洛茲集團 (L) 2014 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Loews first-quarter earnings conference call. (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. A copy of our earnings release and earnings snapshot may be found on our website, Loews.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 might include statements that are look 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 filings with the SEC.

During the call today we may also discuss non-GAAP financial measures. Please refer to our Security filings for reconciliation to the most comparable GAAP measures.

I will now turn the call over to Loews' Chief Executive Officer, Jim Tisch.

Thank you, Mary. Good morning and thank you for joining us on our call today. As you have seen from our press release, Loews reported net income from continuing operations of $245 million or $0.63 per share, compared to $234 million or $0.60 per share for the first quarter of 2013. Our results were impacted by several unusual items which will be discussed by Pete Keegan later on in the call.

This is Pete's last quarterly call as CFO after some 17 years with Loews in that position. Let's first proceed with the call and then I will come back to share some thoughts about Pete.

Let's start with CNA. There was some noise in CNA's results this past quarter. Catastrophes, primarily related to the harsh winter weather, affected first-quarter loss and combined ratios by 4.5 points. Excluding cats and prior-year development, however, CNA's underwriting margin improved almost 4 points as compared to the same physical last year.

Also affecting first-quarter results was a loss from discontinued operations of $186 million related to the sale of Continental Assurance Company, which was announced last quarter and is scheduled to close in the next few months. CAC is a non-core business and its divestiture will help reduce future earnings volatility and free up statutory capital.

While the pace of property and casualty rate increases has slowed compared to the fourth quarter of 2013, CNA continues to seek appropriate rate increases based on its underwriting of each individual account. Overall, we continue to be pleased with CNA's progress.

Turning to Diamond Offshore, the offshore drilling markets have certainly gotten a lot of press recently, and I want to build on the comments off of last week by Diamond's new CEO, Marc Edwards. It is no secret that the operating environment for the offshore drilling industry has become more competitive across all water depths. While no one can predict day rates will go, we believe that Diamond is well positioned to weather all market conditions.

The offshore drilling market is a cyclical business. By maintaining the strongest balance sheet and the best credit ratings in the industry, we are confident that Diamond will be able to take advantage of that cyclicality, as it has done in the past.

Diamond may have the opportunity to buy rigs at distressed prices, as it did in 2009 with the Ocean Courage and the Ocean Valor. If day rate rise, of course, Diamond will benefit from the improved capabilities of its fleet. So rain or shine, we believe that Diamond's long-term prospects remain bright.

Also, through April, Diamond purchased $88 million of its own stock. As Marc Edwards said on the Diamond call last week, this was an opportunistic purchase; but paying dividends to shareholders remains the top priority of the company.

Next to Boardwalk. On our last call we discussed the challenges that the Marcellus and Utica shale plays are creating in the short term. However, we believe that these plays can in the long run provide significant opportunities for growth, especially now that the company is better positioned due to Boardwalk's increased access to internally generated capital.

As an example, Boardwalk has recently seen significant interest in moving natural gas North-to-South on its Texas gas pipeline. Last quarter, Boardwalk announced the Ohio-to-Louisiana access project; and since then the company has strong interest for its second Open Season, which concluded on April 22, to transport natural gas South. Boardwalk may have an opportunity to transport over 1 billion cubic feet per day of gas North-to-South should these combined projects go forward.

In terms of Bluegrass, Sam mentioned on the Boardwalk call earlier today that so far they have been unable to obtain enough firm customer contract commitments to proceed with the project. Boardwalk will continue to consider all of their options.

Before I turn the call over to Pete, I also want to add that the Cabana Bay Beach Resort opened 600 of its 1,800 rooms in March, with the rest of the rooms and suites scheduled to open in June. Cabana Bay is Loews' fourth hotel in Orlando and a continuation of Loews Hotels' very successful partnership in Universal Studios.

Pete, over to you.

Thanks, Jim, and good morning, everyone. As Jim mentioned, Loews Corporation today reported income from continuing operations for the first quarter of 2014 of $245 million or $0.63 per share, compared to $234 million or $0.60 per share in 2013.

Our first-quarter results include the following unusual items. A loss from discontinued operations of $186 million related to CNA Financial Corporation's pending sale of Continental Assurance Company, its annuity and pension deposit business. A charge at Boardwalk of $55 million after tax and noncontrolling interests, from the write-off of costs related to the Bluegrass project. Lastly, at HighMount we incurred a $19 million after-tax ceiling test impairment charge related to the carrying value of HighMount's natural gas and oil properties. By comparison, HighMount had an impairment charge of $92 million after-tax in the first quarter of 2013.

For Loews, book value per share excluding accumulated other comprehensive income increased to $49.43 at March 31, 2014, from $48.48 at March 31, 2013. CNA's contribution to Loews's income from continuing operations for the first quarter was $200 million as compared to $218 million for the first quarter of 2013. The decrease in CNA's earnings was primarily due to lower net investment income, higher catastrophe losses, and lower favorable net prior-year development, partially offset by improved noncatastrophe current accident year underwriting results and higher realized investment gains.

Diamond Offshore's contribution to Loews's net income for the first quarter was $69 million as compared to $82 million for the first quarter of last year. Diamond Offshore's earnings decreased primarily due to lower rig utilization and increased interest expense as a result of higher debt levels. These decreases were partially offset by an overall increase in day rates.

Our Boardwalk Pipeline segment reported a loss of $18 million for the first quarter of 2014, compared to income of $33 million in the first quarter of 2013. The write-off of the Bluegrass project costs were the primary driver of this quarterly loss.

As previously reported, Loews has funded the majority of these costs to date. Boardwalk Pipeline Partners recognized $10 million of the $55 million charge I stated earlier.

HighMount reported a loss of $20 million for the first-quarter 2014, compared to a loss of $88 million for the same period last year. As I mentioned earlier in the call, both quarters were affected by ceiling test impairment charges.

HighMount's first-quarter production volumes and realized prices, which included the benefit of hedges, are as follows. Natural gas production was 7.5 billion cubic feet at an average realized price of $4.06 per 1,000 cubic feet. Natural gas liquids production was 433,000 barrels at an average realized price of $32.26 per barrel. And oil production was 126,000 barrels at an average price of $89.86 per barrel.

HighMount had hedges in place as of March 31, 2014, that covered approximately 59% and 28.3% of its total estimated 2014 and 2015 natural gas equivalent production at weighted average prices of $5.56 and $4.12 per Mcfe.

Loews Hotels & Resorts contribution to Loews's results for the first quarter was $3 million as compared to breakeven results for the first quarter of 2013.

Holding Company cash and investments as of March 31, 2014, totaled $5 billion as compared to $4.7 billion at December 31, 2013. We received $377 million in dividends from our subsidiaries in the first quarter of 2014, which breaks down as follows: $303 million in regular and special dividends from CNA; $61 million in regular and special dividends from Diamond; and $13 million from Boardwalk.

We paid $24 million in cash dividends to our shareholders during the first quarter of 2014. Through April 25, 2014, we bought back 1.1 million shares of Loews common stock for $48 million. Now I will turn the call back to Jim.

Thanks, Pete, not only for your report on this quarter's financials but for every report you have delivered over the past 17 years. This is Pete's last time on our call and I want to take a moment to sing his praises.

Pete Keegan has played a critical role here at Loews Corporation, and as anyone who has been on these calls with us can confirm, he has played it magnificently. He has contributed significantly to our ability to create value for shareholders by always steering our financial course with a steady and experienced hand.

Pete joined Loews in 1997, and I've been lucky enough to work closely with him as our CFO for all that time. I have known him since 1986 when he became the CFO at CBS. All of us at Loews, along with our shareholders, have benefited from his financial expertise, his wisdom, his unflappable demeanor, and his extensive understanding of our businesses.

Luckily, we won't have to give up any of that since Pete has agreed to stay on as a senior advisor. That being said, however, next quarter, you listeners will transition from the reassuring bass vocals of Pete Keegan to the mellifluous tones of David Edelson, who we are delighted to remind you will take over as CFO in May. Don't say we didn't warn you.

Now I will turn the call over to Mary.

Thank you, Jim. Lori, at this time, we would like to open up the call for questions. Can you please instruct the participants on how they can do that?

(Operator Instructions) David Adelman, Morgan Stanley.

Good morning, everyone. Jim, three questions. First, with the write-off of the costs associated with the Bluegrass project, going forward prospectively can something be done differently to minimize the potential write-offs when there is ambiguity surrounding the prospects for projects like that?

You know, it is a cost of doing business. The project, if it were built -- and I do believe that there will be what we call a wide-range pipeline built from the Marcellus down to Louisiana or Texas -- if it is built, the payoff would have been enormous. And the costs that we incurred were simply the entrance fee in order to be able to put together a serious enough proposal to customers that it is taken seriously.

This proposal was taken very seriously. But my guess is that it was a year or two before its time.

Does the current status of it, Jim, versus what it might have been or the prospects for building it or committing a lot of capital six months ago, does that alter at all your thinking about the necessary or appropriate level of cash you want to have at the Holding Company level?

Yes. It does free up some of the cash that we have. There would have been a significant amount of cash that would have been needed for the Bluegrass project, and now that is looking much less likely.

Okay. And then lastly, with Diamond's decision to buy back stock, can you talk -- not just in that instance, but with your publicly traded subsidiaries -- how the balance of the potential interaction, how it exists and how it operates when a subsidiary is going to buy back stock? In other words, with respect to Loews's own independent prospects, just thinking about buying stock in that, to increase its stake in that subsidiary.

So first of all, the subsidiary always goes first. So if Loews wanted to buy stock and if the Board of Diamond decided it wanted to buy stock, Diamond would go first.

This was a decision that was reached by the Board of Directors of Diamond because they felt that the value of the stock -- the price of the stock just did not reflect the value of Diamond Offshore, and thought that that was a good use for the cash of Diamond Offshore. Having said that, the dividends, both regular and special dividends, are a top priority for Diamond.

And the Board felt that making these purchases would not interfere with the ability to pay dividends or the ability in the future to possibly buy rig assets in the market.

Okay. Thank you very much.

Josh Shanker, Deutsche Bank.

Yes, good morning, everyone. So, as you know, I am an insurance guy and we operate as well as we can. But if you like the value of Boardwalk in the $30s, why wouldn't you have increased your stake down here?

Josh, we do not comment on why we buy assets or don't buy them. There are lots of reasons for us not buying an asset, other than we don't think the price is appropriate. And we just as a rule don't try to justify the lack of action.

That makes sense. Clearly, however, you think the price of Boardwalk is terribly undervalued at the moment.

Yes.

All right. And in terms of —- now that the cash that might have been used towards building the Bluegrass Pipeline, you have more cash than you expected to have at this time. Do you feel cash heavy at Loews? Or do you feel comfortable with the position right now?

I feel very comfortable with the amount of cash that we have had. We have had more cash in the future. We still stand ready to help Boardwalk should they need help on financing some of their capital projects. But as I said in my comments, Boardwalk now has substantially more internally generated capital that will allow it to finance these projects on its own.

The thing that I am not surprised about is that Boardwalk is now seeing lots of opportunities for growth projects along its system, as we see the flow of gas that previously had gone South-to-North now starting to move North-to-South. And so I feel good about the investment prospects for Boardwalk.

Very good. I realize it's a small part, but it is not publicly traded; can you talk about Hotels a little bit? Given the opening of the New York hotel, are you seeing any economies-of-scale benefits as you expand properties and the flagship property opens? Is there a way for you to cut expenses across the system?

Our system is actually increasing pretty significantly. We added hotels in Boston, in Washington, we have the new Cabana Bay Beach Resort in Orlando, we have a new hotel that is going to have the Loews name in a few months in Minneapolis. So our system is expanding.

And that should -- while the system is expanding our overhead expenses are not. So yes, that should help us very much with our efficiency.

Can you talk a little bit about margin? What you think -- what margin is today versus what you think is an appropriate margin?

As you may or may not know, we tend not to give forecasts on our calls.

That's -- sure. I'm thinking not a forecast, but what you think your kind of business ought to be operating at. There is no forecast, there is no timeline associated with it. But the kind of business you are in, where you think that it would be running at efficiency if it were running at that level.

I am not going to -- I am just not going to answer that question. I will just say that we have high hopes and expectations for the earnings of our Hotel Company.

Okay. Appreciate the answer. Thank you.

Michael Millman, Millman Research Associates.

Thank you. Maybe you can give us -- dig down a little bit more, starting with Diamond. You indicated that's cyclical business and prices have gone down. But it would seem there has got to be some driver.

Is it that there is too much capacity? Is it that there is concern from potential oil drillers that gas, the amount of gas coming out has gone to keep prices and demand for oil flat? Or other things?

And then I would like to go through Boardwalk and maybe HighMount as well.

So, with respect to Diamond, I think your question is: what are the reasons why day rates have moved down off of their peak? The answer, I think you hit both points in your question, both answers in your question.

Number one, there is an increasing number of high-spec drilling rigs that continue to be delivered into the marketplace, so the supply of rigs is continuing to increase. And there is three-year visibility on that because it takes three years from the time a rig is ordered until the time a rig is delivered. So, we can expect for the next several years to see increasing number of high-spec rigs on the market.

Number two, going back about six months now, oil companies have been cutting their capital budgets. Many oil companies were operating at negative cash flows; and like all of a sudden they all realized that we can't continue doing that.

So they have pulled back somewhat from the rig market. They are not chartering as many rigs as rapidly.

And as a result of the increase in the supply and the lessening of demand, we have seen day rates go down. This is what always happens in this industry. It is, as you know, a cyclical industry; and at some point in time day rates will stop going down and move up again.

Okay. On Boardwalk, it seems that you talk about potential for lots of projects. How close are we to actually getting a project or projects started? And how long before those -- they pay off?

Well, for example, just a few months ago, Boardwalk had an Open Season and is moving forward with moving gas South from the Marcellus down towards Louisiana. And then just last week, the second Open Season for that came to an end, and that seems to have been a successful Open Season.

I can tell you that on Boardwalk's drawing board, there are lots of plans for expansion of its system in all types of places. None of those projects have been announced yet, but our development people are keeping very busy with new ideas and opportunities for growth.

Can you give us a timeline when we can expect the company to feel comfortable, and I suppose, getting back to paying the dividends that they had been paying?

I can't give you a timeline. What I can say to you, though, is that Boardwalk is now operating more like a C-Corp where they generate their own internally generated capital to finance a lot of their growth projects.

There is no doubt that at some point in time, Boardwalk would like to move back to what I would call the MLP model where they pay out most of their distributable cash flow as distribution. But for the foreseeable future, they are going to continue as they are now.

What is the reason for doing it that way?

The reason is that if most of the earnings were -- if most of the distributable cash flow were paid out as distributions, then in order to fund its capital program Boardwalk would have to sell shares at prices that would be very dilutive to the existing shareholders. So instead, the Board of Boardwalk has decided not to undergo that dilution, but rather it decided to dramatically reduce the distribution so that these projects could be internally funded, so that the leverage in the company could be brought down, and so that the company would -- and that this strategy would provide the best results for the people that are holding for the intermediate to long term.

Are we talking two years? Are we talking more like five years?

I can't give you a time.

Okay. And then HighMount, this is all about -- basically all about getting gas prices to rise?

Two things. Number one, gas prices to rise would be very nice. And number two, HighMount continues to -- continues its science experiment as it looks for -- looks to see how it can produce oil economically in its oil properties.

Okay, thank you.

(Operator Instructions) Bob Glasspiegel, Janney Capital.

Good morning, Loews, and let me echo Jimmy's properly positive comments about Pete's contribution. You were terrifically -- you were a joy to deal with on the Street, and wish you good luck and look forward to hopefully seeing you still in your duties as a senior advisor.

Thanks, Bob.

On the sort of -- periodically, Jimmy, you have given an update on your view of what some of the pieces were. I was wondering if you have a rough analysis that you'd share with us today.

On the sum of the parts?

Right.

We provide that in our annual report.

Right.

We provide it graphically. It is pretty easy for anyone to do. All you do is take the outstanding number of shares of Loews; and you look at how many shares of each subsidiary we have; and that tells you how much per share of Loews we have in each subsidiary.

So just roughly speaking, for every share of Loews, there are about 0.62 shares of CNA; there are about 0.18 shares of Diamond; and about 0.32 shares of Boardwalk. Like I said, that's simple division. That is the number of shares of each subsidiary that we own, divided by the number of Loews shares outstanding.

Well, I have done that for 20 years, Jim, that way. But what I was looking for was help on the private pieces, how you valued the Hotels and HighMount and the Boardwalk that doesn't trade.

Well, you know how much cash we have, which is --

Right.

-- at last report, was about $4.7 billion.

$5 billion today.

Or $5 billion, yes. You net that against the debt. And then I leave it to you to come up with your own fearless forecast for the value of Loews Hotels, the value of HighMount, and the value of the Boardwalk General Partner.

Okay. I obviously do that. I guess, HighMount, do we think it is conservative, liberal, or accurately at cost? Is there some hidden value there?

You know, I am sure you can tell I don't want to provide managements' estimates of the value of the nonpublic pieces. It is just something that we don't like to do.

Okay. In the past, at the investor days you have given us a rough way to think about those. But we should try -- we should do that on our own from here on out?

Yes.

Okay. You started to -- you reinstituted a buyback program which had been sort of dormant; and you hinted that the Bluegrass was a factor behind that. How close were you to making the full contribution, given you think it is a great idea that is a year too early? What would be the arguments against funding it yourself?

Funding what ourselves?

The Bluegrass project. How close were you to making a decision to fund it? Was it a layup to not do it?

Yes, so I would say this, that the producers in the Marcellus currently have enough takeaway capacity for the next few years, and they seem not to be thinking beyond that time frame for what to do with their natural gas liquids. So like I said, my guess is that we were a year or two early -- we being Boardwalk.

Right. So it's a pretty clear decision to not go forward, from your perspective, based on that?

Yes.

Okay. Thank you.

We have reached the allotted time for questions and answers. I will now return the call to Mary Skafidas for any additional or closing remarks.

Great. Thank you all for your continued interest. A replay will be available on our website in about two hours. That concludes today's call.

Thank you for participating in the Loews first-quarter earnings conference call. You may now disconnect.