洛茲集團 (L) 2016 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the fourth-quarter and year-end review conference call. (Operator Instructions)

It is now my pleasure to hand the program over to Mary Skafidas, Vice President, Investor Relations.

Thank you, Lori, and good morning, everyone. A copy of our earnings release, earnings supplement, and company overview may be found on our website, Loews.com. The earnings supplement is also available through the WebEx.

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, which will include -- if a shareholder would like to submit a question for consideration, please email me mskafidas@loews.com.

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 made or implied 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 obligation to update or receive 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 securities filings and earnings supplement for reconciliation to the most comparable GAAP measures.

In a few minutes, our CFO, David Edelson, will walk you through the key drivers for the quarter, but before he does, Jim Tisch, our CEO, will kick off the call. Jim, over to you.

Thank you, Mary, and good morning. I want to start by sharing my thoughts on the financial market as a backdrop to what guided our approach to capital allocation in 2016.

I've been around long enough to have lived through all sorts of markets. I've learned to respect markets, while at the same time being skeptical of conventional wisdom. I have lived through a bond bear market and a gargantuan bond bull market. I have seen bond yields above 15% and below 2%.

I've seen inflation inflationary spirals. I've seen deflationary threats. I've seen deregulation and reregulation. I've seen the S&P 500 trade as high as 30 times earnings and I've seen the S&P trade as low as 7 times earnings.

With all this experience, that comes with age I might add, here's what I'm seeing in the markets today. In the credit markets, spreads on high-yield securities are approaching historically tight levels, while key credit metrics, such as leverage and coverage ratios, are showing signs of weakening. The leveraged loan market has been overrun by such massive inflows of capital that you could probably get a loan to buy a fleet of zeppelins at this point in time.

With respect to rates, the 10-year Treasury note is currently trading at around 2.5%, up from its recent lows but still well below historic norms. In my view, the mood of these markets is in stark contrast with the many unknowns of our current economic and political landscape, both here and abroad. For me, it's a major disconnect and it concerns me.

The optimism in the rates and credit markets is likewise reflected in the public equity and merger markets. The S&P 500 is trading at roughly 19 times earnings, 3 turns higher than the 50-year average of 16. These valuations make me uncomfortable, especially given the unknowns in taxation, foreign trade, regulations, and more.

The merger market is being driven by large pools of private and corporate buyers. The weight of private capital, combined with the abundance of available leverage at remarkably low rates, has enabled private equity firms to pay big prices for companies that haven't already been gobbled up by strategic buyers.

To sum up, in my opinion, the markets are priced for perfection and they have been that way for quite some time. Complacency reigns supreme; however, my experience has shown me that this state of affairs won't go on indefinitely.

So why am I sharing these thoughts with you? Because I know that some of you have wondered why we bought back relatively few Loews shares in 2016 or why Loews hasn't made an acquisition. In terms of the first question, looking back over 2016 with the benefit of 20/20 hindsight, I wish we had repurchased more stock in the first half of the year when Loews shares were trading at lower prices and when the S&P was 20% lower than recent levels.

As the equity market climbed to record heights during the second half of 2016, Loews's common stock moved along with it and we became cautious. We are more comfortable buying shares back when the market is at its lows, rather than when it is hitting new highs. While we remain positive on our shares and see real potential for our subsidiaries, we also know that Loews's stock price is positively correlated to the overall equity market.

Unlike many other companies, we don't have set quotas for share repurchases in a given year. We use our judgment to buy back our stock at the lowest price possible. Sometimes we look like heroes, like when we bought 9% of our stock in 2015, and other times having not purchased shares may make us look like we are asleep at the switch, but I promise you we are not. Over the span of time measured in years and decades, we are proud of our record and we feel that our share repurchases have created significant value for our shareholders.

As for the second question about adding another leg to the stool, we continue to kick tires, looking for the right company at the right price. One of our shareholders recently asked if my foot is getting sore and I have to admit it is. Valuations in the merger markets have made our acquisition search difficult and frustrating.

We always try to invest only when all the pieces of a transaction, from valuation to potential cash flow to future industry dynamics, add up to a solid idea. And while I won't comment in detail, last year we did get pretty far down the road towards making an acquisition. In the end, however, the pieces did not all fit together the way we had hoped they would. It's a tough market in which to be a disciplined buyer.

I assure you that we remain committed to our long-standing philosophy of creating value for all shareholders through prudent capital allocation. Sometimes we accomplish this through share repurchases, sometimes by acquiring a new business, sometimes through an investment in one of our existing subsidiaries, or sometimes we choose to take the action of taking no actions.

Our liquidity gives us tremendous strategic and financial flexibility. We will never stop using our best judgment to balance risk and reward to build value for all our shareholders and we are confident that, despite today's market exuberance, we will find opportunities in the future that benefit us all.

Now over to our CFO, David Edelson.

Thank you, Jim, and good morning, everyone. For the fourth quarter, Loews reported net income of $268 million, or $0.79 per share, up meaningfully from a net loss of $201 million, or $0.58 per share, in last year's fourth quarter. CNA was the major contributor to our net income this quarter, accounting for just over 80% of the total.

Let me start by identifying the key drivers of our quarterly year-over-year earnings improvement, after which I will briefly touch on our full-year results. Pages 12 and 13 of our earnings supplement set forth the key drivers for both periods. The supplement is available by webcast and is also posted to the Loews IR website.

Our results in the fourth quarter of 2015 were depressed by two unusual items totaling $359 million, the $177 million charge related to the unlocking of CNA's long-term care active life reserves and the $182 million rig impairment charge at Diamond. Excluding these items, CNA's contribution to our Q4 net income rose $110 million year over year. Four main items drove this quarterly increase, the first three of which related to CNA.

First, CNA's life and group business, which contributed a lot of $40 million in Q4 2015, excluding the reserve charge, contributed $18 million to our net income in Q4 2016, creating a $58 million year-over-year variance. As discussed on prior calls, the unlocking of CNA's long-term care active life reserves at year-end 2015 serves to favorably impact subsequent life and group operating results. By resetting these reserves based on management's best estimates, long-term care should, on average, generate breakeven results if actual experience is in line with those estimates.

Additionally, in the fourth quarter of 2016, CNA released long-term care claims reserves, which drove the positive contribution. Even without the claims reserve release, however, the life and group segment essentially broke even versus last year's loss.

Second, net investment income generated by CNA's P&C and corporate segments accounted for $36 million of the positive year-over-year variance. Higher returns on LP investments were a big driver, as was the negative impact on Q4 2015 NII of a change in accounting estimate adopted to better reflect the yield on fixed maturity securities that have call provisions.

Third, CNA posted realized investment gains this year versus realized losses in last year's fourth quarter. This swing amounted to $39 million year over year. Realized investment results in both years stemmed mostly from normal portfolio actions and other-than-temporary impairments taken to maintain flexibility.

Fourth, Loews's parent company net investment income was up $13 million after-tax year over year. The increase was largely from alternative investments, offset in part by gold-related equities.

The main downdraft in the quarter was Diamond Offshore, as the difficult conditions in the offshore drilling space showed no signs of abating. Diamond's contribution to our Q4 net income, excluding last year's rig impairments, declined from $60 million in Q4 2015 to $36 million in Q4 2016. This $24 million negative swing was largely attributable to the 29% revenue decline at Diamond, caused by fewer rigs operating and thus fewer revenue-earning days, offset partially by a contract dispute settlement with a client.

Both Boardwalk and Loews Hotels had strong quarters. Boardwalk experienced a 9% increase in net revenues that translated into robust profit growth, and at Loews hotels income was up as most properties experienced year-over-year profit growth and the effective tax rate declined.

Let me now turn to a brief review of the drivers of our full-year results. For the full year, Loews reported net income of $632 million, or $1.87 per share, up from $260 million, or $0.72 per share, in the prior year. Again, CNA was the major contributor to our full-year net income.

The same two unusual items that impacted the quarterly comparison also affected the full year. The long-term care reserve charge booked in Q4 2015 reduced our 2015 net income by $177 million and rig impairment charges at Diamond reduced our net income in 2015 by $341 million and by $267 million in 2016. Absent the long-term care reserve charge and rig impairments, our net income increased by $121 million year over year.

As in Q4, the main positive drivers of this increase were CNA and parent company investment income, with Diamond Offshore being the main counterbalance.

CNA benefited from higher earnings in its life and group segment given the positive impact on 2016 earnings of the long-term care reserve unlocking at year-end 2015. CNA also benefited from increases in favorable prior-year developments, net investment income, and realized investment gains. A modest decline in accident year underwriting income partially offset these positives.

Parent company net investment income was up substantially year over year. Gold-related equities drove the increase with fixed income, alternatives, and other equities also contributing nicely. On the other side of the ledger, Diamond's contribution to our net income, absent the impairment charges, declined from 2015 to 2016. The deterioration the offshore drilling market led to fewer working rigs, fewer revenue earning days, and a 35% year-over-year decline in contract drilling revenues.

Lowes continues to maintain an extremely strong and liquid balance sheet. At year-end the parent company portfolio totaled $5 billion broken down as follows: 62% cash and short-term investments; 12% fixed maturities; 17% limited partnership investments; and 9% marketable equity securities.

As you know, we maintain a large and liquid portfolio of cash and investments for two principal reasons: to enable us to take advantage of opportunities when they present themselves and help mitigate risk during uncertain times.

During the fourth quarter, we received $74 million in dividends from our subsidiaries, $61 million from CNA and $13 million from Boardwalk. For the full year we received total dividends of $780 million from CNA and Boardwalk, with CNA contributing $726 million of that total. Today CNA declared a $2 per share special dividend in addition to its regular $0.25 quarterly dividend. Combining the two, Loews will receive $546 million in dividends from CNA this quarter.

Our share repurchase activity in the fourth quarter was modest at 456,000 shares. During all of 2016 we repurchased 3.4 million shares of Loews, or about 1% of our outstanding, at an average price of just under $39 per share. Year over year average shares outstanding were down 2.7% in the quarter and 6.7% for the full year.

I will now hand the call back to Jim.

Thank you, David. Before we open up the call to questions, I want to take a moment to talk about the leadership that we have in place in each of our subsidiaries.

Dino Robusto joined CNA in November of 2016 as its CEO. What we've already seen in this short period of time is his strategic thinking, his operational expertise, and his tremendous drive. He has really energized the employees, brokers, and agents of CNA.

Marc Edwards and the team at Diamond Offshore are in a tough market that has only gotten tougher. Marc has been doing a phenomenal job leading Diamond through this turbulent period and certainly deserves combat pay.

Stan Horton at Boardwalk is one of the most respected CEOs in the natural gas transportation space. Under his leadership, Boardwalk have continued to strengthen its balance sheet while strategically building out the Company's transportation system and advantageously utilizing its existing assets.

Last, but certainly not least, John Tisch at Loews Hotels is a star in the hotel industry and is leading one of the industry's premier brands into its next phases of growth. I want to thank each of our CEOs for the many contributions they are making to Loews and to its shareholders.

Now back to Mary.

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

(Operator Instructions) Bob Glasspiegel, Janney.

Good morning. Jim, you've been a long-time advocate of sort of slow growth economic scenario and I'm wondering -- the President Trump election happened after the last quarter conference call. Does his ascendancy to the presidency change your view of what GDP growth is and impact at all how you think about investing? I understand you think the market is ahead of itself, expensive, etc., but does it change your economic outlook at all?

I think it's too early to tell. What we have seen from some of his statements and some of the executive orders is a push towards reducing cumbersome rules and regulations and I think that is positive. But what we are really going to have to wait to see is what happens with the major economic legislation that comes before Congress.

There's only so much that a president can do and then there's a lot that Congress can do. So we've got to wait and see what happens to fiscal spending. We've got to wait and see what happens to taxation. We've got to wait and see what happens to healthcare and a whole bunch of other legislation.

So I would say that I am hopeful, but I think also it's too early to tell.

One number that I calculated recently is really, really extraordinary and that is that -- as you know, for the past six, seven years we've grown at about 2% a year and we have a $20 trillion economy in the United States. The difference between growing at 2% a year and 4% a year in terms of the cumulative additional GDP from 4% versus 2% is $25 trillion. That means that if you grow at 2% rather than 4%, in 10 years you get the equivalent of 1.25 additional years of GDP.

So that's just an indication of how important and how beneficial pro-growth policies will be in the United States. I believe that for the past six or seven years the malaise that we've seen in the US psyche was due to the fact that we had anemic growth, and I think that stronger growth can make a very significant difference. Now we will see if the man in office and the Republicans in the House and Senate can help create the environment where business can achieve that.

So that's a glimmer of daylight, of hope that I haven't heard from you in a long time. But, bottom line, what you are saying is nothing to change? Investments, capital management, views and valuation, investing, etc., stay the course on what you've been doing?

That's exactly right. As I said in my prepared remarks, there are a lot of unknowns at this point in time. And, listen, in the market you pay a lot for certainty so you've got to make some bets, but I think there's also a lot of room for uncertainty here.

Last question, I know you give out information grudgingly, and I appreciate the disclosure on buyback and your financial disclosures, which I think have been upgraded a lot. I think I remember you saying that you did not want another leg in the energy field previously; that your energy appetite was full. Is that still where you are going with area? Any general area where you might be fishing, just services, US domestic versus international? What pond are you --?

Certainly US-based, preferably with a significant portion of the business in the United States. We're looking to write an equity check of somewhere between, say, $500 million and $1.5 billion. We're looking either at truly down and out businesses, but there aren't so many of them today that we are not already invested in.

And then the other thing we are looking at is businesses that don't have to worry too much about technological disruptions. Businesses where hopefully there is opportunity to make additional investments within the industry to grow the business. They don't have to be in any way sexy. They don't have to be high growth, but we are looking for some level of stability.

That's actually a very good roadmap for me and the investment banking world to help service you. Thank you.

Josh Shanker, Deutsche Bank.

Good morning, everyone. First question, we see another special dividend from CNA. In terms of Board-level discussions, how important is the special dividend to the way the business is being run at the Board level?

The Board level at CNA or the Board level at Loews?

There's some joint people on both Boards, so there might be a relationship between those two questions.

But are you asking how important is the special dividend for CNA or how important (multiple speakers)?

Well, the largest owner of CNA is Loews.

I'm aware of that.

And the extent to which that informs the decision to give a special versus other capital management ideas -- I think that go back about 18 months ago you said this is a 10% dividend yielding company. Well, it's only a 10% dividend yielding company if that dividend is in perpetuity.

So I'm trying to find the Board-level discussions about can I intellectually believe that these -- both these Boards look at that dividend in perpetuity?

So from the Loews's Board perspective, Loews is receiving the dividend. Loews -- and so our Board of Directors very much likes receiving that cash. From the CNA perspective, the Board has determined that based on its business today, based on its capital structure, based on its credit ratings, and a whole lot of other issues that it is capable of paying the special dividend and maintaining its strength.

The Board at CNA has determined that paying that cash out rather than holding it is in the best interest of the shareholders. That, at this point in time, CNA doesn't have the need for that excess cash and capital.

Now can I say that that will remain the case permanently? I have no idea; it all depends upon what happens in the world over the next several years. Economically it depends on what happens to CNA's earnings. It depends upon what happens to other opportunities that CNA may see for itself.

All I know is that this year the Board was very happy to declare that dividend and that no promises are made with respect to the special dividend for next year.

Okay, that actually is very clarifying, thank you. Another President Trump-related question, but probably from a different angle, I look at Loews Hotels (multiple speakers).

Until you said Trump, I don't think we were going to get picked up in those word searches for having a conference call to discuss the new president.

Believe me, this is going to be discussed in a way that no other conference call is going to be asking a question about the president, I assume. It's about the Trump hotel chain as a competitor to the Loews hotel chain.

As you try and grow -- from what I have read in the press, the Trump hotel chain is looking to grow right now, but it seems there's some complementary strategies between those two hotels in looking for properties in the market. Is that true? And does that -- will it be more difficult for you to find new hotels if you have a small luxury competitor also looking to grow in the same cities you are looking to grow in?

You know, it's a really, really big world out there and I would say that to date I don't know that we have ever come across or felt we were competing with the Trump Hotel brand. And as we look for properties, as we develop properties, we run into all sorts of competition, but the Trump brand is not one that we see often.

In terms of appetite that you have right now for new properties, if we are looking at a two-year plan, how much larger should Loews Hotel be at the end of 2018 than it is at the end of 2016, do you think?

So there are two pieces to Loews Hotels. There is our partnership with Universal in Orlando and that partnership is experiencing very significant growth. If you look what has happened over the past 15 years, we have gone from zero rooms to 4,000 or 5,000 or 6,000 rooms.

In fact, 1,000-room hotel just opened up in Orlando. It's owned by that partnership; opened up in Orlando last year. And the year before that a 1,200- or 1,800-room hotel opened up.

So, in Orlando, there is very significant growth and that's driven because the demand driver is right there: it's the theme park. Whereas Disney has tens of thousands of hotel rooms, so far the number of Universal Loews rooms which are on the Universal campus is measured at 5,000 or 6,000. As I said, there is room for growth in Orlando.

In the rest of the country, where we don't have such a large demand driver, then the growth has been and probably will continue to be slower. There we are looking to acquire or develop hotels that are either associated with a demand driver or that have economics of the individual and group business that will give us and attractive return on our investment. So they are two very different parts of the business and together they make up the whole.

One further question on natural gas. Does the seeming desire of some politicians to rescue the coal industry change the gas outlook?

I don't think it changes it very much. When I think of natural gas and natural gas demand, the real demand driver in my mind is exports of natural gas, which in the course of the next three or four or five years will go from zero LNG to 10 billion cubic feet a day of natural gas for LNG. Combined with that there is Mexican demand, which I think has been increasing. Demand from the United States. Exports to Mexico have increased about 1 billion cubic feet a year for the past several years and it looks like that is set to continue increasing.

That's all on a base of US production of about 71 billion cubic feet per day. So that it's easy to see -- with or without any changes in coal electricity production, it's easy to see that in five or six years from now, instead of US production being 71 billion cubic feet a day, it could be 80 billion-plus cubic feet per day.

And the thing I know about that 80 billion cubic feet of natural gas, it's all going to have to move in a natural gas pipeline. Boardwalk is working very hard in making its strategic plans so it can capture as much of that natural gas as possible.

Okay, that's a very thorough analysis of it. Thank you very much and good luck.

Thank you. I will now return the call to Mary Skafidas.

Thank you, Lori. We do a question from one of our shareholders. It is: It appears there is considerable room for improvement when it comes to Loews's corporate overhead. The drag on profitability is in excess of $100 million.

Since most of the assets are publicly-traded and have their own overhead, it can be argued that these expenses relate largely to oversight of the non-publicly traded assets. Even if you want to include the subsidiaries, the expense load is significant. Please provide us with some color regarding why the corporate expense level is high and what you are doing to lower this expense base.

Again, just to remind our callers, we will not be identifying questioners, as per their request.

Look, we focus a lot on our corporate expenses. I don't think they're exorbitant by any stretch of the imagination. $20 million of the expense relates to RSUs, restricted stock units. We also have the expense of the executives which is fully disclosed in the proxy statement. Again, there I think that if you look at comparable businesses, you see that personnel expense, I would think, is a bargain.

We have an investment department of 30-plus professionals that manages $50 billion of assets. We have interest on debt. I can tell you that, from my perspective, expenses are not out of line.

I have an expression that goes: sounds good when you say it fast. And when you say it fast, yes, all Loews does is collect dividends from its subsidiaries and watch over them a bit. But, in fact, there's an awful lot more that's going on. There's compliance; there's investments; there's monitoring; there's the proverbial kicking those tires of looking for new businesses.

And I'd say before you have a chance to look up, it adds up to a relatively -- or what may seem like a large amount of money, but those expenses do get very close scrutiny and we are constantly looking to minimize them.

Thank you, Jim.

And the problem with asking a question by email is you don't get to follow-up.

Thank you, Jim. Lori, that's all the questions we have at this time. We'd like to thank everyone for their continued interest. A replay of this call will be available in about four hours.

I would like to hand the call over back to you to close it.

Thank you. That does conclude today's fourth-quarter and year-end review conference call. You may now disconnect your lines and have a wonderful day.