洛茲集團 (L) 2014 Q3 法說會逐字稿

Welcome to the Loews third-quarter 2014 earnings conference call. (Operator Instructions). It is now my pleasure to turn the floor over to Mary Skafidas, Vice President of Investor and Public Relations. You may begin.

Thank you, Paula, and good morning, everyone. Welcome to the Loews Corporation third-quarter 2014 earnings conference call. A copy of our earnings release and earnings 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, David Edelson. 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 filings with the SEC.

During the call today we might 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.

Good morning and thank you for joining us on our call today. In the third quarter Loews had net income from continuing operations of $179 million or $0.47 per share compared to $318 million or $0.82 per share for the third quarter of 2013. The main causes of this decline were results of [T&A] and in the parent Company investment portfolio. Our CFO, David Edelson, will provide more detail in his remarks.

Before reviewing key developments in our businesses, I want to take a moment to focus on our share repurchases. Year to date we have repurchased 13.6 million shares of Loews common stock for $581 million. In the third quarter we repurchased 5.1 million shares. And since October 1 we have repurchased an additional 4 million shares.

At the holding Company level share repurchases are one of the key levers we use to increase shareholder value. The other levers are investing in our subsidiary and acquiring new businesses. Additionally, as I like to say, if there is nothing to do, do nothing. We are comfortable letting our portfolio of cash and investments build if we don't see near-term opportunity.

One of the metrics we consider when thinking about Loews' share repurchases is the sum of the parts calculation. And especially the sum of the market value of our publicly traded parts compared to the price of Loews shares.

Importantly, we also assess the sum of the parts based on our own view of the intrinsic value of each of our publicly traded subsidiaries rather than just the market price. The lower our share price relative to these valuations the more excited we are about repurchasing our shares. We try to look beyond today's market sentiment and consider the longer-term prospects for each of our businesses when we repurchase shares.

We've always believed that repurchasing our shares at prices below intrinsic value enhances the long-term value of Loews common stock. Our share repurchases have greatly contributed to the significant long-term outperformance of our stock versus the S&P 500.

Now let's take a look at the performance of our subsidiaries. At CNA the Company remains focused on improving underwriting results, even as rate increases become less robust across the commercial Property Casualty market. Both CNA specialty and CNA commercial improved their underlying loss and combined ratios versus the prior year, although operating income decreased for reasons that David Edelson will explain shortly.

CNA's management team continues to take underwriting actions to improve profitability in CNA commercial with the goal of CNA eventually becoming a top quartile underwriter. CNA specialty, which represents almost half of CNA's P&C net premiums, continues to perform quite well.

CNA's balance sheet reflects its financial strength and stability. With $11.4 billion of statutory surplus and $13 billion of Equity the Company's capital position has never been stronger.

Turning to Diamond, the Offshore Drilling market continues to be challenging with day rates well off their peaks and long-term contracts few and far between. The difficult market conditions are reflected in Diamond's operating results and its decision to scrap six mid-water floaters. That being said, there is good news to report from Diamond.

On October 23 the Company announced the contract with Hess Corporation for the last two of Diamond's newbuild drill ships, the Ocean BlackRhino and the Ocean BlackLion. The [Hess] contracts, which were the result of a Herculean effort by Diamond's new management team, are expected to generate combined total revenue of about $1 billion and represent seven years of contract drilling backlog.

With this agreement all of Diamond's newbuilds have been awarded long-term contracts. In addition, all four newbuild drill ships will be working in the US Gulf of Mexico where they will have lower operating costs than in international ultra-deepwater markets.

Equally important, Diamond recently announced that Petrobras has extended the contracts on three ultra-deepwater semisubmersibles. These contracts are expected to generate a maximum total revenue of $1.4 billion and represent an additional nine years of contract drilling backlog.

And finally, during the quarter Diamond increased its revolving credit facility to $1.5 billion, adding flexibility to its already strong balance sheet. The goal is to position Diamond to take advantage of opportunities that may arise from the difficult conditions in the Offshore Drilling market.

Moving on to Boardwalk, the Company continues to make headway on securing long-term commitments from customers to utilize newbuild pipelines connecting to end use markets. Boardwalk's pipeline project that will supply natural gas to the Freeport LNG terminal is a great example of this strategy in action.

Boardwalk has entered into 20-year firm agreements with shippers to transport approximately 1.4 billion cubic feet a day of natural gas to the planned liquefaction terminal in Freeport, Texas. The Company anticipates starting operations in 2018 and expects to earn a double-digit unlevered return on assets.

Boardwalk is seeing more opportunities like the Freeport project with attractive rates of return that ultimately should position the Company for growth over the long term.

Last but not least, let's turn to Loews Hotels. Loews Hotels continues to focus on building its brand and broadening its customer base through the addition of new properties in gateway cities and resort destinations. The financial results are improving nicely, although that's tough to discern from our reported segment information, as David will highlight.

During the quarter Loews Hotels announced that, in partnership with Universal Studios, it will develop its fifth hotel in Orlando, the Loews Sapphire Falls. With this project Loews will build on its very successful 15-year partnership with Universal Studios. When the 1,000 room Sapphire Falls opens in the second half of 2016 it will bring a total number of on-site hotel rooms at Universal Orlando to 5,200.

As a reminder, the 400 room Loews Chicago Hotel is scheduled to open during the first quarter of 2015. As I like to say, make your reservations now. With the addition of the Loews Chicago Hotel and the new resort in Orlando our network will have grown from 18 hotels in 2012 to 23 hotels by the end of 2016. And in that same period the number of rooms will have increased 50% from just over 8,000 to more than 12,000.

Now I would like to turn the call over to David for more details on our third-quarter results.

Thank you, Jim, and good morning. For the third quarter of 2014, as Jim reported, Loews reported income from continuing operations of $179 million or $0.47 per share compared to $318 million or $0.82 per share last year. Net income, which includes a gain from discontinued operations of $29 million, was $208 million for this year's third quarter.

For the nine months ended September 30, 2014, income from continuing operations was $747 million or $1.94 per share as compared to $901 million or $2.31 per share in the prior year period. Our earnings this quarter were negatively affected by declines at CNA, Diamond and Boardwalk as well as by lower parent Company investment results.

CNA's contribution to income from continuing operations, including net realized gains, was $188 million in Q3 2014 versus $245 million last year. The decline was primarily attributable to lower income from LP investments, adverse prior development in CNA commercial, underwriting losses at Hardy, and a loss on an annuity coinsurance transaction related to the sale during the quarter of Continental Assurance Company.

These negatives were only partially offset by improved calendar year underwriting results at CNA specialty, lower year-over-year catastrophe losses and higher realized gains.

Diamond Offshore's contributions to income from continuing operations for the third quarter of 2014 was $25 million compared to $44 million in the prior year quarter. An impairment charge impacted Diamond third-quarter earnings as the Company decided to retire and scrap six mid-water semisubmersible rigs. This impairment charge reduced Loews' third-quarter earnings by $55 million.

As a reminder, during last year's third quarter Diamond's earnings were impacted by lost revenue and bad debt expense as two Diamond customers experienced financial difficulty. This reduced Diamond's contribution to Lowes' after-tax income in Q3 2013 by $35 million.

Diamond's third-quarter 2014 net income also reflected higher depreciation and interest expense and an increased effective tax rate as the rig impairments did not provide a tax benefit. And separately, a change in UK tax laws resulted in additional taxes. As a partial offset, Diamond benefited from settling uncertain tax positions related to several foreign jurisdictions.

Boardwalk Pipeline's contribution to income from continuing operations was $8 million in this year's third quarter as compared to $19 million in Q3 2013. The main drivers of the decline in Boardwalk's income were lower storage and parking and lending revenues, as the market for these services was weak, and higher operating expenses. Additionally, the gains on the sale of storage gas that were booked in Q3 2013 did not recur in Q3 2014.

Loews Hotels and Resorts contributed a de minimis amount to income from continuing operations in both the third quarter of 2014 and the comparable quarter in 2013.

Underlying earnings improvements were masked by various nonrecurring items such as costs connected to the purchase of the Lowes Minneapolis and Loews Chicago O'Hare properties and mortgage defeasance costs from the refinancing of Loews Miami Beach. Additionally, Q3 2013 included a one-time gain on the sale of equity interest in the Loews Madison and Lowes Boston hotels.

Stripping out these and other nonrecurring items in both years, pretax income was up almost $11 million over Q3 2013. The $51 million decline in after-tax parent Company investment income during the third quarter was largely attributable to equity investments, including gold-related equities, as well as LP investments.

As you recall during the second quarter of 2014, we reported within discontinued operations a net impairment charge of $167 million related to the announced sale process for HighMount. During the third quarter we recognized a $30 million positive adjustment to the previously booked impairment charge to reflect the actual sale proceeds. HighMount's operating results for the third quarter are also included in discontinued operations.

Holding Company cash and investments at quarter end totaled $5.2 billion as compared to $4.9 billion at the end of June. We received $135 million in dividends from our subsidiaries in the third quarter which breaks down as follows: $60 million from CNA; $62 million from Diamond; and $13 million from Boardwalk.

During the first nine months of 2014 we received $647 million in dividends from our subsidiaries, up from $547 million for the first nine months of 2013. As a reminder, CNA paid a $1.00 per share special dividend during this year's first quarter.

Cash and investments at quarter end also reflect the net proceeds from the sale of HighMount and from the refinancing of the Loews Miami Beach Hotel. As for returning capital to Loews shareholders, we paid $24 million in cash dividends during the third quarter and spent $220 million buying back 5.1 million shares of Loews common stock.

We continued to purchase shares after the quarter ended. From October 1 through October 31 we bought back a further 4 million shares of Loews common stock for $166 million. On a year-to-date basis we have spent $581 million to repurchase 13.6 million shares or 3.5% of our shares outstanding at the beginning of the year. I will now hand the call back to Jim.

Thank you, David. Before we open up the call to questions I wanted to summarize the highlights at Lowes. For CNA it's slow and steady wins the race. CNA has posted consistent underwriting improvement and maintained a very strong capital position.

At Boardwalk we are seeing growth prospects because of the increased demand for natural gas transportation as natural gas production looks to grow almost 20% by the end of the decade.

And finally at Diamond, trouble is opportunity. With day rates declining in the Offshore Drilling market, hopefully Diamond will have occasion to grow its fleet by purchasing rigs at a discount to newbuild prices.

Overall there is tremendous change happening in the industries in which our businesses are operating. We are focused on turning that change into growth opportunity that will benefit our shareholders well into the future. Now I would like to turn the call back to Mary.

Thank you, Jim. This concludes our prepared remarks and we'd like to open up the call for questions. Paula?

(Operator Instructions). Josh Shanker, Deutsche Bank.

Jim, I'm going to tell you one of your stories; I'm going to tell it wrong so you can fix the story and, again, fill it in I guess. When you look at -- maybe it was the majestic tankers once upon a time or the early days before Diamond was Diamond and you saw -- you said I get all of this for $10 million -- I can't remember if the number was $25 million or whatever it was.

Where are we in terms of the Offshore Drilling business or the natural gas pipeline business where you look at that business and say, oh my God, I can't believe that you can buy this business for this cheap right now?

No, it wasn't $10 million, it wasn't $25 million, it was $5 million and it really was a jaw-droppingly low price considering the assets that we were buying. I don't anticipate that in the offshore drilling business that we're going to get to those $5 million levels.

But I do see that there is -- there are newbuild drill ships that are scheduled to come out of the yard that don't have contracts. There are also a number of very highly levered Offshore Drilling contractors in the industry. And it would not surprise me to see some of our competitors get into financial trouble where they are put into a position or where their lenders are put into a position that they have to sell rigs.

And what Diamond has done is it has prepared itself for that possibility. Diamond has done this before, most recently in 2009 when we bought two rigs out of bankruptcy court, the Courage and the Valor. Those rigs are now both working profitably for Petrobras and just had their contracts renewed.

So we are taking a wait and see attitude. Right now there is nothing to be done. But it is very possible in the next six months to one, two or three years, depending what happens to a lot of different things, there could be very interesting opportunities for Diamond.

With respect to natural gas pipelines, it's a different story. We don't see the possibility at all of buying existing assets at cheap valuations. But what we do see is that there are very interesting opportunities to build new pipes to accommodate the significant increase in gas production that has to flow from the areas where the gas is being produced to the areas where the gas is actually being consumed.

So that the Freeport LNG project that we just announced this quarter is such a case, where we're able to earn what we think will be very attractive -- a very attractive rate of return on assets and with typical MLP leverage of say 50% the rate of return on equity can be significantly higher.

Those are great answers, I appreciate it. And one other answer which I imagine you're going to tell me that you are not going to tell me -- do you have any, at a very wide range, if you want, an idea what you think the market value of the real estate on your balance sheet is as opposed to the balance sheet value?

So I guess what you are talking about is our hotel properties because that is pretty much all of the real estate that we have on our balance sheet. And what I would say is that you have to look at that on a property-by-property basis. Starting next quarter we are going to significantly improve the disclosures with respect to our hotel Company and that I may be able to give you a bit of an indication of the valuations of our property.

Additionally, if you want to think about what the valuation is, get on a plane, go down to Florida, look at a Miami Beach hotel, look at what we have put in place at Universal Studios, remembering that we have a 50% interest. And my guess is that any good hotel person should be able to give you a good ballpark estimate of what those properties are worth.

I might just do that, the winter is coming so it doesn't sound like such a bad idea. Well, thank you very much.

Bob Glasspiegel, Janney Capital.

Yes, Josh is a smart fellow there. On the HighMount sale, can you give me the pieces we should think about as it affects the sort of asset value? You've got some cash, you've got some deferred tax assets, what else -- and you kept some properties ex the divestiture. So what are the key balance sheet items when I see the Q?

Yes, the key balance sheet items are -- we sold HighMount in its entirety, we got cash for that. We have no properties and I don't think that we booked anything in terms of taxes. We do have a tax loss carry forward that should benefit us over the next several years.

I thought that was a deferred tax asset, David, didn't we talk through that or am I miss-remembering that?

Yes, that was transferred to the Loews level.

And how much is that?

I am recalling I think it was about $500 million or thereabouts.

Okay. And the cash is how much?

Well, the net proceeds we disclosed are $794 million and we disclosed that we repaid with that -- out of that we repaid debt of $480 million.

So, the net amount is the difference between those two.

$314 million.

Right. And the tax loss carry forward is how big?

We have not disclosed that, Bob.

Okay, read that off a Q when it comes out or -- that's not disclosed in the Q?

No.

Okay. Second thing, trading losses, as you said, were -- in the quarter were on gold and what was the other contributor?

LP investments.

Okay. And finally -- go ahead, I'm sorry.

No, it was that, that was really accounted for the delta between last year's third quarter and this year's third quarter.

$79 million, that is a pretty big swing just on gold and LPs.

LPs, yes.

Okay. And finally, gold -- I mean oil going below $80 a barrel, Goldman saying $75.00. How should we think about that on your sort of portfolio of companies?

Well, we are not in HighMount anymore, so --.

Right.

It doesn't affect us there. It may have an impact in Offshore Drilling, but I don't really think so. Because in Offshore Drilling typically oil companies are thinking three and four years out and not thinking about tomorrow.

That is the way -- that is the mindset of those that are drilling for shale oil because in shale, number one, you can turn the spigot on and off with respect to drilling very quickly. Number two, in the shale oil production you get a big burst of production initially and then it trails off rather quickly. So that you want to make sure if you are producing shale oil that when you frac the well and turn it on it is producing at a time when oil prices are relatively attractive.

My guess, for what it is worth, is that oil prices between $75 and $80 a barrel are going to have a rather significant effect on US oil production. Right now the numbers call for US oil production to increase next year by 750,000 to 1 million barrels a day, somewhere in that region.

My guess -- my fearless forecast is that if oil prices stay where they are you will see US production increasing by a significantly smaller amount. And that is due to the fact that for shale oil producers that are not hedged in terms of their oil prices, they will see a very dramatic decline in their free cash flow.

And to the extent that so many of them are below investment grade it would be difficult for them to get new financing to actually pay for the cost of drilling. So I would not be surprised at all to see the Baker Hughes oil drilling rig count decline rather significantly in the coming months if oil prices stay at this level.

Okay, that sort of sets the backdrop for the opportunities that you may be seeing in buying drilling rigs down the line?

Well, no, no, no. When I talk about shale I'm talking about land drilling.

Okay.

My guess though is that oil prices -- current oil prices will not affect offshore drilling nearly as much as it affects the land drilling, because the horizon for an offshore -- a company drilling offshore prospects is the horizon is say two to five years. The horizon for somebody drilling a shale well on shore is six months to a year. So it's a dramatically different mindset between the two oil companies.

Thank you.

Andy Baker, Barclays Capital.

Just a question for you. So $5.2 billion of Corporate cash roughly at the end of the quarter, the stock market is at an all-time high, bond yields are still really, really low. Gold has obviously had difficulties lately. Where do you look for opportunity to earn a risk-adjusted return that you are comfortable with going forward from here?

Like everybody else, it is really tough., With respect to stocks, they are high. Although as I'm sure you know, when you parse through the indices you see that there are some stocks making new highs, but there also are a lot of stocks that are well below their highs and well below their longer-term -- or their intermediate-term moving averages. So the guys in our -- that are managing our equity portfolio are still finding opportunities in which to invest.

In terms of fixed income, I would say that generally we are decidedly bearish about interest rates and we are generally pretty bearish about most of the markets within the interest rate market. For example, investment grade bonds and below investment grade bonds we are not excited at all about that. We think that interest rates on these securities should be higher as should interest rates on government bonds and it is our guess that over time that will in fact happen.

So, right now for CNA we are generally keeping our fixed income portfolio in our non-matched accounts as short as we can. We are playing the roll down in yields. And we're actually hoping for a time when interest rates go higher and when we can get excited about investing in fixed income.

And in terms of -- obviously your primary use of cash, it is either make investments or buy back your own shares. And buying back your own shares at a discount to its NAV is always -- or it is generally a very good -- a big positive for NAV in general.

I mean, when you look forward do you develop sort of expected returns on the crusher portfolio a crusher equity portfolio and then compare the opportunity that you see externally with the opportunity you see in your own stock?

So, when I think about my job description I would say there are two words that best describe it, and that is asset allocator. And what we tend to do here at Loews all the time is think about where to invest cash, we have lots and lots of different opportunities to do that.

We can do that in our subsidiaries from time to time to the extent that they have projects that need help from us, or we can invest in -- reinvest in fixed income for CNA. We are constantly looking at equity prices. We're constantly looking at rates of return that can be had on one type of investment versus another.

And in fact, the reason we got out of the -- the reason that we sold HighMount is because we saw that the rates of return that we could achieve by putting more money into HighMount was insufficient compared to the rates of return that we could see in other areas of investment.

So we are constantly monitoring markets. We are constantly looking at corporate transactions to buy a new business. We're constantly assessing the value of Loews. We're constantly assessing the value of the stock market and the rates of return that can be available in other investments and putting that into our heads and every day coming to decisions as to where the most attractive investments are. And share repurchases are just one part of that larger puzzle.

Thanks, Jim. And just lastly then, in the past you've talked about maybe some broader themes that you have sort of been inspired by or that guided some of your investment. Anything out there that you see more longer-term, or maybe not so long-term, that you think is an interesting sort of thesis for you to be looking at or investment thesis?

There is nothing that really grabs me right now. I was thinking the other day -- Josh previously mentioned the Jim Tisch $5 million test. And I was -- separate and apart from Josh, the other day I was thinking back to the early 1980s when we got into supertankers and when we were able to buy seven- or eight-year-old supertankers that had cost $15 million apiece when we were able to buy them for $5 million apiece.

The difference then and now is that the financial markets and the investment markets are dramatically more crowded. When we bought supertankers there was nobody else looking at buying supertankers. And I contrast that to today where a few years ago when supertankers or shipping took just a little dip, there were lots and lots of investors, asset managers looking to go into the market.

So the main thing that I see right now is very crowded investment markets. Meaning that most of the things that we see are either fully priced or fairly priced. That is the situation today. There isn't an enormous amount of fear. There is a sense that growth will generally continue. And there is just a lot of money coming into investment managers.

I promise you at some point in time that will change, I just don't know or have any idea when that will be. But when we invest we think about that possibility, we think about the downsides and we try to manage accordingly.

Thanks a lot, Jim.

(Operator Instructions). Michael Millman, Millman Research Associates.

Yes, I want to go back to talking about oil-related investments and then hotels. Wouldn't you think that the offshore drillers would be concerned that the on land frackers would basically create a ceiling for prices?

That is an issue, but the amount of oil that is produced from onshore shale formation is relatively low compared to the amount of oil that is produced worldwide. So just rough order of magnitude, there is 100 million barrels a day of oil that are produced in the world and the amount that comes from shale formations is less than 5% of that.

If you look back a few years it is dramatically lower. And the question I think you are asking is whether in the next five years instead of being 5% that amount can be 10%, 15% or 20%. And my guess is that that will not happen. That shale is a significant factor here in the United States, but it is not a significant factor in the rest of the world.

And that has to do with a lot of things that we have here in the United States that don't obtain in the rest of the world. It has to do with the legal regime. It has to do with the fact that mineral rights are owned by the land owner, not by the state. It has to do with the entrepreneurial drive.

It has to do with the fact that there is a oil service industry here that is very, very highly developed. It has to do with pipelines in place and transportation and roads and population density. And again, all of those have come together here in the United States and for one reason or another tend not to exist on nearly the same scale in the rest of the world.

So, for the time being my guess is -- my strong guess is that the shale revolution that we are seeing here in the United States will not -- will not occur in the same scale internationally and therefore won't be significant factor with respect to the Offshore Drilling markets.

Or will occur at a much higher price I guess you are saying.

Yes, that is right. That is exactly right. If you had the same shale prospects in a foreign country, instead of the breakeven price being $75 a barrel it could easily be $150 a barrel. And those countries would have the chicken and egg problem of being able to get to the scale so that the cost of producing shale oil in those countries could come down to attractive prices. My guess is that it is going to be very hard though for them even with scale to get down to where we are here in the United States.

Okay, thank you. And on the hotel, on an adjusted basis what was the pretax for nine months?

I am --.

On an adjusted -- when you say adjusted basis, what do you mean?

Taking out nonrecurring items?

Nonrecurring items, you know --.

I don't have that right in front of me. I will have to get back to you.

Okay. And maybe looking at this another way, what -- of the 12,000 rooms what's Loews' share?

We'll also have to get back to you on that.

Okay.

There are -- not only is there the universal partnership but there are also partnerships with respect to a number of other hotels.

When we enhance our disclosure in the fourth quarter we will attempt to address that issue. Because our accounting is difficult because of the JV and accounting and because one quarter a hotel may be wholly owned and the next quarter it may be a JV hotel. And that makes it difficult to compare across quarters.

I see. And maybe what is the debt that you have on the books for your hotel properties?

Well, we have some mortgage debt on a couple of our properties, the most significant being the Loews Miami Beach Hotel where I mentioned a refi that we put $300 million on that property. Previously it had $125 million on it.

There is debt on the Orlando -- on Orlando, I believe that's in the neighborhood of -- and we only have a 50% ownership there, I believe that is around $350 million, but I will have to get -- or $450 million but I will have to get back to you on that. And then it's -- and then there is really essentially a little bit on Philadelphia, so it dribs and drabs after that.

Okay. As you recognize the whole purpose is to try to back door the value.

Yes. Well, that is why we are enhancing our disclosure, Mike, in the fourth quarter.

Appreciate it. Thank you.

This concludes the allotted time for the question-and-answer portion of today's conference. I would now like to turn the floor back over to Mary Skafidas for any additional or closing remarks.

Thanks, Paula. I just wanted to remind everyone that a replay will be available on our website in approximately 2 hours on Loews.com. That concludes our call.

Thank you. This does conclude today's teleconference. Please disconnect your lines at this time and have a wonderful day.