洛茲集團 (L) 2018 Q2 法說會逐字稿

Good morning. My name is Christy, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Loews Corporation Second Quarter 2018 Earnings Conference Call. (Operator Instructions) Thank you.

I will now turn the call over to Mary Skafidas. Please go ahead.

Thank you, Christy, and good morning, everyone. Welcome to Loews Corporation's second quarter earnings conference call. A copy of our earnings release, earnings supplement 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 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 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 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. Before he does, Jim Tisch, our CEO, will kick off the call. Jim, over to you.

Thank you, Mary. To start things off, I want to spend a few minutes talking about Loews' decision to redeem Boardwalk's outstanding LP units. As I mentioned on our last call, as a result of the decision in March of this year by the Federal Energy Regulatory Commission, we began to rethink the efficacy and wisdom of the MLP structure for Boardwalk. After careful consideration of all options, we determined that exercising our call provision was in the best interest of Loews' shareholders.

On June 29, we announced that we would redeem Boardwalk's outstanding LP units at a formula price of $12.06 per share, for a total cost to Loews of slightly over $1.5 billion. The transaction closed in July. We were able to execute this transaction by camping -- tapping the ample liquidity in the Loews corporate treasury. I'll be talking more about Boardwalk on future calls.

Now on to other Loews business. Loews had a strong second quarter, positively impacted once again by consistent earnings from CNA. Premium growth for CNA remains strong and the company saw positive rate trends in the second quarter. Additionally, the underlying loss ratio improved in the first half of the year from an already strong base.

Earlier this morning, CNA announced a 17% increase in its regular dividend, reporting CNA's strong operating results and outline. And while around the subject of CNA, but also, I'd like to take the opportunity to thank Craig Mense, who is retiring after serving as the CNA Chief Financial Officer for the past 14 years. The company's fortress balance sheet today is due, in large part, to Craig's extraordinary focus and outstanding fiscal management. Craig, if you are listening, we at Loews thank you for your tremendous service and wish you a wonderful retirement.

Next, I'd like to do a 1-year checking on our newest subsidiary, Consolidated Container Company or CCC. Loews acquired CCC and the transaction had closed in May of last year. And I'm happy to report that the business is performing well. In 2018, we expect CCC to produce double-digit cash-on-cash returns on our equity investment. For anyone who may need a quick review, CCC is the leading rigid plastic packaging manufacturer based in Atlanta, Georgia. The company makes containers for stable end markets, such as beverages, motor oil, laundry detergent and dairy products. With the acquisition of CCC, Loews added a new industry to its already diverse portfolio of businesses as well as another platform for growth.

When we acquired CCC a year ago, we talked about our desire to grow the business. And the CCC team has started that process by making 2 recent tuck-in acquisitions. The company has bid on more sizable acquisitions, only to find out, for the bigger companies, the prices have been too high. CCC is happy to be patient while continuing to look for additional acquisition targets. We hope to have more to report in this area in the quarters ahead.

Another reason we were attracted to CCC were the strong and experienced management team as well as its track record of operational excellence. Happily, time has only added to our positive opinion of CCC's senior leadership team. Over the last year, CEO Sean Fallman and his team have focused on creating greater efficiencies and streamlining production processes to obtain better margins.

Additionally, CCC has placed increased emphasis on their innovative, Dura-Lite technology, a patented design that utilizes less resin while creating beverage packaging of higher strength and improved customer ergonomics. For CCC, the Dura-Lite technology has had to increased unit volume and has enhanced relationship with customers. Dura-Lite is better for CCC's customers, who are now spending less on packaging materials, and better for the environment as well.

And while we're on the subject of the environment, there's been a lot of discussion in the news recently about plastics and their effects on our planet. This is an extremely important issue and one that both Loews and CCC take seriously.

Today, I want to talk about 2 aspects of plastics in the environment: single-use plastics such as straw, disposable, cutlery and plastic lids; and plastic waste that pollutes the world's oceans. First, I'd like to emphasize that CCC is not in the business of producing single-use plastic items. Its focus is on producing primary packaging designed to protect and extend the shelf life of the contents inside. Of all the packaging that CCC produces, 97% is fully recyclable. In addition to manufacturing and packaging, CCC is also the second largest U.S. producer of recycled, high-density polyethylene, a widely used form of plastic.

CCC produces 100 million pounds of this recycled, high-density polyethylene per year. As for ocean-bound plastic, 8 million tons of plastic waste ends up in the world's oceans every year. The vast majority of this plastic, about 60% comes from 5 countries: China, Indonesia, the Philippines, Thailand and Vietnam. By way of comparison, the United States is responsible for that 4% of waterborne plastics.

Acutely aware of the damage that ocean-bound plastic can cause, CCC created a program that recycles plastic from at-risk areas, trying to put a dent in the amount of waste that reaches the beaches and waterways. In 2017, CCC committed to recycling 10 million pounds of ocean-bound plastic by 2019. And today, it's more than halfway to its goal. While CCC offers a number of services and products to help minimize the impact of plastic on the environment, solutions from manufacturers are only part of the answer. If the goal is to create a circular economy for the packaging industry and eliminate plastic waste, then we need more companies to be willing to buy and use recycled resin in their products, which to date, have not been the case. Also, communities worldwide need to develop the proper infrastructure to support recycling. As consumer demand for recycled plastic products increases, CCC is ready, willing and able to provide them.

Moving on, I want to give a quick shout-out to Diamond Offshore. In recent contract negotiations, the company has increased its backlog on 3 drillships by 5 years. This level of activity is a sign that demand for offshore drilling rigs is increasing as well as a testament to Diamond Offshore's reputation and operational excellence. Well done.

And finally, before I turn the call over to our CFO, David Edelson, I want to talk briefly about share repurchases. Year-to-date through last Friday, Loews has repurchased 16.6 million shares of its stock, or 5% of the outstanding shares, at a total cost of approximately $840 million. These buybacks reflect our confidence in the underlying businesses as well as our belief that the intrinsic value of Loews is significantly higher than the market price for our shares. It's safe to say that share repurchases remain one of our major capital allocation tools for creating long-term value for our shareholders.

And now David, over to you.

Thank you, Jim, and good morning. Loews reported net income of $230 million in the quarter, essentially unchanged from $231 million in last year's second quarter. However, earnings per share increased to $0.72 from $0.69 as average shares outstanding declined 5% due to share repurchase activity. Before I walk through the key drivers for the quarter, I'd like to briefly discuss the recently closed purchase of the common units of Boardwalk Pipeline not previously owned by Loews as well as the status of our parent company portfolio of cash and investments.

As Jim commented, we spent approximately $1.5 billion in the Boardwalk transaction. Following the transaction and our share repurchase activity, the parent company investment portfolio stands at approximately $3.1 billion, down from $4.7 billion at the end of the second quarter. In keeping with our strategy of holding substantial liquidity, we are rebalancing the parent company portfolio more toward cash and equivalents. I would note that even after the Boardwalk transaction, we hold cash and investments far exceeding our $1.8 billion of parent company debt. The rating agencies have all maintained the Loews' ratings and outlooks.

Now for some comments on our segments. CNA contributed net income of $240 million in Q2, down slightly from the second quarter of 2017. P&C underwriting income was up year-over-year as CNA posted a combined ratio of 93.8, basically comparable to last year's second quarter, along with a 5% increase in net earned premium. The lower corporate tax rate benefited after tax underwriting income. Investment income was also strong, with improved returns on the LP portfolio and higher after-tax returns on the fixed income portfolio. CNA incurred onetime costs in Q2 2018 as it transitioned to a new IT infrastructure service provider. Additionally, CNA had significant realized gains in last year's second quarter versus minimal realized losses this year. CNA's core income, which excludes realized gains and losses, was up 13% in the quarter.

Diamond Offshore contributed a net loss of $37 million in Q2 2018 as compared to net income of $7 million last year. Diamond's profit margin was hurt by a 32% year-over-year decline in contract drilling revenues versus only a 3.6% decline in contract drilling costs. Revenue-earning days and average daily revenue were both down. Diamond booked rig impairment charges in both periods, which reduced Diamond's contribution to our net income by $12 million this year and $23 million in last year's second quarter.

Boardwalk's net income contribution was $16 million, up from $6 million in Q2 2017. During Q2 2017, Boardwalk's net income contribution reflected a $15 million loss on the sale of a processing facility. Excluding this loss, Boardwalk's contribution declined $5 million year-over-year. Boardwalk experienced a 7% year-over-year decline in net operating revenues as incremental revenues from growth projects did not make up for the negative revenue impact, including the 2017 restructuring of the firm transportation agreement, a decline in storage and parking and lending revenues and contract expirations.

Boardwalk's operating expenses were up slightly due to an increased asset base from recently completed growth projects. For many months, equity analysts were overestimating Boardwalk's revenue and earnings prospects for the second quarter and full year. I would note that the company's performance is consistent with our expectations and those of Boardwalk management. As a reminder, Boardwalk will continue to file with the SEC because it has bonds outstanding. However, the company will no longer hold quarterly earnings calls.

Loews Hotels contributed net income of $17 million, up from $10 million in Q2 2017. Miami Beach drove the increase with Coronado, Ventana Canyon, Orlando and many others also contributing. A lower effective tax rate in Q2 2018 enabled Loews Hotels to drop more of its income to the bottom line. Loews Hotels adjusted EBITDA, which is reported and defined in our quarterly earnings supplements, rose 8% from last year's second quarter to $66 million. During the third quarter, Loews Hotels and Universal will open a 600-room Aventura Hotel at Universal Orlando. Loews Hotels will then have 6,200 rooms at Universal Orlando, with another 2,800 rooms expected to come online in Orlando over the next 2 years.

Turning to the parent company. Pretax investment income was $42 million, up $40 million from the prior year second quarter, driven by higher returns on alternatives, equities and cash. The lower corporate tax rate benefited after-tax results in Q2 2018.

Corporate and other improved $11 million pretax year-over-year, primarily due to the absence of CCC-related transaction expenses in 2018 as well as other corporate expenses. The higher after-tax loss was solely attributable to the lower tax rates. We received $86 million in dividends from our subsidiaries during the second quarter: $73 million from CNA and $13 million from Boardwalk.

As long as Boardwalk maintains its current distribution, our quarterly distribution from Boardwalk would be close to $26 million going forward. CNA announced this morning a $0.05 increase in its quarterly dividend to $0.35. At that rate, Loews would receive ordinary dividend of $85 million quarterly and $340 million annually from CNA, before considering it special dividend.

We repurchased 5.8 million shares during the second quarter at an aggregate cost of $290 million. During July, we have repurchased another 1 million shares for $49 million. As Jim mentioned, we have repurchased a total of 16.6 million year-to-date, representing 5% of our shares outstanding at the beginning of the year.

Finally, I'd point out that the accounting for the Boardwalk transaction resulted in our book value increasing by $2 per share at June 30.

Let me now hand the call back to Jim.

Thank you, David. Before we open up the call to questions, I want to highlight a new addition to our investor relations material. Some of you have asked for more information about our subsidiary strategies and mid- to long-term prospects for growth. In response to your request, we have now posted on our website presentations for CNA, Diamond Offshore, CCC and Loews Hotels, narrated by their respective CEOs and leadership teams. Boardwalk's presentation will be out later this year. We're happy to provide these virtual Investor Day style presentations, and we look forward to hearing your feedback and answering any questions you might have.

Now back to Mary.

Thank you, Jim. Christy, we're ready for the Q&A portion of the call. If you'd like to queue the folks listening.

(Operator Instructions) And your first question is from Bob Glasspiegel with Janney Montgomery Scott.

I'm going to dig around on Boardwalk to the best I can. Jim, you put $1.5 billion and then you sort of gave a low-key discussion of it. Are you really excited about this? Is this something you just had to do? How should we think about it? Then I have some accounting questions.

Yes. Listen, we've always thought that Boardwalk is an excellent asset. The changes in FERC made it so that we really felt the need to exercise the call. And that's really where we are right now. Nothing has changed about our long-term view concerning Boardwalk.

What sort of cash-on-cash return -- you talked about some of your other investments, the current run rate?

So Boardwalk was paying a dividend of $0.40 a year. And it's our expectation that Boardwalk will be able to continue to pay those dividends.

Okay, that's sort of your dividend return. But just sort of on the value of an investment. At some point, the cash flow starts to grow a decent bit if these investments come through, right?

Yes. Listen, I said in my remarks that we'll be talking more about Boardwalk in the later calls. And that's really what I'd like to do now.

Okay. And a less substantive question on Boardwalk, just an accounting question. You're doubling, sort of, the dividend and doubling the earnings, but there are some purchase accounting adjustments, and perhaps, goodwill that might offset that. On a simplistic basis, if we double, sort of, the current run rate of earnings, what other adjustments need to be considered? Goodwill versus accounting, et cetera?

Very insignificant, Bob. Let's take that off-line. But it's very insignificant.

Okay. So if we double the earnings run rate, we'll be close to where you're doing?

Yes, sir.

And you're using cash, which should be a decent bit accretive from an EPS perspective, correct?

Correct. We're using balance sheet cash.

Your next question is from Josh Shanker of Deutsche Bank.

So I'm going to ask a bleak question and violate the Boardwalk silence. But it's really not about Boardwalk, it's about portfolio management. In the past, you've said that if you made another -- before Consolidated Container, if you made another acquisition, you'd ideally like to avoid being in the energy sector because you just -- you want to be more diversified. How does expanding the investment in Boardwalk impact -- I mean, look, if you had not (inaudible) buy it. But at the same time, what's the portfolio management philosophy? And are you more exposed to energy than you want to be all of a sudden?

No, I don't think so. Loews has a market cap of $15 billion or $16 billion. This adds another $1.5 billion of exposure to energy. Boardwalk already was a $1.5 billion exposure. So now it's $3 billion out of the total of $16 billion. Add another $1.5 billion for Diamond Offshore. And you see that CNA dwarfs both of those investments. So in terms of portfolio management, I'm not so concerned about the size of Boardwalk.

On hotels, can we talk about the new hotel? How much of a drag it is to be building a hotel out? I mean, as we -- not just that on (inaudible) but in general? And when the hotel is built, what kind of expense reduction we see that, that moment has passed? And what kind of income comes in for a large property?

Well, I would say, Josh, yes, you're right. Obviously, you're in -- when you're in building mode, you're not generating revenue and you're incurring expense. Although, a good bit of expense is capitalized, of course. And then as you approach opening, you have preopening expenses, which are expensed. So -- and then it takes just a wee bit of time for a hotel to get up and running into its sort of earnings -- revenue and earnings run rate. But I would say, given the magnitude of Loews Hotels at this point, a 600-room hotel is not -- it -- obviously, the company can withstand it and generate strong profitability and strong year-over-year growth as well. Remember, this isn't the only hotel under construction. There are: Kansas City that we've discussed; Arlington, Texas that we've discussed; St. Louis that we've have discussed; and of course, these new hotels in Orlando. So there's certainly the prospect for significantly higher revenue, and God willing, profitability going forward.

Yes. And we believe that these 6 projects that we're currently working on will be hotels that have RevPAR and EBITDA that far outpace what's available in their particular markets now.

And if you'll permit one more because I know there's usually a long queue. The -- in terms of Consolidated Container, I have not looked at the new presentations on the website. But I wondered if you can talk to me about the pipeline for bolt-ons. In general, how many general conversations you're having with potential future partners or future acquisitions at a given time? And then over like a 3-year period, is there a way to gauge how much money we can consolidate -- Consolidated Container will be spending on bolt-ons?

So the bolt-ons, which what you might call mom and pop, can range in price from $5 million to $20 million, $30 million, $40 million or $50 million. When we buy them, there are a lot of synergies that mean that if we buy them at a particular multiple, we can save, say, 2 EBITDA turns by buying them and including them in our system due to the synergies that we have. There are lots and lots of these mom-and-pops in the industry. And as you might imagine, as you get to larger sizes, there are fewer and fewer.

And Josh, I would say, just given the fragmented nature of the industry, in terms of the number of conversations going on at any given time, many at various different stages, of course. So there's a significant pipeline that is being nurtured.

That's right. It's just like, I don't know if there's a way to scaling that, I guess.

Yes. I mean, they've done 2 in the past year. We would hope that they would continue, if not accelerate, that pace. So...

They've done 2. But they've kept the tires of an awful lot more.

And quickly one more. You might have already said it. What is the imbalance of unencumbered cash on the balance sheet at Loews right now post the Boardwalk transaction?

So we have about $3.1 billion of cash after the $1.5 billion went out for the Boardwalk purchase. And we have $1.8 billion of debt.

Yes. And by the way, I would just -- I would be remiss in not pointing out that the debt comes due anywhere between 2023 and 2043. So it's not as if there's a short-term call.

There are no other questions. So I want to answer the question that wasn't asked. And the question that wasn't asked is, what do I think of the price reaction of CNA to its earnings today? And my answer is I'm totally befuddled. My own belief is that CNA is very cheap, going into this earnings call. CNA reported what we at Loews thought was very good earnings. And as a result, the stock is down 3% or 4% today. So I am very surprised at CNA's price auction. As you all know, we bought a lot of Loews shares, 5% of the shares just this year. And a lot of the reason for the purchase of the shares was because we believe in CNA, and CNA is such a big factor in the Loews' share price. There's 0.77 CNA shares for every Loews share. And as I said previously, the value of CNA to Loews dwarfs the value of our other subsidiaries. So in my view, not only are CNA share is down, but also, the sum of the parts is quite dramatic to us. So it makes us, I would say, surprised at just what's going on in terms of the valuations of CNA and then Loews. But I guess, it's better for us. Us, meaning the shareholders who is building the company.

Great. Thank you, Jim. Christy, we'd like to conclude the call for today. We want to thank everyone for their continued interest. A replay will be available on our website, loews.com, in approximately 2 hours. And we'll talk to you all next quarter.

Thank you. This does conclude today's Loews Corporation's second quarter earnings call. You may now disconnect.