Loews Corporation (L) Q4 2007 Earnings Report, Transcript and Summary

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' remark 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 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 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, a 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 will 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 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 the number of non-recurring items that unfavorably affected an otherwise good year for Loews. These items are outlined in our press releases, and in a few moments Peter Keegan will discuss some in further detail. For two consecutive years, CNA has delivered strong, consistent financial performance. Our 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 continues to soften. CNA has a highly diversified book-of-business, which it's 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 IOS, as well as an opinion of the tax council regarding the tax-free nature of the transaction. We have submitted our application to the IOS and are expecting a favorable response within our planned timeframe. 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 S-4 this past week. And finally, following the 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 led to increases in capacity reservation rates. However, the market for park and loan gas storage services weakened because of a decline in natural gas price spreads. Boardwalk 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 a cash distribution of $0.46 per unit, which represents the 8th consecutive quarterly increase since the company went public. This payment will result in a quarterly cash flow for 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 factoring nature of their drilling program. That comment has been borne out in the time that we have owned HighMount. Of 242 wells drilled during 07, 236 produced commercial qualities 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, our revenue per available room increased $184 in 07, from $168 in the prior year, reflecting improvements in room rates and occupancy. So, to sum up, at Loews we continued 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 non-recurring 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 will discuss the investment portfolio results in greater detail in a few moments. The second item is the net realized investment loss at CNA and its fixed income portfolio. These losses were derived primarily from other than temporary impairment losses in 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 of 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 its 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, besides 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's stock. In addition to the previously mentioned items, I'd 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 of 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 of 2006. For the full year, our interest in net realized losses was up $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's stock decreased to $128 million or $1.18 per share from $137 million or $1.26 per share in the fourth quarter of 2006. For the full year, net income for Carolina Group's 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 and a reduction of Loews' economic interest in the Carolina Group, resulting from the sale of Carolina Group's stock during 2006. Diamond Offshore's contribution to net income decreased to $76 million from $110 million in the fourth quarter of 2006. For the full year of 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 $57 million for 2007, which consisted 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 thousand 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 Pipeline's contribution to Loews' fourth quarter net income was $32 million versus $35 million in the fourth quarter 2006. For the full year, Boardwalk contributed $106 million for Loews' net income versus a $103 million in 2006. Comparison of results between 2007 and 2006 is affected by secondary equity offerings by Boardwalk during the first and fourth quarters of 2007. The increase in outstanding limited partner units reduced Loews' total ownership interest from 80% down to 70% at year end, and proportionately decreased 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 of 2007 versus $3 million in the fourth quarter of 2006. Net income for the full year was $36 million versus net income of $29 million in 2006. At year end 2007, holding company's 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 pervious 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 will turn the call over to Marty Orlowsky of Lorillard. Marty?

Thank you Peter, and 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 manufacturers 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. 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 the 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 manufacturers 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 0.8%, as compared with an industry decrease of approximately 5%. Lorillard's 2007 domestic shipment share of market was slightly over 10%, representing a plus 0.42 per share as compared with '06, for 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 '06 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 wholesale unit inventory adjustments made in early 2007 as a consequence of increased purchases made in late 2006 in anticipation of an industry price increases. The menthol segment accounted for 27.9% of total domestic industry shipments in 2007, an increase of 0.5 of a share point compared with the same period for '06. Newport achieved a 9.19% share of domestic market wholesale unit shipped in 2007, an increase of 0.39 of the share point over 2006. And Newport share of the menthol segment shipments for the full year of '07 was 32.9% an increase of 0.7 of a share point as compared to the full year of 2006. According to Lorillard's retail shipment database for 2007, Newport achieved a 9.55% share of domestic retail shipments, up 0.4 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 the long-term goal of sustaining and/or increasing Newport's position in the marketplace. Thank you and I'll now turn it back to Darren.

Thank you, Marty. Operator at this time, we'll take questions. Question And Answer

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 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, is it CNA and Loews?

You know 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 have 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 markets and likewise there has 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 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 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 are being very careful in our search and we feel there is no need to be in a rush.

Okay. And how I compare to this [ph] and I've some questions for Marty. Firstly, Marty you've mentioned what your database indicated Newport's share was at retail for the year, what was it in the discreet fourth quarter?

Our retail share in the fourth quarter was... the Newport was 9.55% and it was up 0.4.

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

Yes, from '06 to '07 we have calculated, we have factored 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 offhand, but we started to have a de-loading effect from a buildup of inventory that's begun to occur in the earlier part of the fourth quarter. So, the combination of a comparison quarter-over-quarter because of the 300... we were down $300 million coming into the years essentially in '07. And then further exacerbating effect of the de-loading that took place from a build up at the end of December was primarily the reason for Newport's fourth quarter performance shipment wise.

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

Well, I think I would attribute it to anticipation of the FET increase. Actually the loading probably began in the later part of the third quarter and that was all in anticipation of the FET increase and as that became... that's the way it's acknowledged [ph] as you well know for several months into the fourth quarter. Once it became clear that, that wasn't going to occur, we started to see de-load 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 particularly low then?

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

Okay. And then lastly, Marty, on the Scott charge; its strikes me, it seems like relative to your peer companies, you took a relatively larger charge, and I am 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 is still... there is sort of a high watermark of what the potential damages may be in that case. But you really can't know with 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. Obviously, it can be lower, it could be higher, but we felt that was the appropriate number for us to deal with, and I can't triangulate because I can't speak for the other companies.

And then actually 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 result to it. 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 you 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 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 that they were digging around on sub-prime opportunistically, in short duration sub-prime. Could you comment on what we'll see purchases from Loews that happened in the fourth quarter?

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

Okay. Where have you been picking off opportunities?

At 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 have made, nor independent boards have made, other than your helping CNA, you have been more in the selling mode of your subsidiaries rather than in the buying mode. With a much more fluid market here and some of these stocks potentially selling below which I think might be their asset values, is there any reason why you shouldn't be able to buyback shares and some of the subsidiaries?

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

Okay.

You said, we've been in the selling mode rather than 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 been buying total companies, I was talking about buying or selling shares of existing properties.

Okay.

That was more of my point. You've sold the Carolina Group and there was one another.

Actually, we actually took that share as of CNA in return for CNA preferred shares.

Right. I always know you help in, but any of that does... is buyback of any of these subs on the table as an option?

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

Even CNA, I mean, were they concerned about liquidity and you haven't 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 large subsidiary.

But there is a possibility, you did throw that upon to me.

You know me, I never let anything off.

Thank you, Jim.

My pleasure.

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

Good morning, everyone. Just a couple of quick questions for Marty. On the SG&A for the fourth quarter, any perceptive 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 then the second thing is have you noticed anything in terms of the consumption environment, it seems like a lot of the volume financed was inventory related, but just wanted to get your thoughts on any change in consumer environment? Thanks.

Well the SG&A is essentially Scott does the... the charge for the Scott litigation other than that there was no unusual impact on our SG&A expenses. In fact, it was probably either flat or maybe little 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-up. We don't try to calculate it, it's a very difficult number to come up with and I can only... I know who are the companies that forecast or making statements what they think it's going to down, I don't know. Obviously increased smoking restrictions will have some impact on the consumption side, but I can't quantify it.

Okay, thanks a lot of 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 we are entering a period where consumption decline accelerates for the industry going forward and that is more difficult for you guys to show top line growth. What are the avenues are you looking at in terms of the increasing shareholder value in that context?

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

I mean, I understand, the '07 numbers are really difficult to understand because of lot of things that happened, but it does appear that the underlying consumption declined was more exaggerated in 2007 and to the extent that 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 which you think about cost restructuring more aggressively. I am just wondering how we think about.

Judy let me, I am sorry I am going to interrupt you. I can't speak as Jim pointed out initially. I am not going to speak to what Lorillard may or may not do in a future. I will gladly answer that when we are in a position to do so and we are in a position to articulate whatever appropriate and relevant business strategies we develop. So I am not going to speak to the future, all I am 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 we have been committed to and anything relative to the future I will be more than happy to offering you a discourse on some time in the not to distinct future.

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

Okay. Marty, just looking at the menthol segment, to what extend do you think Newport is benefiting from Cool taking a bit more aggressive stands on pricing they have talked about they thought that Cool has been overly promoted in the past and it looks like they scaled back to some extend on that front. Do you think you are seeing any benefit on Newport side from that trend?

That Newport's experiencing an advantage because Cool is not promoting as aggressively?

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

Well I don't known if I do, it could tribute Newport's position one way... or performance one way or the other to any given brand. Obviously, if and Cool 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 Cool. Yes, 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 a little bit more down than we would have thought. Does that kind of mirror the comment speech you made about the Loews overall portfolio as well, in terms of the portfolio income?

Are you referring to the $22 million investment income number in the fourth quarter?

Yes, correct.

Yes, it 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. And 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 two factors.

Okay. Then my question is 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 and or we can... pretty much for our on own models kind of flat line that right now?

No, it's been reset in effect for the future. The step-up was a one-time step-up, but it will continue through in the future.

Okay.

I'll point out, that inflation adjustment... there is a minimum 3% increase annually or on adjustments and inflation, whichever is higher, and inflation has been running higher than 3%. So you really have to take a look at the inflation area impact on the MSA payments.

Okay.

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

Yes, that's what I thought that was kind of the last final step-up there. Okay. Then, I think following-up on a question from Nik, earlier. Obviously, people like our sales who cover the consumer space, the question that always comes up is with regards to consumers trading down. Now, if you 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 are more insulated, and I really... it would be difficult for me to conclude to the extent to which the smokers in Newport would trade up or would trade down. All I can say is historically, Newport does have a unique taste signature as the 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 it would be insulated from things? I don't know about that.

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

No. I believe it just went in to the marketplace. We had good distribution on it, and I really don't have anything to look forward on that.

Okay. And then a final question, Marty, and may be also to some extent to Jim here. If I kind of read the answer you gave Judy with regard to the trend line, whether 07 or 08 is going to be above strength line or not in terms of consumption. Can you just may be, 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 were today 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 geographies where you have already a good or strong position?

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 is 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 our menthol brand or Newport for that matter, but it's a costly process. You are really paying fair premium in a sense on the profit side, on the margin side to achieve that. 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 so much there, Marty.

Thank you.

Thank you. Our next question is coming form Andy Baker with Jefferies. Please go ahead. Andy Baker - Jefferies & Co.: Thanks a lot for taking the question. I was wondering if you could give us any more granularity on the reserves, I mean, can you give us a breakdown on what the Permian Basin versus Michigan versus Alabama, what your probable reserves are as well?

You are talking about -- Andy Baker - Jefferies & Co.: HighMount.

This is HighMount, Marty. Andy, we haven't released those yet, so I don't want to put them out now. The chances are, they will come out in our 10-K. Andy Baker - Jefferies & Co.: Alright, fair enough. Can you talk about your sort of outlook on your stick in Boardwalk Pipeline, I mean, you are at the point now where you are getting some extra benefit from having the general partnership interest. I mean, this is I think, one of them, sort of the less understood assets. I wonder if you could give us your thoughts on the general partnership and how you expect that to play to your benefit looking at cash flow and valuation overtime?

We always thought that having the general... 100% of the general partnership was very attractive because we get the incentive distribution like which was starting to kick in now as the returns to the limited partners goes higher. So if a long-term asset that we believe were holding and we think that it's going to be very valuable for all Loews shareholders. Andy Baker - Jefferies & Co.: Do you think that having the general partnership, doesn't bring you technically over 80%. Does that help you retain all financial flexibility, did you tax free transactions with your business?

Well, I haven't even thought about tax free transactions. This is... an MLP is just totally different than a C-Cop. 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 silent investors. Now, 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 those. So on the one hand, we are trying to gain good value for the general partner, but we know that Loews have also lot of shares the limited partnership interest and we are doing everything we can to improve the valuation of those limited partnership shares. Andy Baker - Jefferies & Co.: 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, it was just a cash charge and also relative to larger one of your competitors Altria Group, they took it... I think it was $26 million in the quarter you are just so much higher. Is it 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 joining several among the dependence. So everyone will pay an equal amount of whatever the total is. It is a...we took a charge in reserve in the event that we have to make the pay out to whatever... to that amount or whatever it may alter a bit. 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, legal experts and accounting experts have looked at the case and the conclusion was and it obviously is a judgment that we would reserve and take the charge of the 66 pre-tax. I don't know, you have to ask if it's Altria what their rationale is, but 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.

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 or is there any liability at all. So, you see... what you see are three different estimates from three different companies.

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

It's difficult to say. You have any number of issues that remains to be adjudicated. Notwithstanding, it just went back from the Louisiana State Supreme Court. It was on appeal, though Louisiana State Supreme Court did not deny the appeal or review of the decision that was made by them middle court in Louisiana. So, it goes back to the trial court and there are 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.

Okay.

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

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

The Lorillard, the Carolina balance... Carolina Group's balance sheet includes the Lorillard balance sheet and the lion's share of the assets are all Lorillard, except for I believe about $100 million of cash withheld at the Carolina Group level. So, yes, most of what you see will remain with Lorillard, and in fact if you look at the S-4, 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 this quarter?

Yes.

Yes? How do the inventory levels look for the wholesalers?

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

Alright. 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 I believe in the current quarter, and I was wondering if we could project that at least quarterly through this year, you expect 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 CAN --

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

It's 140.

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.

No, the Diamond... I would say, yes, that's a quarterly number. Is the 175 a quarterly number you are talking about?

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

I can't tell you what the Boards of Directors of these companies are going to do from quarter-to-quarter, but you do you 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?

I think that sounds about right.

In regard to your comments 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 if you ask a lot of different people, you will get a lot different answers. And now, maybe 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 is a lot more volatility to the economic outlook than we had anticipated at anytime 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 over discounted of what's out there and make something more attractive?

I don't know what it's going to do. It's just the state of a fair result.

Okay, thank you.

Thank you. There appears to be no further questions at this time. I will 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.