Loews Corporation
Q1 2017 Earnings Call Transcript

Published: 1 May 2017

[Operator:]

Ladies and gentlemen, thank you for standing by. And welcome to the Loews' Q1 2017 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. And after the speakers' remarks, there will be a question-and-answer session. Thank you. I will now turn the conference over to Mary Skafidas, Vice President of Investor Relations and Corporate Communications.

[Mary Skafidas:]

Thank you, Chrystal. Good morning, everyone and welcome to the Loews 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, which will include a selection of questions submitted via email by our shareholders. 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 our 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, but before he does, Jim Tisch, our CEO, will kick off the call. Jim, over to you.

[James S. Tisch:]

Thank you, Mary. Good morning. And thank you for joining us on our call today. I'd like to start out by discussing Loews' recently announced entry into the packaging industry. As you probably know by now, a few weeks ago, we signed an agreement to acquire Consolidated Container Company or CCC for $1.2 billion. The company is a leading rigid plastic packaging manufacturer based in Atlanta, Georgia that makes containers for stable end markets such as beverages, motor oil, laundry detergent and dairy products. The acquisition of CCC will add a new industry to Loews' already diverse portfolio of businesses and provide a great foundation for expansion through organic growth and bolt-on acquisitions. We've been analyzing the packaging industry for quite some time, getting to know it well and looking for the right deal and we believe we found it. CCC is an outstanding company that checks all the boxes for Loews' criteria. First, first of all, the size of the investment meets the Goldilocks test. The $600 million check is just right, allowing us to feel comfortable about making add-on investments down the road. Aside from the size of the investment, the other checkboxes are the fragmentation of the industry, the opportunity for add-on investments, their defensive position in consumer end markets, strong cash-on-cash returns and a highly qualified management team. Consolidated sector of the packaging industry is attractive to us for a number of reasons. The rigid plastic packaging sector is somewhat recession-resistant in that its products are used primarily for non-discretionary consumer items. And while there are evolutionary changes in the business, we believe it's unlikely that this sector will be subject to major technological disruption. CCC is the largest national player in the small-to-medium volume segment of this industry with 59 manufacturing facilities across the U.S., either co-located or close to their customers, a distinct advantage in minimizing transportation costs. The company has long-term client relationships with little turnover in its customer base. Over the last several years, CCC has focused on customers who have small, but growing brands that have been challenging traditional incumbents in various product classes, such as Seventh Generation cleaning products and Persil laundry detergents. A data point that will come as no surprise to our shareholders is that we especially like the steady cash flow characteristics of this sector. We anticipate near-double-digit cash-on-cash returns on our investment. CCC's free cash flow will, for the foreseeable future, be used either to pay down debt or to finance acquisitions. Finally and most importantly, CCC has a strong and experienced management team with a track record of operational excellence. As I've said before, we've kicked a lot of tires in this process and we have yet to come across a management team as ready for primetime as CCC's. We look forward to working with its CEO Sean Fallmann and his team to profitably grow the company. The acquisition of CCC would be financed with approximately 50% cash and 50% debt at the CCC level. For Loews, this is a relatively small acquisition that allows us to continue to retain substantial liquidity at the parent company. After the close, Loews will still have approximately $5 billion of cash and investments. We expect the transaction to close later this month and we'll include partial quarter financial results for the Loews Packaging Group in our second quarter earnings release. As far as this quarter goes, I'm happy with our results and the progress of each of our subsidiaries. Our CFO, David Edelson, will now provide more details. Over to you David.

[David B. Edelson:]

Thank you, Jim, and good morning. For the first quarter, Loews reported net income of $295 million or $0.87 per share, up from $102 million or $0.30 per share in last year's first quarter. I will call out the key drivers of our $193 million year-over-year quarterly earnings improvement. These are also set forth on page 12 of our earnings supplement. The supplement is available by webcast and has been posted to the Loews' IR website. In summary, CNA had an excellent quarter and contributed the bulk of our net income, accounting for approximately 80% of the total. Similarly, CNA drove our year-over-year increase, with Boardwalk Pipeline, Loews Hotels and parent company investments also contributing. Diamond Offshore was the main earnings drag this quarter given the ongoing difficult conditions in the offshore drilling market. Turning to the details. CNA's substantial increase in net income came on the back of strong net investment income, a lower retroactive reinsurance charge than in the prior year, a significant turnaround in realized gains and good underwriting results in its core P&C business with especially favorable results in Specialty and International. As a reminder, in the first quarter of last year, CNA's results were depressed by three items

[James S. Tisch:]

Thank you, David. Before we open the call to questions, I want to summarize our thoughts on CCC. Loews does not often make acquisitions at the holding company level. We have certainly looked at a lot of deals and industries over the past several years, but none have completely fit our criteria until now. Our goal is and has always been to create long-term shareholder value through responsible capital allocation. I believe that CCC gives us the platform for the type of growth that we've been looking for. Now, back to Mary.

[Mary Skafidas:]

Thank you, Jim and thank you, David. Chrystal, before we open up the call to questions from participants, we wanted to take one question from shareholders that was emailed in. The question is

[James S. Tisch:]

So, no, our views on the secular versus cyclical challenges at Diamond haven't changed and this is not – the purchase of CCC was not an either-or decision vis-à-vis Diamond Offshore. When the CCC acquisition closes, we'll still have close to $5 billion of cash on our balance sheet. Rather, we saw this as – we saw CCC as an attractive investment for Loews Corporation. It's the exact opposite in many ways of Diamond. It's totally non-cyclical compared to the extreme cyclicality of Diamond Offshore. It seems to us to be a platform for growth. And with respect to Diamond, even at today's very low market price for Diamond, Loews still has $1 billion of exposure to the offshore drilling industry. So from a portfolio perspective, we're very comfortable with our exposure to and the upside potential for Diamond Offshore and we're also happy to have a new subsidiary that has all the possibility that I spoke about in my remarks just a few minutes ago.

[Mary Skafidas:]

Great. Thank you, Jim. Chrystal, we'd like to hand it back over to you so that you could give participants on the call instructions for asking questions.

[Operator:]

And our first question comes from the line of Bob Glasspiegel with Janney.

[Robert Glasspiegel:]

Good morning, Loews. Is it plug-and-play with CCC or is there some enhancements that you can add to either the expense side or strategy?

[James S. Tisch:]

No, they are good to go for us as soon as they close. There will be some minor things that have to be done just to make sure that we can account for CCC properly as a public company. But otherwise, they are fully loaded and ready to go under the Loews' banner.

[Robert Glasspiegel:]

Are there any numbers you want to share with us as far as earnings power, run rate or EBITDA?

[James S. Tisch:]

Look, what I've said publicly is that we're acquiring CCC at just over 8 times EBITDA and that we foresee that we will have close to double-digit cash-on-cash returns in the first year from the investment.

[Robert Glasspiegel:]

Okay.

[James S. Tisch:]

Both of which, we think, is very compelling for us.

[Robert Glasspiegel:]

The $600 million is the cash investment that we should think in terms of...

[James S. Tisch:]

Yeah. Yes.

[Robert Glasspiegel:]

And you said that the cash from this will be used to either pay down debt or do deals, so we shouldn't look for any dividends from this upstairs over the near term?

[James S. Tisch:]

Not initially. As I said in my remarks, we see this as a great platform for us to make additional investments in the space. And no, we don't have any additional investments teed up at this point in time.

[Robert Glasspiegel:]

Gotcha.

[James S. Tisch:]

I should say, no, the management of CCC doesn't have any investments teed up at this point in time.

[Robert Glasspiegel:]

Does this impact the buyback program prospect, assume either the need for the money or the need for information transmission impacted buyback in Q1, are you frozen in Q2 as well or...?

[James S. Tisch:]

We're not frozen at all. So we can still buy back shares. We can still – if we find it by yet another leg to the stool, we have – as I said, when the dust settles from this transaction, we'll have close to $5 billion in cash, which for us is a very comfortable cash position that doesn't constrain us in any way in terms of our quest to allocate capital to build long-term shareholder value.

[Robert Glasspiegel:]

Cool. Last question. What was the biggest contributor to the trading gains in the quarter?

[James S. Tisch:]

I think, if I have to say, it was the strength of the stock market. Our results are correlated to the stock market and also to gold prices because we have a not very large, but somewhat volatile investment in gold securities.

[Robert Glasspiegel:]

Thank you, Jimmy.

[James S. Tisch:]

My pleasure.

[Operator:]

Our next question comes from the line of Josh Shanker with Deutsche Bank.

[Joshua D. Shanker:]

Yeah. Good morning, everybody.

[James S. Tisch:]

Good morning.

[David B. Edelson:]

Good morning.

[Joshua D. Shanker:]

Good morning. Can you talk a little bit, Jim, about how you set executive comp here? You have a new business now and how will we know and how will you know whether it will be successful via remuneration of the people who are running it?

[James S. Tisch:]

So the team at – first of all, we like very much the team at CCC. We think they're very strong, they're very professional, they know their space, they know their competition. And so, as I said, they are really ready for primetime. We have, in terms of compensation, we have agreements in place with the management team that is designed to align our interests exactly with their interests. So to the extent that earnings, earnings and the value of the enterprise grows over the next three to five years, Loews' shareholders will benefit as will the CCC management team.

[Joshua D. Shanker:]

What is the base case versus what is the exemplary compensation case?

[James S. Tisch:]

I don't want to go into any of the specifics because that I think will be seen as a projection and as you know, we like to give projections. Just rest assured that we think that the goal is entirely reasonable. It would be great for Loews if it's achieved, but we think it is very much achievable.

[Joshua D. Shanker:]

Okay. And a hotels question. How is your occupancy rates, and your charge per room, or charge for key, I guess, going over the past 12 months or 3 months. What's the trend right now?

[James S. Tisch:]

Well, the operations are doing well at Loews Hotels. I would say – I would just point out, however Orlando, which is a major business within Loews Hotels, is doing extremely well and as you know, recently opened some additional rooms. I would point out that the Loews Miami Beach was also a major driver of Loews Hotels, was under renovation and that renovation concluded in the second half of the year, into the first quarter of this year. So that put a bit of a damper on some of the results, but net-net doing well.

[Joshua D. Shanker:]

And how is the search for new cities coming and the extent that the pricing of both the joint operating agreements and new properties is attractive or unattractive at this moment?

[James S. Tisch:]

Being pursued aggressively, being very selective, attempting to work with attractive partners in many of those circumstances to be able to find the right opportunity and earn the right return, sort of smart capital-effective growth. And so that's what we're doing. So hopefully, we'll have things to talk about before too long.

[Joshua D. Shanker:]

Okay. Thanks for all your answers.

[David B. Edelson:]

Sure.

[Operator:]

At this time, there are no further questions in queue. I will now turn the conference back to Mary.

[Mary Skafidas:]

Great. Thank you, Chrystal. Thank you, Jim and David. And as always, thank you all for your continued interest. A replay will be available on our website loews.com in approximately two hours. That concludes the Loews' call.

[Operator:]

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