洛茲集團 (L) 2015 Q3 法說會逐字稿

Good morning. My name is Jackie and I will be your conference operator today. At this time, I would like to welcome everyone to the Loews third-quarter earnings conference call. (Operator Instructions). Thank you. I would now like to turn the call over to Mary Skafidas, Vice President of Investor and Public Relations. Please go ahead.

Thank you, Jackie and good morning, everyone and welcome to Loews Corporation's third-quarter 2015 earnings conference call. A copy of our earnings release, earnings snapshot and Company overview 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, 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 may also discuss non-GAAP financial measures. Please refer to our security filings for reconciliation for 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. Since I'm not in the habit of ignoring the elephant in the room, I want to start today's discussion by focusing on the stock prices of Loews and our subsidiaries. You certainly don't need me to tell you that the stock market performed terribly in the third quarter. Unfortunately, the stocks of our subsidiaries performed even worse. The S&P 500 was down about 7% in the third quarter. The Diamond was down more than 30%. Boardwalk was down 19% and CNA was down 9%. Loews' share price was, of course, affected by these declines and performed on par with the S&P 500 for the quarter.

In general, we believe that the stock market is undervaluing our shares and those of our subsidiaries. Despite being frustrated, rather than complain, we look at this as an opportunity to create value for Loews' shareholders by buying back our stock and we did. Our lemonade from lemons attitude will not come as a shock to those of you who know us. We were happy to buy back 8.7 million shares of Loews' stock in the third quarter. Year-to-date, we've spent over $750 million buying back more than 19.6 million shares.

You might be asking yourself why didn't we purchase more of our subsidiary shares directly. It's simple. As I mentioned, we believe that all of our subsidiaries' shares are currently undervalued in the market. When we purchased Loews' shares, we were simultaneously buying all of our subsidiary shares at a conglomerate discount. So we focused the lion's share of our buybacks on Loews' stock to get what amounts to a double discount.

Let me spend a few moments on what might be driving the decline in our subsidiary shares. For our energy subsidiaries, the drop in their share prices is a function of the headwinds facing their respective markets. Diamond's share price has moved in line with its peer group. The entire offshore drilling industry had a miserable year in the stock market and the misery is ongoing. Unfortunately, the current fundamentals of the offshore drilling industry are lousy as well. Offshore drilling rig day rates have been driven down due to a trifecta of challenging market conditions -- namely, one, a steep drop in oil prices; two, the reduction in oil companies' exploration and production budgets; and three, a wave of new rig deliveries that began about six years ago.

These conditions have caused drilling contracts to be shortened, canceled or renegotiated resulting in rigs being idled. Additionally, oil companies have deferred or canceled new drilling projects. Even with day rates currently at less than half of their peak levels, oftentimes there are still no takers for the rig. These circumstances have created a difficult backdrop for the offshore drilling industry to say the least. Not to be lost in all of this, and despite the doom and gloom, Diamond did perform well this quarter, reporting strong earnings from their new drill ships with very little downtime and good cost management.

Since the start of this down cycle, I've been asked is offshore drilling coming back. My answer is an unequivocal yes. By some estimates, offshore oil production supplies up to 30% of the world's oil. This is a significant percentage that cannot be replaced by conventional onshore drilling or shale production. I believe that the lack of drilling now will sow the seeds for an oil price recovery later. When prices rise, which they will, Diamond's customers will return to exploring for new sources of production and while Diamond is mostly being affected by the cyclical downturn in the offshore drilling market, with its conservative capitalization, strong liquidity position and the added bonus that all of its sixth generation rigs are contracted, I am confident that the Company will be able to weather this cycle and emerge well-positioned for the rebound.

Turning to Boardwalk, their stock was down, but somewhat less than the Alerian index, which is a composite of energy infrastructure master limited partnerships. The index took a 25% nosedive in the third quarter as investors became concerned about ML distribution growth rates, or, as I like to call it, the MLP treadmill. This is the very same treadmill that Boardwalk stepped off of about a year ago, allowing its management team to focus on positioning the Company for long-term growth and profitability.

This longer horizon strategy has allowed Boardwalk to take advantage of the changing supply and demand dynamics in the natural gas market by connecting its network of natural gas pipeline and storage assets to new and used markets without the dilutive effects of significant share issuance at low prices. Boardwalk's focus has been on developing organic growth projects backed by long-term contracts. These projects promise to be great investments and are expected to provide Boardwalk with an unlevered double-digit rate of return on assets as they are completed over the next two to four years. Even though the industry is in transition and the stock price is low, we are bullish about Boardwalk's long-term prospects.

Finally, let's take a look at CNA. The Company's stock is down a bit more than the 6% decline of its peer group. CNA had a solid third quarter and to my mind, there does not seem to be a correlation between stock price and performance here. CNA's strategy continues to be to deliver improved underwriting margin and its commercial business is the strongest it's been in years. While positive developments in the core P&C business were offset somewhat by reduced performance in the limited partnership portfolio, the underlying business is very strong.

Before I turn the call over to our CFO, David Edelson, I want to reiterate why we remain positive on the long-term prospects of each of our subsidiaries. CNA is stronger than it's ever been. Its specialty business has always been a top performer and is the envy of the insurance industry while its commercial business has shown tremendous improvement in there is still room for more.

As for Diamond Offshore, to say that it's operating in a very tough environment is an understatement. However, we've seen this movie before and we know how it ends. That's why Diamond has maintained a strong balance sheet and worked hard to secure long-term contracts for its newbuild rigs. There is no doubt that the Company will weather the storm and hopefully grow in the process.

Boardwalk has been able to capitalize on the changing supply and demand dynamics of the natural gas industry. The Company is developing significant organic growth projects with outstanding rates of return that will be coming online in the next several years.

And finally, Loews Hotels & Resorts has successfully focused on profitable growth and operational excellence. From 2012 through 2015, the hotel chain added eight hotels across the country. These additions have contributed positively to adjusted EBITDA. It's a trend that we hope to see continue.

At Loews, our actions are guided by our responsibility to our shareholders and our focus on creating long-term value. The strategies employed and steps taken by each of our subsidiaries have the same motivations and goals. So while our stock and those of our subsidiaries may be out of favor among some, you won't find us complaining. Rather, you are more likely to find us repurchasing Loews' stock and creating value for all of our shareholders. And now I'd like to turn the call over to David.

Thank you, Jim and good morning, everyone. In this year's third quarter, Loews reported income from continuing operations of $182 million or $0.50 per share, up slightly from $179 million or $0.47 per share in the third quarter of 2014. The favorable year-over-year variance stems from higher quarterly net income at Diamond and Boardwalk, as well as higher net operating income at CNA. Offsetting these positive factors were realized investment losses at CNA versus realized gains in the prior year.

On a net income basis, this year's third quarter was down from last year as last year's third quarter contained a gain from discontinued operations to reduce the previously recognized impairment charge from the sale of HighMount. For the nine months ended September 30, income from continuing operations was $461 million or $1.25 per share, down from $747 million or $1.94 per share in the prior year. Diamond and CNA drove the decrease, along with lower parent company investment income. Diamond booked rig impairments in both years with significantly larger impairments in 2015 than in 2014. Additionally, Diamond's rig operating income declined in 2015 because of reduced rig utilization, especially for the mid-water fleet, along with higher depreciation and interest expense.

Numerous offsetting items impacted CNA's year-over-year year-to-date comparison, including lower LP income in 2015, a retroactive reinsurance charge in 2015, but not in 2014, higher favorable net prior year development in 2015 than in 2014 and several other items. The net of all these was a year-over-year income decline. Year-to-date, net income was up 20%. Last year's results included a $364 million after-tax loss from discontinued operations attributable to the HighMount disposition and CNA's sale of its Life business. We ended this past quarter with book value per share of $52.52, total shareholders' equity of $18.7 billion and parent company cash and investments of $4.8 billion against debt of $1.7 billion.

Let me now delve more deeply into our quarterly earnings. CNA contributed $190 million to our third-quarter income before realized investment results, up from $164 million last year. Note that last year's third quarter included a $31 million hit to CNA's earning contribution associated with the sale of its life business. CNA benefited in Q3 from improved accident year underwriting results and higher net favorable prior year development. The Company's combined ratio before catastrophes and development in its core P&C business improved almost 1 point to 95.5%. Favorable prior year development lowered the calendar year combined ratio to 85.7%, a 10.4 point improvement from last year's third quarter.

It's encouraging to see CNA continuing its year-over-year improvement in underwriting margin. On a year-to-date basis, CNA posted a 94.3% calendar year combined ratio. Excluding development and catastrophe losses, the ratio was slightly higher at 95.9%. Again, both of these represented real improvement from the prior year.

The strong increase in CNA's P&C underwriting profit in Q3 was partially offset by a loss on limited partnership investments, which CNA maintains in its portfolio to provide equity-like returns with less volatility. This loss reduced CNA's profit contribution to Loews by $54 million versus a positive contribution of $17 million last year, a $71 million after-tax year-to-year swing.

Further reducing CNA's contribution to Q3 net income were realized investment losses of $29 million after tax compared to $24 million of after-tax gains in Q3 2014. These losses were largely other than temporary impairments taken to give CNA the flexibility to sell certain securities. Diamond's contribution to income from continuing operations was $47 million, up from $25 million for the same period last year.

Two unusual items obscure the year-over-year comparison. In last year's third quarter, Diamond impaired the carrying value of six rigs, which reduced its earnings contribution by $55 million. In this year's third quarter, we wrote off $20 million of goodwill on Loews' books associated with Diamond. Excluding these two unusual charges, earnings decreased modestly. Contract drilling revenues fell 18% as the revenue increases from ultra deepwater and deepwater rigs failed to offset the lost revenue from mid-water and jackup rigs.

The Company's rigorous expense management program brought contract drilling expenses down almost as much as the decline in contact drilling revenues, but depreciation and interest expense were up year-over-year, reflecting the delivery of the last two newbuild drill ships. Diamond's management is working hard to manage expenses and optimize the operating performance of its fleet during this difficult period in the offshore drilling market.

Boardwalk Pipelines' contribution to income from continuing operations was $18 million in Q3 2015 as opposed to $8 million in Q3 2014. Boardwalk's net operating revenues were up with growth projects, the Evangeline Pipeline and the Gulf South rate case all contributing. This uptick in revenues outpaced expense increases, including higher depreciation and interest expense.

Additionally, at the Loews level, we benefited in the third quarter from a $6 million after-tax franchise tax refund related to Boardwalk. Loews and Boardwalk have a subordinated loan agreement in place under which Boardwalk can borrow up to $300 million at any time until the end of December. Boardwalk has not yet drawn under the agreement. We have agreed to extend the agreement to make the proceeds available to Boardwalk through year-end 2016.

Loews Hotels' contribution income from continuing operations was $2 million during the third quarter, up from a minimal contribution last year. Adjusted EBITDA was $30 million, down slightly from the prior year quarter. Adjusted EBITDA during Q3 was hurt by results in our wholly-owned hotels, particularly in our New York and Coronado properties. Notably, the four joint venture hotels at the Universal Orlando Resort continued to perform strongly, as did numerous other properties.

The parent company portfolio posted an after-tax loss of $22 million in the third quarter driven by losses incurred on equities and limited partnership investments, including gold-related investments. As a reminder, cash and equivalents make up about 70% of this $4.8 billion portfolio. We received $83 million in dividends from our subsidiaries in the quarter, $61 million of CNA, $9 million from Diamond and $13 million from Boardwalk. During the first nine months of the year, we received $733 million in dividends from our subsidiaries, up from $647 million for the same period in 2014.

During 2015, we have repurchased 19.6 million shares of Loews' common stock, over 5% of our beginning-of-year shares outstanding. We repurchased 7.6 million shares in the first half, 8.7 million shares during the third quarter and 3.3 million shares thus far in Q4. In total, we have spent $753 million on share repurchase this year. And with that, I will now hand the call back to Mary.

Thank you, David. Jackie, at this time, we would like to open up the call for questions.

(Operator Instructions). Bob Glasspiegel, Janney.

Good morning, Loews. Jimmy, that's the most optimistic and open you've been about valuation considerations for your subsidiaries in -- I don't think you've ever before on a call, correct me if I am right, foreshadowed that you might buy back stock for Loews if current valuations continue. In the past, you've had a no comment attitude about share repurchases and rarely, if ever, commented that you thought subsidiary prices were cheap. What's driven the change in disclosure on buyback?

First of all, there's no change in disclosure and secondly, I don't know that there was any foreshadowing. I was commenting about what happened in the third quarter and what's been happening this year. I was expressing some of my frustration with valuation of Loews and our subsidiaries. And I want to make clear, do not confuse frustration with complaining. While I am frustrated, I also consider this a golden opportunity and I think we've taken plenty of advantage of it having repurchased over $750 million worth of our stock this year.

But I caution you not to see -- not to take what I said as foreshadow. Yes, I think the prices of our subsidiaries are depressed, but I don't know what that's necessarily going to mean in terms of our share repurchases going forward. We have lots of options we consider. Every day, we think about whether or not we want to buy shares and there are always competing uses for our money. So we think about it and as I think you know from our past experience, we can turn on a dime.

I appreciate that, but I would still think, from my experience listening to these calls, that was the most aggressive you've been in characterizing where the valuation of the subsidiaries are versus your sense of value.

Yes, so one other thing I should add. The share price declines of both Diamond as well as Boardwalk were nothing short of spectacular. So two out of three of our subsidiaries had very bad share price performance during the third quarter and as I said at the outset, that was the elephant in the room and I wanted to address it.

Fair points. Thanks for your answers.

Josh Shanker, Deutsche Bank.

Good morning, everyone. So if I calculate declared dividend yields on the various properties, you guys are generating about $350 million in cash to the parent each year, but I assume that there's a high probability that CNA does another special. Let's just say that gets up to $500 million, $600 million. When you are thinking about share repurchases, you have plenty of cash and you have competing uses, how do you think about how much you are willing to deploy to buy back your own stock? What are the different tethers that you wrestle with?

So this year, I don't know where your numbers came from. Let me give you mine. So this year, we will have about $800 million of cash flow from our subsidiaries and we've spent about $750 million of that. We started the year with, I think, north of $5 billion in cash and right now, we have about $4.8 billion. So -- and we like to maintain a minimum of say $1.5 billion to $2 billion at least. So we see that we've got cash flow coming in in the form of dividends and we have $3 billion of capital that can be used for lots of different purposes, share repurchases, investments in our subsidiaries, a new business or, as I like to say, if there is nothing to do, we will do nothing with it.

And what is the principal security that $4 billion some is sitting? Is that in treasuries? Where is that right now?

So there's about, I guess, $400,000 to $500,000 in stocks and another $900,000 or so in hedge funds of one sort or another and then the rest is in money market instruments of one sort or another that are paying us very, very little.

And in terms of -- I assume, obviously, you can get that cash tomorrow. You are not selling stocks or the hedge fund positions in order to finance your repurchases? Or maybe you are?

No, we are not, but the equity positions, as you well know, could be liquidated rather quickly. And with respect to our hedge funds, that portfolio was designed in part to be able to be liquidated over a number of quarters.

Okay. And I feel it will never be a full conference call without a hotel question.

Go for it.

So when you look at the map and you think about the network effects for business travelers who need a -- who want to be in a hotel network that has critical mass and mass in all the major cities, how many more hotels do you need to be competitive from that perspective of a loyalty program?

I would say a handful of hotels. I think that we've done -- over the past four or five years, we've covered a lot of the map with Boston, Washington, Chicago -- we have two -- Minneapolis and San Francisco. So we've come a long way. There are other cities that we'd like to be in. We are moving forward on plans to develop some hotels and we are looking to acquire others. So there is still room to go, but we are hard at work on it.

Can you rank preference for buying a hotel outright, getting into a JOA, or just doing the management of a property?

Listen, I like capital-light, so management is always number one. But, with management, you don't control the asset and in some ways, you don't control your own fate. A partnership is the next best thing because that's not capital-light, but it's capital-lighter, so that we don't have to put up all the money for the hotel. And the third alternative is for us to buy 100% of a hotel, which we have done a number of times. What we look to do when we buy 100% of a hotel is that, over the next one to two years, we look to sell down our percentage interest in that hotel so we don't have as much cash invested in the property.

Okay. Well, thank you for all the answers and good luck in the days to come.

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

Can you give us an idea, maybe a rough idea, of what kind of growth you expect say in the next two years, next five years in Loews?

In Loews Corp.?

In the total value of earnings of Loews' co-op, yes.

Michael, I am pleased to say that we don't make forecasts for our business, so I can't really respond to you. What we talk about more than earnings is value. And we talk about that over three to five years and let me just say I would be disappointed if the value of Loews did not increase significantly over that time period.

Would you care to define significantly?

No, but I will know it when I see it.

One of those.

Yes.

And so maybe looking at this with more of a magnifying glass, is -- can you rank the contributions from your current subs and maybe future subs?

So when you say contributions, what do you mean exactly?

What I mean is, right now, roughly, I guess, CNA represents two-thirds of valuation and going down the list.

Okay, so let me take a stab at it and tell me if I answered your question. So CNA is the big gorilla in the room. CNA, as you correctly say, represents two-thirds of the value of Loews and also generates probably -- this past year generated 80% or 85% of our cash flow. Behind that are Boardwalk and Diamond Offshore. I would say that both are recuperating. Diamond Offshore, as you know, cut its dividend so that it could get off of the MLP treadmill -- cut that distribution in January and has been able to finance its growth with primarily internally-generated funds. And as I said in my remarks, has very good growth prospects going forward.

We are looking forward to that $1.5 billion of organic growth coming on line. There's still more organic growth that they are hoping to put on the books. So even though Boardwalk isn't paying out significant dividends, it is building its business and its network and we are really very pleased with that.

At Diamond Offshore, it is the strongest company in its industry. It has investment-grade ratings. It's got cash available to it to invest and it's just waiting for the opportune time to invest in more rig assets. Diamond Offshore, as you well recall, between 2006 and 2014, paid out $41 a share of dividends. So to Loews Corporation, that represented almost $3 billion and there was a time when, instead of Diamond stock being $20 a share, it was 7 times higher, so it represented very significant value to Loews.

Now I'm not predicting that Diamond is going to go back to $140 anytime soon. But I do think that in the fullness of time and once this oil cycle has played itself out and oil prices are back to what I would consider to be equilibrium prices, that Diamond Offshore shares can improve as well.

And then, finally, I would say that, with respect to Loews Hotels, it doesn't have a lot of earnings, but it does have a lot of value. The hotels in our portfolio, many of them are the envy of a lot of people in the hotel business and the goal at Loews Hotels is to continue building the value of the Company. As I said, it may be difficult for you to see in the form of net income. We do show adjusted EBITDA as a measure to help give you some ability to value the business, but I would simply end by saying that, as I've said before, I love all my children. I love all our businesses and I think each one of them is doing well within the context of their industry.

So there's no mention of maybe using your metaphor to adopt any new children?

We are always looking to do that, but right now I can't love a child that I haven't yet adopted.

So would you think that there's more opportunity now than there's been in the last several years?

To buy another business?

Yes.

No, I think, right now, things are generally priced for perfection. And as I continuously say, we kick a lot of tires, but we just haven't found the right thing.

Okay. Thank you.

That was our final question. I would now like to turn the floor back over to Mary Skafidas for any additional or closing remarks.

Great. Thank you, Jackie, and thank you all for your continued interest in Loews. A replay will be available on our website, Loews.com, in approximately two hours. That concludes today's call.

Thank you. This concludes today's conference call. You may now disconnect.