洛茲集團 (L) 2013 Q2 法說會逐字稿

Welcome to the Loews second-quarter 2013 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). Thank you. I will now turn the call over to Mary Skafidas, Vice President of Investor and Public Relations. Please go ahead.

Thank you, Lori, and good morning, everyone. I would like to welcome you to Loews Corporation's second-quarter 2013 earnings conference call. A copy of our earnings release and snapshot may be found on our website, Lowes.com. On the call this morning we have our Chief Executive Officer, Jim Tisch, and our Chief Financial Officer, Peter Keegan. 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 may 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 and the Company's filings with the SEC. During the call today we might also discussed non-GAAP financial measures. Please refer to our securities filings for reconciliation to the most comparable GAAP measures. I will now turn the call over to Loews' Chief Executive Officer, Jim Tisch. Jim?

Thank you, Mary. Good morning and thank you for joining us on our call today. Loews had net income of $269 million or $0.69 per share for the second quarter of 2013 as compared to $56 million or $0.14 per share for the same quarter last year. Last year's second quarter was impacted by an after-tax ceiling test impairment charge at HighMount of $142 million or $0.36 per share.

Before we take a closer look at the results and the progress of each of our subsidiaries, I want to address the rise in interest rates since May 3 and the impact these rates -- rate increases have had and will have on our investment strategy and our fixed income portfolio.

Let's take a trip down memory lane. In February of 2011 I stated on our earnings call that interest rates in the US would inevitably rise. I remarked that rising interest rates would result in a decline in the market value of CNA's investment portfolio given that CNA's portfolio is comprised predominantly of fixed income securities. Such a decline would, in turn, negatively impact GAAP book value.

Fast-forward to today and that is exactly what is happening. CNA's unrealized gain decreased by 41% or $1.8 billion during the second quarter from $4.3 billion at March 31 to $2.5 billion at June 30. There is, however, a silver lining to higher interest rates, which is that CNA will have the opportunity to invest its significant operating and investment cash flows into higher yielding securities.

As a reminder, CNA manages its investments within two distinct portfolios -- the property-casualty portfolio, which supports the core P&C liabilities; and the Life & Group portfolio, which supports the longer duration liabilities in CNA's life and group segment. The ability to invest at higher yields ultimately benefits both portfolios.

But that is enough from the I-told-you-so department; now let's move smartly along to the I-would-rather-be-lucky-than-smart department. As many of you on the call know, on May 2 we issued $1 billion of senior debt securities consisting of $500 million of 10-year notes with a 2.625% coupon and $500 million of 30-year bonds with a coupon of 4.125%.

Given our already strong cash position we had no immediate need for additional funds, so this transaction was purely opportunistic, allowing us to take advantage of favorable rates. Little did we know how favorable they would be. As it turns out we issued our securities when interest rates were at their lowest. Like I said, I'd rather be lucky than smart. Over the years we have found that it is easier to raise money when you can rather than when you have to.

Now let's take a look at our subsidiaries' results starting with CNA. CNA received some great news in June when S&P upgraded the Company's financial strength rating from A- to A, in recognition of CNA's strong capital position and earnings. It's a real credit to the progress being made by the management team at CNA.

CNA had a good quarter and continued to improve its underwriting performance. Excluding catastrophes and prior year development, CNA saw continued improvement in the combined ratio and loss ratio and its core P&C operations. Its underlying P&C combined ratio improved 3.6 points versus the second quarter of 2012 and the underlying loss ratio had a year-over-year decrease of about 2.9 points.

Premium rates continued to be strong increasing approximately 8% during the quarter in CNA's P&C operations. For CNA Commercial rates increased 9% for the quarter and for CNA Specialty they increased 7%.

Now let's turn to Diamond Offshore. Demand for offshore ultra-deepwater drilling rigs remains strong, as reflected by attractive day rates. Diamond had a solid second quarter and is moving forward with the same core strategies which we believe create value for all shareholders.

Diamond's fleet renewal program is ongoing; during the second quarter Diamond announced its latest new build, a harsh environment semisubmersible rig that will work for BP in Australia on a three-year contract after it's delivered to Diamond in early 2016. The initial operating day rate under the drilling contract is $585,000, and the rig will cost approximately $755 million. The cost, which is higher than recent drill ship orders, reflects its harsh environment capabilities.

This new harsh environment semi is in addition to Diamond's four drill ships and two rebuilt semi's that are currently under construction. The first rebuilt semi, the Ocean Onyx, will be delivered in early fall and is scheduled to go on day rate before the end of this year. The first of the drill ships, the Ocean BlackHawk, will be delivered before the end of this year and will go on day rate early next year.

Diamond expects the Ocean BlackHornet, the second drill ship, to begin working in the US Gulf of Mexico during the first half of 2014. Diamond expects to take delivery of two additional drill ships and the other rebuilt deepwater semi during 2014 and is currently working to secure contract -- to securing contracts.

Moving on to Boardwalk, they had another stable quarter. Net income increased slightly over the same period last year. Louisiana Midstream, which was acquired in October 2012, positively contributed to the quarter and helped offset a reduction in net income related to contract renewals. Louisiana Midstream enabled Boardwalk to enter the natural gas liquids storage and distribution business and furthered the Company's diversification strategy aimed at making Boardwalk less reliant on distributing and storing natural gas.

Continuing to focus on moving its diversification strategy forward, in May of this year Boardwalk entered into a joint venture agreement with the Williams Companies to continue the development process for the proposed Bluegrass Pipeline along with related storage, fractionation and export terminal assets. The Bluegrasss Pipeline would transport natural gas liquids from the Marsalis and Utica shales to growing petrochemical markets in the US Gulf Coast.

As Boardwalk's CEO, Stan Horton, discussed earlier on their call, Williams and Boardwalk are meeting with potential customers about the project. We're hopeful that this significant project will move forward, but we are still in the early stages of the process.

Taking a look at HighMount, the Company's operating results continue to be negatively affected by ongoing low prices for natural gas and natural gas liquids. HighMount has focused its drilling program on locations that could result in higher oil production, such as its acreage in the eastern portion of the Mississippian Lime in Oklahoma and the Wolfcamp Shale in the Permian basin in Texas. Both of these programs are early and the development stage and HighMount continues to improve its understanding of both plays.

And finally some comments on Loews' Hotels and Resorts. Although there is substantial progress being made towards Loews Hotels twin goals of broadening its customer base while improving profitability, you will not see that progress reflected in quarterly earnings during 2013, which is a transition year for Loews Hotels.

In the past year Loews Hotels has undergone significant changes adding properties in Boston, Washington, and Los Angeles, developing properties in Orlando and Chicago, and starting extensive renovations at a number of our hotels, most notably the Loews Regency Hotel in New York, which has been closed since January. We believe the actions taken by Loews Hotels in 2013 will position the chain for enhanced profitability and growth in the years to come.

At the holding company, Loews ended the quarter with cash and investments of approximately $4.6 billion. We repurchased 1.9 million shares of Loews common stock for $85 million during the quarter and continued to repurchase shares after the quarter ended. Year to date through July 26 we repurchased a total of 4.9 million shares of Loews common stock for a total of $216 million. Now I will turn the call over to Pete.

Thanks, Jim, and good morning, everyone. Loews Corporation today reported net income for the 2013 second quarter of $269 million compared to $56 million in the 2012 second quarter. Net income for the second quarter of 2012 includes an after-tax non-cash impairment charge of $142 million at HighMount related to the carrying value of its natural gas and oil properties. Excluding this impairment charge net income for the second quarter of 2012 was $198 million.

Net income for the six months ended June 30, 2013 was $511 million or $1.31 per share as compared to $423 million or $1.06 per share in the prior year period. Net income for the six months ended June 30, 2013 and 2012 includes after-tax non-cash ceiling test impairment charges of $92 million and $170 million at HighMount. Excluding these non-cash impairment charges net income for the six months ended June 30, 2013 and 2012 was $603 million and $593 million respectively.

CNA's contribution to Loews net income for the second quarter was $175 million as compared to $151 million last year. CNA's earnings increased primarily from higher net investment income due to increased limited partnership results, improved non-catastrophe current accident year underwriting results and a legal settlement benefit of $27 million after-tax and non-controlling interest. These increases were partially offset by lower favorable net prior year development and reduced results from the Life and Group noncore segment.

Diamond Offshore's contribution to net income for the second quarter of 2013 was $87 million compared to $94 million in the prior year quarter. Results for the second quarter decreased primarily as a result of a prior year gain of $23 million after-tax and non-controlling interest from the sale of five jack up rigs partially offset by higher day rates and utilization as well as lower contract drilling expense in 2013.

Boardwalk Pipeline's contribution to net income for the second quarter was $22 million as compared to $25 million in the prior year quarter. The decrease in Boardwalk's contribution to Loews' net income is because we own a slightly smaller stake in the Company than we did this time last year. 54% ownership in this quarter as compared to about 61% for the same quarter last year.

HighMount recorded net income of $5 million for the second quarter of 2013 compared to net income of $3 million in the second quarter of 2012, excluding a non-cash cost center ceiling test impairment charge of $142 million after taxes for the second quarter of 2012.

HighMount's second-quarter production volumes and realized prices, which included the benefit of hedges, are as follows -- natural gas production was 8.2 billion cubic feet at an average realized price of $4.31 per 1,000 cubic feet; natural gas liquids production was 501.2 thousand barrels at an average realized price of $34.69 per barrel. Oil production was 150.8 thousand barrels at an average price of $95.41 per barrel.

HighMount had hedges in place as of June 30, 2013, that covered approximately 67% and 36.7% of its total estimated 2013 and 2014 natural gas equivalent production at a weighted average price of $6.49 and $5.68 per MCFE.

Loews Hotels contributed net income of $1 million compared to $6 million for the second quarter of 2012. Results were primarily due to the Loews Regency Hotel in New York which will be closed for the majority of this year for extensive renovations partially offset by newly acquired hotels, the Loews Madison Hotel in DC and the Loews Boston Back Bay hotel.

Holding company cash and investments as of June 30, 2013 totaled $5.6 billion as compared to $3.7 billion at March 31, 2013. We received $182 million in dividends from our subsidiaries in the second quarter of 2013 and $364 million in dividends year to date. From CNA Loews received $49 million in dividends in the second quarter 2013 and $97 million in dividends year to date.

From Diamond Loews received $61 million in dividends in the second quarter of 2013 and $123 million in dividends year to date. From Boardwalk Loews received $72 million in dividends in the second quarter of 2013 and $144 million in dividends year to date. We paid $25 million in cash dividends to our shareholders during the second quarter of 2013 and bought back 1.9 million shares of Loews common stock for $85 million. We also issued $1 billion in debt in May of this year.

As Jim mentioned, we continue to repurchase shares after the quarter ended from July 1 to July 26 we repurchased a total of 868,000 shares of Loews common stock for $39.5 million. I made a slight misstatement -- I said we had $5.6 billion in cash, we have $4.6 billion in cash. And now I've completed my remarks; I will turn the call back over to Mary.

Thank you, Pete. Lori, at this time we would like to open up the call for any questions.

(Operator Instructions). David Adelman, Morgan Stanley.

Jim, were there any material changes in Loews' investment portfolio and its composition during the quarter?

No, not significant. You're talking about the holding company level I assume?

Yes.

Yes. Nothing significant, no.

So the bond proceeds more or less were allocated as pro rata with the existing mix and makeup?

No. They are generally being held in cash instruments. So roughly I would say the amount of hedge funds and equities that we own did not increase.

Okay. And then, Jim, with respect to HighMount and the effort with respect to oil production and the process you are going through and the test drilling and so forth that is being done. What over the next year or two are going to be the key milestones that will indicate to you the prospects of success?

Well, in both the Mississippian Lime and also in the Permian basin, in the Wolfcamp Shale we are looking to see if we can produce oil from those two regions economically. We know there is oil down there because we have drilled wells and we have and we still are producing it. But the question is whether we can figure out how to extract the oil and earn at least a reasonable rate of return on our investment. It will take us another several quarters to be able to determine whether or not we can do that. But we do know that the oil is down there.

Okay, thanks a lot.

Bob Glasspiegel, Janney.

I was wondering if you could, number one, give me what your debt balances were at 6-30-13?

We had $1.7 billion in debt at the holding company level, Bob.

Okay, so you -- you raised $1 billion and your earn in, as great as the rates are that you borrowed, congratulations on timing it brilliantly. But --.

Like I said, I would rather be lucky than smart.

Right. But you are earning a negative carry on it. So I was wondering should we think over the next three to five years the $1 billion is just going to be used on your trading portfolio or does this get your sort of acquisition team to a different level that you can do deals that you might not have done before? I mean what do you anticipate the primary use is going to be over the sort of intermediate term?

You know, Bob, I don't know. But the thing I do know is that over the past 15 years or so at least we have had cash balances of $2 billion, $3 billion, $4 billion, $5 billion or $6 billion. We never worried about spending it. but lo and behold we -- the incoming cash that we had coming into Loews was spent either buying businesses or buying our shares or supplying capital at attractive returns to the businesses that we own.

So somehow or other we are able to find investments to make. And the thing that is driving us though is, like I said in my prepared remarks, we find it is much better to raise capital when the rates are attractive rather than to raise it when you need it. When you need it the debt or the equity capital can be very, very expensive.

Totally understood. But you didn't mentioned buying stocks or buying bonds with the money as sort of a potential avenue to employ over the next three to five years. I mean I know your public comments about bonds I would think rates would have to go up a decent bit to think about putting money at the corporate level there.

Here is what I would say. If you want to buy the stock of a company that has got a significant equity portfolio, go to Berkshire Hathaway. We do not think that we are going to generate significant long-term returns for our shareholders by having a large equity portfolio. We are looking to either buy in our shares, buy in other business or invest in our own businesses. That is the main way that we are going to build value for our shareholders.

You do have a trading portfolio for a reason though, right?

Say again?

You do have a trading portfolio for reserves.

Yes, yes, we have an equity portfolio of about $500 million to $600 million. We have that because we do want -- we do have expertise in investing in equities and we do think we can do a good job at it combined with the fact that by having the equity portfolio it keeps us closely in touch with the markets and what is going on. But in terms of that being a line of business or an avenue to significant shareholder value growth, I just don't think that is going to be the place.

Great. Thanks a lot.

Michael Millman, Millman Research.

I guess very recently the Fed -- there has been some federal investigation of financial companies involved in commodity movement. I was wondering if you are seeing anything regarding the gas pipelines in this connection.

No, to my knowledge we've seen nothing like that at all. My understanding is that with respect to the commodities that were written about in the New York Times, it was bulk commodities, typically metals, being delivered back and forth from one warehouse to another for Lord knows what reason.

We haul natural gas under contract from one location to another usually distant location based on the orders from our customers. So my strong supposition is that that is dramatically different than what you are seeing in the metals markets.

Great, thank you.

(Operator Instructions). Andy Baker, Barclays.

Two questions I guess. First, I think it was last call where you were talking about the impact of the exposure to gold in your portfolio. I'm just wondering if you have maintained that same level of exposure to gold both through the ETF's and the miners.

Yes, we have. And that is why the return in our investment portfolio was as low as it was this quarter. It was basically break even. That is because of the losses that we experienced on those gold-related investments offset the gains we made from the rest of the portfolio.

Great. And could you just sort of explaining little bit more -- I don't think we have talked about this in the past -- but how -- what the ROI is on the hotel renovation investment dollar? I mean you lose the revenues, you spend the money and then how does this come back to you? Is it higher room rates, is it higher occupancy? Is it -- I assume it is not a cost cut.

So, for some hotels where there is maintenance CapEx you have to do that just to keep the property up to snuff. For other hotels -- and there isn't a significant additional ROI from that. On the other hand, for a hotel like the Regency, we are expecting a very significant return on our investment as this is really the first major, major upgrade that we have had in the hotel in 50 years and we expect a significant increase in the hotel's EBITDA. So, we believe that the investment will have a significant double-digit rate of return.

The other place where we invest for the hotel company, other than maintenance CapEx and rehabilitation CapEx, is in new hotels. And there we are doing that in the form of hotels that we are developing either in Orlando or Chicago, or hotels that we are purchasing. And there, again, we don't put a number on the ROI that we expect out of the investment, but we think those ROIs will be very attractive for us.

Great, thanks a lot, guys.

At this time there are no further questions. I will now turn the call over to Mary Skafidas for any closing remarks.

Thank you, Lori. Thank you all for your continued interest. A replay will be available on our website, Lowes.com, in approximately two hours. And that concludes today's call.

Thank you for participating in Lowes' (technical difficulty) quarter 2013 earnings conference call. You may now disconnect.