洛茲集團 (L) 2016 Q2 法說會逐字稿

Welcome to the Loews second-quarter earnings conference call. (Operator Instructions). Thank you. I will now turn the conference over to Miss Mary Skafidas. Please, go ahead.

Thank you, Crystal, and good morning, everyone. Welcome to Loews Corporation's second-quarter earnings conference call. A copy of our earnings release, earnings snapshot and Company overview 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 due to a wide range of risks and uncertainties including those set forth in our SEC filings.

Forward-looking statements reflect circumstances at the time they are made. The Company expressly disclaims any obligations 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 to date we might also discusses non-GAAP financial measures. Please refer to our security filings for a reconciliation to the most comparable GAAP measures. I will now turn the call over to Loews' Chief Executive Officer, Jim Tisch.

Thank you, Mary, and good morning. We are going to change the format of this call slightly today just to mix things up a bit. Our CFO, David Edelson, will start by walking you through Loews' second-quarter results and then I will talk about our view of the medium- to long-term prospects for each of our businesses. Okay, David, over to you.

Thank you, Jim, and good morning. Loews reported a net loss of $65 million or $0.19 per share in Q2 2016 as opposed to net income of $170 million or $0.46 per share in last year's second quarter. Year to date we have generated net income of $37 million or $0.11 per share.

Our second-quarter earnings were dominated by asset impairment to Diamond Offshore, which overwhelmed favorable results posted by CNA Financial and Boardwalk Pipeline, as well as good returns generated by our parent Company investment portfolio. The impairment to Diamond, which totaled $678 million pretax on its books, reduced our net income by $267 million.

Before I drill into Diamond's results let me summarize the year-over-year quarterly net income contribution by each of our subsidiaries and by the parent Company investment portfolio.

Two of our subsidiaries, CNA and Boardwalk, posted significant increases in net income contribution over the prior year. CNA contributed $189 million including realized gains, up 52% from last year, and Boardwalk's contribution rose from $12 million last year to $17 million this year.

In addition, the parent Company investment portfolio generated $56 million of after-tax income this year, a big swing from last quarter's $8 million loss and the $7 million gain in Q2 2015. Our remaining two subsidiaries, Diamond and Loews Hotels, posted year-over-year declines, in each case driven by unusual items.

Diamond contributed a $290 million net loss in Q2 2016 versus net income of $45 million last year, and Loews Hotels essentially broke even this quarter down from net income of $8 million in the prior year.

Loews Hotels' results this quarter were significantly affected by the write-down of an equity investment in a joint venture hotel property. But clearly Diamond drove our disappointing second-quarter results so let me start by explaining Diamond's second quarter.

The offshore drilling market continues to be extremely challenged with limited new drilling opportunities and an oversupply of rigs. In addition, customers are choosing not to extend current contracts and in some cases seeking ways to early terminate existing contracts.

Diamond assessed its rig fleet for impairment at the end of the quarter and, in light of the difficult market environment and Diamond management's evolving view of the length and severity of the downturn, eight rigs have been written down to substantially lower net book values. These rigs are a mix of third, fourth and fifth generation semi submersibles. Four of the eight rigs being impaired are stacked, two are still on contract and two are being scrapped.

There are four key drivers of the write-downs on the six rigs not being scrapped. Number one, longer lapse time until the rigs are projected to return to work. Number two, higher cost to reactivate the stacked rigs and ready them to return to work. Number three, lower expected future day rates once the rigs return to work. And finally, lower assumed utilization once the rigs return to work.

Absent its asset impairments, Diamond's operating income was relatively weak during the quarter. The combination of fewer rigs on contract and an unexpectedly high amount of unscheduled downtime on its newbuild drill ships led to a 42% decline in contract drilling revenues versus the second quarter of 2015.

Diamond's net income in Q2 was further reduced by evaluation allowance for current and prior year tax assets associated with foreign tax credits as Diamond no longer expects to be able to utilize these tax credits to offset income taxes in the US.

Jim will provide further thoughts on Diamond's prospects shortly. I would just emphasize that Diamond remains financially strong and is well positioned from a capital and liquidity standpoint to weather today's storms, continue as a leader in the offshore drilling space and seek to turn adversity into opportunity.

Turning to CNA. In the second quarter CNA contributed $189 million to our net income, which includes $6 million of realized investment gains. This compares to a net income contribution of $124 million in the second quarter of 2015.

The substantial increase was primarily driven by three items. Number one, higher favorable prior year development this year emanating from all three P&C businesses: specialty, commercial and international.

Number two, the absence in this year's second-quarter of a retroactive reinsurance charge associated with a loss portfolio transfer of CNA's asbestos and environmental liabilities with National Indemnity.

And three, improved results in the Life & Group segment reflective of the Q4 2015 reserve unlocking that reset the underlying actuarial assumptions on the long-term care reserves.

CNA's core P&C business posted net operating income for the quarter down slightly from the prior year despite a solid 1 point improvement in the calendar year to combined ratio.

From an underwriting standpoint the impact of higher favorable prior year development was offset by an increase in CNA International's accident year combined ratio. This increase was driven by higher catastrophe losses as well as lower accident year non-cat underwriting profit attributable mostly to large loss activity.

Additionally, P&C's net operating income during Q2 2016 was negatively affected by currency exchange rates. Last year a retroactive reinsurance charge reduced CNA's contribution to our second-quarter net income by $49 million. There was no such charge in this year's second-quarter as CNA completed its asbestos and environmental reserve reviews this year in the first quarter.

During the second quarter CNA's Life & Group segment, which houses the long-term care business, produced a $4 million net operating loss compared with a $24 million operating loss in the second quarter of last year. This slight loss was essentially in-line with expectations following the unlocking of the Company's long-term care active life reserves at year end 2015.

As a reminder, the financial results for CNA's long-term care business reflect the variance between actual experience and management's best estimate actuarial assumptions. On a year-to-date basis the Life & Group segment has posted a $6 million net operating loss versus a loss of $41 million in the first half of 2015.

On to Boardwalk. Boardwalk posted a strong second quarter as net revenues were up 8% year over year just as they were in Q1. EBITDA was up 14% and net income was up 63%. Boardwalk's contribution to our net income increased from $12 million last year to $17 million this year driven by the strong underlying operating results.

A reconciliation of Boardwalk's EBITDA to its net income can be found in its Q2 earnings release.

The main drivers of Boardwalk's strong revenue quarter were the return to service of the Evangeline Ethylene Pipeline in mid-2015, recently completed growth projects placed into service over the last year, and improved revenues from parking and lending and storage.

This year's second-quarter revenues were favorably impacted by a $13 million legal settlement whereas last year's second quarter benefited from the receipt of $6 million of business interruption insurance proceeds.

I wanted to highlight two developments with respect to Boardwalk's funding profile.

First, Loews agreed to extend the borrowing period under our $300 million subordinated loan agreement by two years, from December 2016 to December 2018. All other terms remain the same. Boardwalk has yet to utilize this facility.

And second, Boardwalk exercised a one year extension option on its credit facility extending the maturity date from May 2020 to May 2021. All but one bank participated in the extension resulting in $1.475 billion being extended to May 2021. Currently Boardwalk is not drawn on its credit facility.

Now for a quick review of Loews Hotels, which contributed pretax income of $4 million, down from $14 million in the second quarter of 2015. The Company's operational strides were masked by the write down of an equity investment in one of its joint-venture hotel properties.

Adjusted EBITDA, which excludes this write down, increased over the prior quarter. A reconciliation of adjusted EBITDA to net income can be found in the Loews quarterly snapshot on loews.com.

Please note that we expect the Hotel Company's second half results to be somewhat muted by recently commenced renovations at the Loews Miami Beach Hotel.

Let me turn to the parent Company. In the second quarter the parent Company investment portfolio generated after-tax income of $56 million compared with income of $7 million in the prior year quarter. Equities, including gold-related equity investments, accounted for the bulk of the income and the year-over-year increase.

We ended the quarter with parent Company cash and investments of $4.9 billion and debt of $1.8 billion. During the quarter we received $74 million in dividends from our subsidiaries, $61 million from CNA and $13 million from Boardwalk. Year to date we have received total dividends of $632 million combined from CNA and Boardwalk.

Our share repurchase activity since last quarter has been modest. We repurchased 1.9 million shares from April 1 through the end of July spending $76 million. Year to date we have spent just under $109 million repurchasing 2.8 million shares. Average shares outstanding were 339 million in the second quarter, down 8.5% from 370 million in Q2 2015. And now I will hand the call back to Jim.

Thank you, David. Now I would like to talk about the medium- to long-term prospects of each of our subsidiaries. Actually, I think it is a much more fitting conversation for us to have since at Loews quarterly results are not necessarily indicative of the long-term performance and ultimate value of our businesses.

While we take notice of the near-term developments we really measure the significance of an event or the returns on an investment over the short-term. As always, we are focused on the long-term value we can deliver to shareholders.

First, let's turn to Diamond Offshore. I want to start out by addressing the proverbial elephant in the room. Diamond's results this quarter were severely impacted by the rig impairment charges David mentioned earlier in the call.

Keep in mind that the severe downturn in the offshore drilling market, combined with the difficulty in predicting the timing and degree of its inevitable recovery precipitated these impairments. It is important to note however that Diamond is scrapping only two of the eight rigs being impaired today.

Having been in the offshore drilling business for nearly 30 years and the super tanker business for seven years prior to that, I have seen cyclical downturns before. I am hopeful that in this case, and similar to prior cases, the rigs being stacked today will work again and earn an attractive rate of return in the future.

Holding onto and ultimately reactivating capable older rigs is a strategy that Diamond has employed historically to create value and differentiate itself from its competitors.

There is no doubt that an oversupply of six generation drill ships currently exists. However, I believe that the older semi submersibles being stacked today may indeed find work as the market recovers on jobs for which these third, fourth and fifth generation rigs are better suited.

Diamond's innovative strategies along with its financial strength and conservative capital management should enable the Company to emerge from this turbulent market cycle stronger than any of its competitors. As I have said before, if there's a silver lining to this oil price downturn it is that the lack of drilling activity today will only help speed the recovery of oil prices tomorrow.

The effects of the current under investment (technical difficulty) oil drilling are already starting to be evident and will play out in the coming years. Demand for oil is still growing and remains quite healthy.

With all its new rigs contracted at least through 2019, I am confident in Diamond's medium- to long-term prospects. While today the situation may seem bleak, we have seen this movie's prequel before and remember well how it ended.

Now let's turn to our other energy subsidiary, Boardwalk Pipeline Partners. When discussing the future prospects of the pipeline space I hear a lot about the challenges the industry faces: commodity pricing exposure, re-contracting issues, ballooning Marcellus production, and slowing gas demand growth.

While all of these factors are important, we believe that demand for US natural gas will once again reaccelerate both domestically and internationally. As we know, exports of natural gas are increasing and the US has the capability to produce an enormous amount of low-cost natural gas.

As of today there are commitments to build LNG export plants with capacity of 8.5 billion cubic feet per day. The majority of these plants are located on the Gulf Coast and are scheduled to come online before 2020.

Pipeline exports to Mexico are also increasing. Last year these exports grew by nearly 1 billion cubic feet per day, which represents a 1.5% of US supply. Those exports are on track for a similar increase this year.

Additionally, industrial demand for natural gas and liquids is growing, spread by petrochemical production. This growth is a boon for Boardwalk which provides services to the Gulf Coast petrochemicals industry and has key assets located in Louisiana's industrial hub.

Boardwalk is capitalizing on these trends with several natural gas and liquids projects already underway, all of which are on schedule and on budget. As these projects come into service over the next several years they will also help offset possible revenue declines from renewals of certain legacy contracts and contribute to Boardwalk's cash generation.

Turning to the insurance market and CNA, you are familiar with some of the challenges facing the sector, including industry consolidation, a slow growth global economy, persistently low interest rates and decelerating premium rates.

While not immune from these challenges, CNA has continued to make progress on its major strategic effort to become a top quartile underwriter. CNA is also aided by the fact that it is operating at a time when the insurance industry's capital management is extremely disciplined.

Over the last few earnings calls I have spent time explaining why I strongly believe that CNA can compete effectively in this environment while also delivering strong operating profits.

Just to review, CNA has: a strong foundation built on financial strength; outstanding human capital that is continually improving; a strong branch network and rigorous underwriting disciplines that have resulted in improved risk selection.

So while the insurance industry may face some headwinds, CNA has never been stronger with regard to its capital, its brand and its competitive position.

And last but not least, let's take a look at Loews Hotels. The hotel industry continues to enjoy favorable market fundamentals albeit at a slowing pace. For the last six years hotel room demand has outstripped supply and, while both continue to grow, supply has been catching up. The increasing supply of rooms does create a more competitive environment, but there is still plenty of growth to be had.

Another industry dynamic is the trend towards consolidation of major hotel companies. We believe that this trend can be a good thing for smaller and more nimble companies such as Loews Hotels. After all, it is much easier (technical difficulty) our chain of 25 properties to roll out and deliver innovative new services and offers for our guests.

Loews Hotels will remain focused on opportunistically growing the chain in key markets. The focus of our growth will be on group hotels, our sweet spot, as well as resort destinations such as Orlando.

Just two weeks ago Loews opened its fifth hotel in Orlando, the 1,000 room Sapphire Falls Hotel, bringing our key count there to 5,200. The grand opening of this new property is just the latest development in what has been an exceptionally successful partnership with Universal Orlando Resorts.

Before we proceed to our Q&A let me review why I am confident about the medium- to long-term prospects of each of our businesses.

CNA has improved its underwriting performance and paid significant dividends to shareholders by maintaining its strong capital position.

Diamond is currently in a very tough market and, although we can't predict when the market will turn, Diamond is weathering the storm well. It's been conserving its financial resources and maintaining its position as the strongest offshore drilling Company in terms of credit rating, finance, innovation and leadership.

Boardwalk has made smart capital decisions that should allow it to fund its announced growth projects and to contribute to its cash flow once these projects come online.

And Loews Hotels continues to grow its chain steadily with an eye towards increased profitability and cash flow.

As for Loews Corporation, we have always maintained a fortress balance sheet, our parent Company cash and investments exceed our debt, just as they have for the vast majority of the last four decades. Despite the current turbulence in the energy sector, our financial position remains ironclad and allows us to take advantage of opportunities as they arise.

Whatever the environment Lowe's and its subsidiaries are operating in, our strategic imperative remains the same, creating value for shareholders over the long-term. And now I would like to turn the call back to Mary Skafidas.

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

(Operator Instructions). Josh Shanker, Deutsche Bank.

So, I want to throw a bunch of things out there and have you sort of explain to me relative valuations for various things.

Back about a year ago when oil was priced at around I think $35 a barrel and Diamond's stock was trading below $30 you bought back some stock I am sure with an eye on where you thought two-year oil was going to be.

About a quarter ago, with CNA stock dropping below $30, and trying to I guess capture what you expect to be about a 10% dividend yield, you bought back stock.

So, both Diamond and CNA might be a attractive to you -- not as attractive, but can we talk about the price of oil, the price of a 10% dividend yield and your willingness to buy back subsidiary stock as opposed to your own?

Okay, let's start with Diamond. When we bought back the shares of Diamond I think that we did not anticipate that the decline in offshore drilling would be as bad as it has been. We didn't anticipate that oil prices would go into the $20s; we didn't anticipate that oil companies would cut back their capital budgets so dramatically. And we certainly didn't anticipate that utilization today of drilling rigs would be at the levels that they are at.

So, I think we were surprised, and I daresay that the rest of the market was surprised, by what has happened in the offshore drilling industry. But now I think we recognize very clearly exactly where we are in that business.

With respect to CNA, I would say it is just the opposite of Diamond. Things have worked out pretty much as we have expected. CNA continues to improve on its underwriting; its earnings have come in very strong. And when we bought CNA's stock in the $20s we said then and we say now the stock is just too damn cheap.

You are right, when we bought it it did represent a 10% yield when you look at -- look in the rearview mirror and take into account the special dividend along with the regular dividend. And we believe very much in the strength of CNA's business.

As I said in my remarks, we believe strongly in the capital level that CNA has and we believe strongly in the improvements that are taking place at CNA.

And so -- and versus Loews' stock, the return on Loews' stock I guess?

So, when I think about what I do, I think my primary job is that of capital allocator. We allocate capital to Loews' share repurchases, to purchases of subsidiary shares, we allocate capital from time to time to our subsidiaries to the extent that they might need capital from Loews and it represents a good return to Loews.

And then we also allocate capital to -- less often but in bigger amounts to repurchase -- to purchase, sorry, new businesses. So these are just the types of capital allocation issues that we have, the competition for our capital.

And from my perspective, and the Loews Corporation perspective, we are constantly making judgments every day what is the best place for our capital. And the times when we bought CNA shares and the times when we bought Diamond shares, at those points in time, without the benefit of a rearview mirror today, we decided to purchase those shares.

And just backtracking, do you have a view on two-year oil?

I like it a lot. I think -- as I said in my remarks, I think oil companies and the world in general are dramatically under investing in oil production capacity. I think that -- I think, I believe, I know that depletion is real, that oil wells do not continue producing forever. Some of them decline at 70% a year, some of them decline at 5% a year, but all of them decline.

And to the extent that the world is not reinvesting in new productive capacity, those declines in production will be felt in the coming years. Combined with that, even though some say that oil demand growth is sluggish, oil demand is still continuing to increase every year, generally on the order by about 1 million barrels a day or about 1%.

So, as you add a few years together of under investment combined with continued demand growth, I think you can see that in a few years time prices will have to go up in order to provide the investment returns needed by oil companies in order to make the investment in more productive capacity. And I think that in two years time that will certainly happen.

In prior calls I've said that $65 was my fearless forecast for year end 2018 oil. I think there is a good chance that oil will be significantly higher than that -- on the order of say $10 a barrel.

Okay. And in terms of the I guess cash flows to Loews Corp right now, as you look at your appetite for deploying dividends, repurchases and other opportunities, is there a corporate outlook about how much cash flow you expect your businesses to generate to you in the next 12 months?

Yes. We think about that all the time.

And the CNA dividend coming, I guess do you consider the special part of the dividend part of that capital management or that cash flow forecast?

We take all the sources of capital that we anticipate coming into Loews into account. The thing that Loews doesn't do, nor do our subsidiaries do, is make forward-looking statements as to what specifically those amounts are.

Okay. Thank you for answering all the questions and good luck with the remainder of the year.

Bob Glasspiegel, Janney.

The parent investment income was relatively robust, relative to recent run rates, in a period where the stock market was not that robust. What was the source of the $56 million?

As they say, you die by the sword, you live by the sword. We had for a number of quarters, even years, suffered with gold investments. And what has happened in this most recent quarter is that our gold investments came to life. And the investment income in the quarter is primarily attributable to our gold investments.

How big a commitment do you have to gold?

It is surprisingly small. It is about $150 million maybe. It is not so big. We have had on our gold investments this quarter, this year to date more than 100% rate of return, not annualized, just in the six months, 100% -- greater than 100% rate of return on those gold investments.

Okay. Second question is -- you said you are going to have a drag on hotels in the second half because of -- was it Miami investments? What is the order of magnitude of that drag or investment spending?

This is David. Where -- Miami is undergoing a renovation in occupancy RevPAR will be way down during that period of time. So we don't break out the earnings of Miami or any of our individual properties. So, suffice it to say though that Miami is quite a profitable property and the lack of profitability from that will be a drag on earnings.

I'd say it differently (multiple speakers).

Was it $3 million to $5 million or much bigger than that?

We are not going to give a range. But let me just say Miami is a significant contributor to Loews Hotels' income. And it is earnings during this capital improvement time will be dramatically affected by the work that is being done.

But we strongly believe that the hotel that will be seen by the public when the work is completed will be a dramatic improvement over an already very profitable hotel.

Okay. How long is the renovation period again?

It is planned to be concluded at the end of November, the first part of December.

Okay. And last question, Jim, over the last several years your economic view of like 2% GDP growth has proven to be a very valid forecast. We are limping along a little bit below that. Any concerns about near-term economic outlook? Are you revising sort of your consistent --?

I am staying with my forecast. And when you said growth has been a bit below it, below my 2% mark, I am reminded of what [Larry Lindsey] said to me. And he may have been quoting some other economist, but he said that economists use decimal points to show the world that they have a sense of humor.

I get that.

I am going to stick with my 2% growth forecast.

There is nothing as far as the election or Brexit or the macro stuff that has happened that makes you pause on that forecast?

My forecast takes all of that and more into account.

Great. Okay, that makes me feel a little bit better. Thank you.

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

So given that you see, and maybe the industry sees some improvement in oil prices the next couple years, that would suggest that there is no rush to dump rigs, I guess like the Yankees selling. Where does that leave Diamond's strategy?

So, Diamond is scrapping two rigs, but we believe that even in a robust recovery that there won't be work for those two rigs. Those rigs are generally very old and have served their useful productive lives.

But we do have a number of rigs that are stacked that will be able to come out of stacked mode and operate when, as and if the oil -- offshore oil drilling industry improves.

I guess maybe I didn't ask my question well. In the past you have indicated that a big turning point is when the industry gets so discouraged or out of money that they are dumping rigs as an opportunity to pick them up. Do you see that occurring in this cycle of two years, five years, whatever it may be?

So, the primary market for third, fourth and fifth generation rigs I believe will be in the shallower water depth where sixth generation typically positioned rigs cannot compete. They just technically cannot compete there.

So, I think that there will be in the future a good market for those third, fourth and fifth generation rigs, but it will be a relatively small market. Certainly not as big as it was in prior decades. So, we are very comfortable -- Diamond is very comfortable with the exposure that it has to that class of rigs.

So, do you see -- maybe I am not understanding your answer. Do you see a dumping, so as to speak, of rigs by the industry creating good opportunity -- better opportunities for pricing rigs?

So, I don't foresee Diamond purchasing any third, fourth or fifth generation rigs. When you look at the economics of purchasing a third, fourth or fifth generation rig what you quickly realize is that the purchase price of the rig is really incidental and very small in comparison to the cost of recommissioning the rig and going through a special survey.

So, in my opinion the cycle is different, slightly different this time than last time because in the cycle, say in the late 1980s, early 1990s you were able to buy rigs, recommission them for very little and bingo you would be back in business.

This time the cost to recommission a rig after it has been in stacked mode for a few years can in some instances be measured -- can be greater than $100 million. So, it doesn't -- the economics of that are not driven by whether you pay $5 million for the rig or $7 million for the rig.

We feel that we have enough of that class of rigs that when and if the industry comes back we will make a lot of money from those rigs. And we would anticipate making money then from sixth generation and later rigs if the market truly improves.

Okay. Slightly different on the gold. With a 2% forecast for economic growth, that would not suggest a lot of inflation, which would seem to argue against gold investments.

So, I don't want to argue the merits of gold, I would just say that for us gold in our portfolio has been a very good hedge. That when stocks are down gold tends to outperform and when stocks are up gold tends to underperform. And so, it has been I think a very good balance for our portfolio.

I am not, nor is anybody else here at Loews, what you would call a gold bug. But it was -- it is interesting to me that in the first half of this year with a relatively modest investment in gold securities we have been able to earn an outsized rate of return on that investment.

Okay, thank you.

That concludes the Q&A portion of today's call. I will now turn it back to Mary Skafidas.

Great, thank you, Crystal, and thank you all of you for your continued interest in Loews. A replay will be available on our website, lowes.com, in approximately 2 hours. That concludes today's call.

That concludes today's conference call. You may now disconnect.