HighMount?

The CapEx was $125 million.

Great. And Jim, just -- it's very often in the case -- just switching gears here to the split-off, very often in these cases, management, the Board and the large shareholders disclose that they do have the intention to participate. Do you have any -- I haven't seen anything from you. Any plans to comment on that?

We will make the comment when we make the comment and we don't want to comment before then. We'll let all of our filings speak for themselves.

Fair enough. And then just a question for Peter. Can you just give us some breakdown on what the Loews Corporate cash and investments is, just sort of how that's invested? When you make decisions -- when you see these $0.85 on the dollar bank loans and stuff at CNA, do you see those at Loews Corporate too? And if "they seem like good investments to me," do you take advantage of that?

Most of the Loews investments are in more liquid securities than things like bank loans. And so the lion's share, the majority of our investments are in cash and cash equivalents and treasuries. We have a modest equity portfolio and other odds and ends. But for the most part, the test for putting something into the Loews portfolio is that it be very liquid.

Thanks a lot.

Thank you. Your next question is from Blaine Marder with Loeb Partners. Please go ahead.

Hi guys. I'm new to your calla but I'm wondering if you could share with us your capital allocation strategies stemming around CNA, either at the Loews level or the CNA level? You've got an asset here trading at 70% of book value. And honestly, from a public market perspective, it's not an attractive investment. It's not growing. They've got exposure to asset-backs on the balance sheet and it's a controlled entity. So, what are the thoughts here? Would you consider taking this asset in to take advantage of the discount to book or what are your thoughts?

Blaine, I see that this is your first time for the call because you talked about how being a controlled entity makes CNA an uninteresting investment. Well, by the same token you wouldn't have bought Carolina Group when it went from $25 a share and at one point more than triple. We don't -- we manage our subsidiaries as -- our public subsidiaries the way you would hope management would manage their own public company. We have a focus creating value for all the shareholders and we believe that over time, the market will recognize that value. With respect to CNA, you're right, there are lots of problems in the industry, but the question that you have to ask yourself is whether or not the market reflects those issues. I personally am comfortable with our mortgage-backed portfolio and I'm comfortable with the other assets that we have on the CNA balance sheet. And the fact that CNA doesn't trade at a premium to book value was a reason why CNA selected to buy in shares this quarter. But having said that, I should also say that having CNA as a public Company, even if it's priced at a discount to what we might think its real value is, is nonetheless positive because it does provide a benchmark for all investors to be able to determine the value and worth of CNA to Loews.

Fair enough. But by affecting the share repurchases at CNA, essentially you're sort of increasing your pro rata ownership of the Company on a sort of craving basis?

Yes, you could say that. But I would argue that it's beneficial for all shareholders that CNA is able to buy its stock and at a substantial discount to book value. The fact that Loews benefits is, yes, it's an interesting fact, but the point is that all shareholders benefit from that.

Thanks a a lot.

Thank you. Your next question is from Anton Kowalski with Canyon Capital.

I had a question about HighMount E&P. I'm just wondering, do they have any exposure to the Haynesville Shale or Pierre Shale or any of the other shale plays that the other E&P companies are talking about?

No, we are primarily in three areas and the -- those shales that you mentioned are not where we are.

Okay. And would you mind commenting on what price you have hedged at this year?

Yes, hold on one second. We have hedged 70% of our volume at -- this year, the hedge for our '08 -- for all of our '08 hedges, going back from the beginning when we started hedging, so that goes back into '07 is $8.42. And for our '09 hedges the average price is about $9.05.

Great. Thanks so much.

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

Thank you. I think you said that on Loews that the cash was $4.4 billion. Did you give us what the debt was?

About $865 million.

$865?

Yes.

And that $4.4 billion is before the $700 million investment in HighMount?

No, the 4. -- the $700 million in Boardwalk.

In Boardwalk. Sorry. That's before it.

Yes, correct.

Also, I think last quarter you said that economic conditions were too cloudy for acquisitions of some of this cash. Is that still the operative strategy?

My crystal ball is still pretty cloudy, yes.

And on the hotel business, luxury hotels, even the first quarter seemed to have higher RevPAR and increased earnings. Could you talk about what Loews' RevPAR was sort of modest for luxury hotels and earnings were only flat?

Well, first of all, we are not a large hotel Company, so a lot of what drives us is based on a few markets, primarily the Florida market and secondarily the New York market. Those markets have been reasonably good for us but it doesn't reflect the full national trend. And I don't know what the other companies have experienced in the first quarter but I thought, that in view of what's going on in the economy and the financial markets, that the hotel business actually turned in pretty good results.

Okay. Thank you.

Thank you. Your next question is from Steven Errico with Locustwood Capital.

Actually, my questions were answered on the spinoff but I do have one on the -- on your E&P business. Have you ever thought about or spoken about the fact -- would those assets be suitable to drop down into an upstream MLP, the HighMount assets?

Maybe yes, maybe no. Investment bankers would love for us to do it because it generates lots of fees. We look at it from time to time but the only way we would do it is if, number one, it creates value for Loews' shareholders. And number two, if it's a transaction that is also of value to whoever will be buying this paper. And right now, we have not convinced ourselves of either one of those two facts. So, we've done nothing.

Thank you.

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

Since, we're going to have to do the work to try to value HighMount, I need a little bit of help, just on what would be good peers. I've been looking at XTO and obviously there's EOG and HK and COG. But just to see how the $4 billion investment has done since July, is there a company that's best matched up?

I'm going to let you do those benchmark valuations yourself. I don't want to be citing who I think are our peers in this business.

Okay. But it's fair to say that you have a quite significant gain, that's not recognized in the mark-to-market. And when you come and make your presentation in -- at the next investor day, I assume you're going to give us your view on what you think it's worth then if you do give us the sum of the parts?

All the more reason for you to come to our investor conference.

And just for modeling earnings, what sort of drives earnings growth? You've sort of said what you've locked in as far as pricing. How much leverage is there in earnings?

Well, the Company produces about 120 billion cubic feet per year, but there are some what we call VVP's, volumetric production payments that we have to pay that I think this year is about 8 or 10 B's. After that there won't be any VPP's at all. So you can compute the revenues by multiplying the net volume by whatever price you want to assume.

Right.

And we gave you the prices for the hedged amounts and then you can compute the returns for the other amounts. Making sure, of course, that you add or subtract what we call the basis, which is the cost to get our hedged product or any product to a major market.

Okay. Thank you very much.

My pleasure.

Thank you. Your next question is from Andy Baker with Jefferies & Company. Please go ahead.

Hi, can you hear me?

Yes, we can. Now we can.

Thanks for taking the follow-up. I just wanted to talk how you feel about so far the HighMount business? It looks like you -- given the numbers you gave me before, you effectively had 2.474 Tcfe at the end of the year, 2.54 Tcfe now, so it's up about 46 Bcfe, even though you produced 25 Bcfe. So, is that sort of in line with your expectations, in terms of what your exploration would yield for you, in terms of a good return on investment for the CapEx you talked about before?

Andy, I have to be honest with you, I'm sorry you asked the question. A portion of the increase in reserves is a result of revisions that came about because the natural gas prices are higher than they were before. But as the drill bit -- I don't think I have the number right here. Just looking to see exactly how much we replaced at the drill bit and how much was revision.

And that's the revision that as prices go up, there's more that's economic for to you go after and therefore it gets put into reserves, is that -- ?

That's correct.

And then just on VWP, just how do you feel about -- the dividend obviously continues to go up and that's great and I know you're in the period where you share a greater portion of their cash flow. The dividend obviously this quarter, the growth is only $0.005 versus the $0.01 we've been getting every other quarter. Is that -- do you feel this trend is somewhat slowing there and it's going to take longer to get to the higher levels of participation on your part than maybe we should have expected a year ago?

Well, Boardwalk, as you know, has a very significant construction plan in progress that hopefully will be completed within 12 months from now but Boardwalk also had a need for cash to help finance that plan. I'm pleased that the Company is able to continue growing the dividend. As I said in my remarks, that was the ninth consecutive time that its increased its dividend and the earnings have been improving. So, I'm sort of very pleased with the performance that Boardwalk has provided.

Okay. Great. Thank you very much.

Thank you. Your final question is from David Adelman with Morgan Stanley. Please go ahead.

Marty, I wanted to ask you three quick follow-up questions, if I could. First, you mentioned the economic dynamic. Do you think the economy to date is having any impact on the business or general consumer down trading in the category?

I think there might be some slight pressure there, yes.

Okay. Secondly, Marty, in indicating that there wasn't a greater relative emphasis on share versus profitability, how do you reconcile that with the facts that the net price realization pace had moderated in that Newport's retail share versus year ago, I think was up 30 basis points, which has to be one of the brand's largest year on year share gains in some time?

It's -- yes, it was large. I don't know if it was the largest. But as I've said on a number of occasions, our actions are really geared towards sustaining long-term strength in Newport primarily. So we're not reacting to anything in particular. We're not -- we didn't make any kind of conscious decision going into the first quarter that we were going to spend at X level to boost the share. I think that there was some competitive factors that were taking place there. For example, one of our principle competitive brands did not experience a very positive first quarter. So, we may have gained some business as a result of that, which really didn't -- wasn't affected directly by promotional spending, per se.

Okay. And then one last thing, Marty. Clearly, in this quarter and in the fourth quarter, whether it was inventory movements or one-off costs, there were a lot of unusual items. But if you strip all of that out, I think it's fair to say that there's been a moderation in the rate of Lorillard's operating profit growth versus the rates of prior years. And if you just step back and look at the big picture, to what do you attribute that change in dynamic?

Well, the principle factor is in the past our operating profit was obviously directly affected by our ability and decisions we made to lower our promotion spending. That's the key driver, obviously. Since we've maintained a flat position essentially on promotion spending, particularly in the first quarter this year versus last year, that has an impact on operating income. If you carve out all the other stuff that went on. So I think the issue is the growth that we experienced was obviously very, very positive but it was also unique, obviously, to the industry itself in many respects. We may -- so I think right now we may be entering more of a period of a more normal kind of balance in terms of operating profit, opportunities for growth, than maybe we've seen in the past. Although, I still feel we're in a very -- relatively positive position, basically. Okay. Thank you.

All right. Thanks.

Thank you. I would like to turn the floor over to management for any further or closing remarks.

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. This concludes today's Loews first quarter 2008 earnings conference call. You may now disconnect your lines and have a wonderful day.