洛茲集團 (L) 2011 Q2 法說會逐字稿

Good morning, my name is Melissa and I will be your conference operator today.

At this time I would like to welcome everyone to the Loews second-quarter 2011 earnings conference call. All lines have been placed on mute to prevent any background noise.

After the speakers' remarks there will be a question-and-answer session. (Operator Instructions). I would now like to turn the conference over to Darren Daugherty, Director of Investor Relations. Please go ahead.

Thank you, Melissa. Good morning, everyone, and welcome to Loews Corporation's second-quarter 2011 earnings conference call. A copy of the earnings release may be found on our website Loews.com.

On the call this morning are Jim Tisch, our Chief Executive Officer; and Peter Keegan, our Chief Financial Officer. Following our prepared remarks this morning, we will have a question-and-answer session.

Before we begin however, I will remind you that this conference call might include 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 which is included in the Company's 10-K and 10-Q filings with the SEC.

During the call today, we might also discuss certain non-GAAP financial measures. Please refer to our securities filings for a reconciliation for the most comparable GAAP measures.

I'll now turn it over to Loews Chief Executive Officer Jim Tisch.

Thank you, Darren. Good morning. Thanks for joining us on our call today.

In the second quarter, Loews net income decreased to $252 million from $366 million in 2010. The decline is mainly attributable to two factors at CNA.

First, there was lower level of favorable net prior-year reserve development than in 2010. And second, CNA posted higher catastrophe losses during the quarter than during the second quarter of 2010.

CNA continued to make progress growing and improving the underlying performance of its core property and casualty operations despite the natural catastrophe losses affecting the industry during the quarter. Net written premiums grew by over 5% in CNA's core P&C operations. Growth in both its specialty and commercial segments was driven by new business and higher retention in targeted industry segments In P&C operations, rate increased by 1% versus the prior year quarter.

Further expanding its specialty franchise on June 10, CNA completed the acquisition of the minority shares of CNA Surety, increasing the scale of the company's profitable specialty business. We continue to believe that CNA and its surety business will benefit from this strategic realignment.

This quarter CNA reported favorable net prior-year development of $72 million before tax and non-controlling interest, the 18th consecutive quarter during which it released reserves. In the prior year quarter, CNA recorded favorable net prior-year development of $265 million before tax and non-controlling interest hence the year-over-year decline.

Turning to Diamond Offshore, Diamond's results reflect an increase in average utilization of high spec floaters versus the prior year quarter although this was partially offset by a decline in contract drilling revenues from the mid-water and jack-up fleets. Results for the quarter benefited from three high spec floaters returning to work after being idle during the second quarter of last year following the Macondo accident.

One of these rigs remains in the US Gulf of Mexico while the other two were mobilized in international markets. This year Diamond has ordered three new ultra-deepwater drill ships that are designed for operation in up to 12,000 feet of water.

During the second quarter, Diamond announced that it entered into five-year charters for the first two drillships. These charters are expected to generate combined revenues of approximately $1.8 billion when the rigs begin working in 2013 and 2014.

Additionally, Diamond recently announced 10 new contracts that are expected to generate over $1 billion of revenue and that represent over 14 years of contract drilling backlog. The addition of these new contracts brings total revenue backlog as of July 21 to over $8.6 billion and extending through 2019.

At Boardwalk Pipeline Partners, the company increased revenue over the prior-year period primarily from continued growth from its expansion projects and strengthen in the power generation and industrial markets. Boardwalk's new CEO Stan Horton has now been on board for about 100 days and we are pleased with the progress that is underway.

While we were today on the Boardwalk earnings call, Stan enumerated a growth strategy that includes strengthening the company's existing pipeline assets by connecting new supplies and markets to its system. Boardwalk will continue its efforts to diversify further into the midstream sector via gathering and processing but will also consider opportunities outside of the traditional natural gas sector that could help diversify its business mix. The goal over the next several years is to strengthen its traditional pipeline business while diversifying its products and services.

Boardwalk will look for organic growth and acquisition opportunities that are accretive and that do not significantly increase its overall risk profile. Since going public in 2005, Boardwalk has increased its cash distributions each and every quarter. Today, it continued that streak declaring a distribution of $0.255.

Moving on to HighMount E&P, HighMount's net income increased significantly versus the prior year quarter, although the comparison was relatively easy due to a number of one-time factors related to the sale of assets in the interim share in the Black Warrior Basin last year.

HighMount remains focused on exploring for more liquids-rich resources in its existing leaseholds while looking to improve the performance of its base business in the [Finera] field. Additionally HighMount will continue looking for opportunities to grow its asset base organically and through acquisitions.

And finally, Loews finished the quarter with holding company cash and investments of $4.3 billion. During the second quarter we repurchased 5.5 million shares of our common stock for a total cost of approximately $228 million or about $41.89 per share.

Year to date through July 28, we have repurchased 10.9 million shares for a total cost of $455 million. And with that, I will now turn the call over to Pete Keegan, our Chief Financial Officer.

Thanks, Jim, and good morning, everyone. In the second quarter, Loews Corporation's earnings per share declined to $0.62 from $0.87 in the prior year quarter.

The decline was primarily due to lower results from CNA and partially offset by higher earnings from Diamond Offshore. CNA's contribution to Loews' net operating income decreased to $103 million in the second quarter from $247 million in the prior year quarter.

As Jim stated, favorable net prior-year development was $72 million before tax and non-controlling interest but declined year over year compared to favorable net prior-year development of $265 million in the second quarter of 2010. For the quarter, CNA's pre-tax catastrophe losses increased to $100 million from $48 million for the same period in 2010.

Catastrophe losses in 2011 related primarily to domestic storms and the earthquake in Japan. CNA's realized investment gains were unchanged versus the prior year second quarter, totaling $12 million after-tax and non-controlling interest.

Diamond Offshore's contribution to net income for the quarter increased to $125 million from $104 million in the prior year quarter primarily as a result of an increase in average utilization of its high specification floaters, partially offset by a decline in contract drilling revenues earned by the remainder of its fleet.

Contract drilling expenses increased with the addition of normal operating cost for Diamond's newest rig, the Ocean Valor, as well as increased amortized mobilization cost and higher cost associated with rigs operating internationally rather than domestically. Partially offsetting increased drilling costs were lower income tax expenses.

HighMount E&P's operating income for the quarter increased to $15 million from $5 million in the prior year quarter. The year-over-year comparison includes a number of non-recurring items related to the sale in 2010 of assets in the Antrim Shale and Black Warrior Basin.

HighMount's operating revenues as well as expenses decreased versus the prior year quarter due to the sale of assets. Operating revenues for HighMount's Permian Basin assets increased by $3 million versus last year's second quarter owing to higher average realized prices despite a decline in production volumes resultant from lower drilling activity. HighMount's production volumes and realized prices in the second quarter are as follows.

Natural gas production was 11.8 billion cubic feet at an average realized price of $5.53 per thousand cubic feet. Natural gas liquids production was 671,000 barrels at an average realized price of $39.72 per barrel and oil production was 82,000 barrels at an average price of $97.28 per barrel.

As of June 30, HighMount had hedges in place that cover approximately 76% of total estimated 2011 natural gas equivalent production at an equivalent price of $6.27 per MCFE and 53% of estimated 2012 production at an equivalent price of $5.48 per MCFE.

For the quarter, HighMount's interest expense decreased reflecting the partial repayment of its outstanding term loan with proceeds from asset sales. Additionally, results in the prior year second quarter included higher tax expense that was incurred as a result of the write-off of deferred taxes in connection with the asset sales.

Also as a result of the asset sales in the second quarter of last year, HighMount recorded an after-tax charge of $11 million related to discontinuing hedge accounting and derivative positions. Moving on to Boardwalk Pipeline, Boardwalk's contribution to net income for the quarter decreased to $5 million from $21 million in the prior year quarter. This decline primarily resulted from a $28 million pre-tax impairment charge associated with Boardwalk's decision to dispose of a portion of its inventory of large diameter pipeline supplies.

Boardwalk reported higher gas transportation revenues versus the prior year quarter stemming from capacity increases from completion of several compression projects in 2010 and operation of the Fayetteville Lateral at its designed capacity. This growth was largely offset by a decline in park and loan and storage revenues caused by unfavorable natural gas price spreads.

In the second quarter, Loews Hotels reported net income of $6 million versus $4 million in the prior year quarter. Hotels continue to benefit from ongoing strength at our Orlando properties.

In the second quarter, revenue per available room increased to $175.59 from $152.82 in the prior year quarter. Holding company cash and investments as of June 30 totaled $4.3 billion.

During the quarter we received $158 million in dividends and interest from our subsidiaries. We purchased $228 million of Loews common stock and we paid $25 million of dividends to our shareholders.

On April 15, 2011, Loews repaid at maturity the outstanding principal amount of $175 million to retire the 8.9% debentures. From July 1, 2011 through July 28, we acquired an additional $41 million of our common stock. And now I will turn the call back over to Darren.

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

(Operator Instructions) David Adelman, Morgan Stanley.

Good morning, everyone. Were there any material changes in the composition of the corporate investment portfolio during the quarter?

No, not significant. You're talking about the Loews $4.3 billion portfolio. Is that correct?

Correct.

Yeeah, there were no significant changes. We have about $500 million or $600 million of equities. We have another $700 million or so of hedge funds and then we have the rest primarily in cash and other cash like instruments.

Okay and then secondly, you've mentioned in the past an interest at HighMount of making additional acquisitions over time. And I'm curious, have there been things for you to look at in the last three to six months?

And secondly in an acquisition context, what do you think of HighMount or Loews edges in that situation other than financial discipline and having obviously the financial resources to make an acquisition? In other words, are there potential synergies with the existing operations? Do you think that you have certain operational advantages from a cost perspective and so on?

So, yes, HighMount has been kicking a bunch of tires. Nothing has come to fruition yet.

But there -- in fact there is a lot to look at. And the things that we're looking at primarily are buying rights to leases on land for both -- we're both looking at gas, gas liquids and oil.

And there are in fact lots of transactions that take place in the oil patch in these types of acquisitions and there are plenty of them around. We are looking for transactions that will return for us what I would call significant double-digit after-tax returns.

And I would say that we have come close on a few times but still haven't finalized anything. But I think we do have the opportunity to do so.

I think that what HighMount brings to the table is a very good, very disciplined approach to finding and developing hydrocarbons under the ground. And combined with that -- combined with having the right people -- as you mentioned, we do also have the financial discipline and the wherewithal to make these acquisitions and my belief is that if we can do some of these -- some of these acquisitions -- it will be not only beneficial to HighMount, but also beneficial to Loews in that we will be able to invest our cash at very attractive rates of return.

Michael Millman, Millman Research.

Thank you. Actually just following up on the last comment and some others, are you considering that Loews Corp. would invest with HighMount in some of these deals or maybe you can explain that and maybe you can talk generally about the investment idea flow that you may be seeing or may not be seeing, if that's changed.

So if HighMount were to come up with some properties to buy, chances are HighMount would not be able to fully finance it on its own, and therefore Loews would be prepared to make a capital contribution to HighMount in order to enable them to make that acquisition.

Can you give us some idea how much -- the range that you might be willing to go?

We're not going to make a bet the ranch acquisition but I could see us doing an acquisition for a few hundred million dollars.

Okay.

Your next question (multiple speakers) I'm sorry, go ahead.

The other question was whether you are seeing -- or the type of investment idea flow you're seeing, if any.

You know, we're seeing odds and ends, but nothing dramatic that really piques our interest or curiosity. There really hasn't -- if you look in the newspapers, you see that there really have not been a lot of transactions that have been done, and I'm not exactly sure why that is, but there's really been nothing that's been of much interest to us.

Maybe just tacking on a question, did you say on Boardwalk that they might make acquisitions outside their basic business? Does that suggest anything or what does that suggest?

On the Boardwalk call today, Stan Horton did enunciate a policy of looking for MLP-eligible assets that go beyond the [intrastate] natural gas pipeline business. Right now Boardwalk is primarily [intrastate] natural gas pipeline.

Boardwalk has expanded its look for assets but we have nothing in mind at this point in time, nothing in particular in mind at this point in time.

Bob Glasspiegel, Langen McAlenney.

Remind me whether you said you were going to term any more debt out or just stay with less debt to capital.

No, we have no current plans to issue any more debt at the Loews Corporation level. So we now have a $700 million and change in debt at Loews.

You have a targeted debt to capital ratio that you have articulated?

No, but at this rate, it will be zero eventually.

So that sort of implies you don't see anything new and -- if you're deleveraging (multiple speakers)

Here's the story. We've got $4.3 billion of cash.

Right.

If we were to borrow say ten-year money, it would look on an absolute basis very attractive. But then what you have to do is think about okay, what am I going to do with the cash?

Suppose we were to borrow $1 billion. That $1 billion would be spent after the $4.3 billion that we already have on the balance sheet was spent.

So this is the last cash that will be spent. The problem is suppose we could borrow for say under -- say 4.5% or so. The problem is we're going to invest the money at about zero.

So we have got on an annual basis a 450 basis point negative carry. That means that in a year or two, we could afford for interest rates to have gone up 100 or 150 basis points and we could still be equally well-off not having issued now versus issuing later. So the problem really is that the negative carry makes it expensive, combined with the fact that we have no use for the money.

Well, if we were just going to look at buying a dollar of debt back versus buying a share back, it seems like the economic return on buyback would be higher than debt. You're going to come back and say you're doing all the buyback you want to do or --?

Whoa, I'm talking about -- you're right. I'm talking about issuance.

Right.

You're talking about borrowing money in order to buy back shares?

Well, no, you spent a dollar of retired debt which is a [920] pretax return that you could've spent to buy back stock.

The debt we bought back was -- it matured.

Okay, now I've got you. Okay, how about borrowing -- replacing it to buy back stock [yet]?

Again we are not looking to lever up the balance sheet. And like I said, we have got $4.3 billion of cash on the books now.

We purchased -- we've spent over $400 million year to date in share repurchases. So we're actually pretty happy with where we are on share repurchases.

Okay, any changes -- you are still in the long, real slow recovery point or is it double dip at all in your probabilistic scenario for the next year?

My [feel is] forecast was and continues to be for about 2% economic growth driven in large part because the consumer and the government is so full up on debt. And I don't think that we can have a robust recovery until we start to chip away at those levels of debt.

Well, the world sort of caught up with you in expectations to some extent and some people have passed you by. You're not thinking you're overly optimistic with that growth outlook? And if you did, would that change anything you'd be doing as far as capital spending?

Our capital spending is not driven by the economy per se. It's driven by the needs of the individual businesses and the opportunities that we see in the individual businesses.

My guess is that if we had 5% growth instead of 2% growth, that that would translate into more opportunities that we see in the existing businesses. But right now, notwithstanding the 2% growth, we have actually committed to pretty significant capital spending at Diamond Offshore.

We're also looking to do that at HighMount with our drilling for hydrocarbons. And at Boardwalk Pipelines, they are pursuing opportunities to build out our pipeline system even further. So even with a 2% growth environment, we still have plenty of things to look at.

Thank you very much.

(Operator Instructions) Sam Yake, BGB Securities.

Yes, thank you for taking my questions. I'm kind of new to the Loews story and I just had a couple questions that maybe you get all the time, but I'm just wondering if you could give us an update.

My first question is do you ever consider taking a large minority position in publicly traded securities instead of buying the entire company? And what are your thoughts on that?

Generally not. We like to be able to control our own destiny. And more often than not when you have a large minority stake, what you are is a large minority shareholder. So that's not particularly high on our list right now.

Okay. THen could you also give us an update maybe on your thoughts on the cash dividend? It's a relatively small amount now, but I was just wondering what you're thinking about returning cash to shareholders through the cash dividend.

So over the years, we have returned an extraordinary amount of cash to shareholders. We do that through a combination of dividends and share repurchases and more recently, most of that return of cash to shareholders has come through share repurchases.

So that in the first half of the year as I said, we have repurchased -- or in the year to date we have repurchased over $400 million of cash. We have as I like to say a long and glorious history of share repurchases.

We have less than one-third the shares that were outstanding in 1970 and we have done that through what I would call well-timed share repurchases. It's a part of our DNA, we were repurchasing Loews shares long, long, long before repurchases were the corporate vogue.

We're not doing it because it's the corporate vogue but rather because we think that it creates very good long-term value for our all of our shareholders. I would say that if shareholders are interested in relatively high dividends being paid from Loews common stock, then I would advise them to sell the stock because that is generally not what you are going to see from Loews.

Right, well to be frank -- thank you for your answers -- one of the things that attracted me to Loews was your long and glorious history of share repurchases. So I'm completely on the same page with you on that and thank you for taking my questions.

A pleasure.

At this time there are no further questions. I'll turn the call back to Mr. Daugherty for closing remarks.

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

Thank you for participating in today's conference call. You may now disconnect.