Loews Corporation
Q1 2014 Earnings Call Transcript

Published: 28 Apr 2014

[Operator:]

Welcome to the Loews’ first quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question and answer session. (Operator Instructions) I’ll now turn the call over to Mary Skafidas, Vice President of Investor and Public Relations.

[Mary Skafidas:]

A copy of our earnings release an earnings snapshot may be found on our website www.Loews.com. On the call this morning we have our Chief Executive Officer Jim Tisch and our Chief Financial Officer Peter Keegan. Following our prepared remarks this morning we will have a question and answer session. Before we begin however, I will remind you that this conference call might include statements that are forward-looking in nature. Actual results achieved by the company may differ materially from those projections made in any forward-looking statements. Forward-looking statements reflect circumstances at the time they are made and the company expressly disclaims any obligation to update or revise any forward-looking statement. This disclaimer is only a brief summary of the company’s statutory forward-looking statements disclaimer which is included in the company’s filings with the SEC. During the call today we may also discuss non-GAAP financial measures. Please refer to our securities’ filings for reconciliation to the most comparable GAAP measures. I will now turn the call over to Loews’s Chief Executive Officer Jim Tisch.

[James S. Tisch:]

As you’ve seen from our press release, Loews reported net income from continuing operations of $245 million or $0.63 per share compared to $234 million or $0.60 per share for the first quarter of 2013. Our results were impacted by several unusual items which will be discussed by Pete Keegan later on in the call. This is Pete’s last quarterly call as CFO after some 17 years with Loews in that position. Let’s first proceed with the call and then I’ll come back to share some thoughts about Pete. Let’s start with CNA. There was some noise in CNA’s results this past quarter. Catastrophes primarily related to the harsh winter weather affected first quarter loss and combined rations by 4.5 points. Excluding cats in prior year development however, CNA’s underwriting margin improved almost four points as compared to the same period last year. Also affecting first quarter results was a loss from discontinued operations of $186 million related to the sale of Continental Assurance Company which was announced last quarter and then scheduled to close in the next few months. CAC is a non-core business and its divestiture will help reduce future earnings volatility and free up statutory capital. While the pace of property and casualty rate increases has slowed compared to the fourth quarter of 2013, CNA continues to seek appropriate rate increases based on its underwriting of each individual account. Overall, we continue to be pleased with CNA’s progress. Turning to Diamond Offshore, the offshore drilling market has certainly gotten a lot of press recently and I want to build on the comments offered last week by Diamond’s new CEO Marc Edwards. It is no secret that the operating environment for the offshore drilling industry has become more competitive across all water depths. While no one can predict where day rates will go, we believe that Diamond is well positioned to weather all market conditions. The offshore drilling market is a cyclical business. By maintaining the strongest balance sheet and the best credit ratings in the industry, we are confident that Diamond will be able to take advantage of that cyclicality as it has done in the past. Diamond may have the opportunity to buy rigs at distressed prices as it did in ’09 with the Ocean Courage and the Ocean Valor. If day rates rise of course, Diamond will benefit from the improved capabilities of its fleet so rain or shine we believe that Diamond’s long term prospects remain bright. Also, through April Diamond purchased $88 million of its own stock. As Marc Edwards said on the Diamond call last week, this was an opportunistic purchase but paying dividends to shareholders remains the top priority of the company. Next, to Boardwalk. On our last call we discussed the challenges that the Marcellus and Utica shale plays are creating in the short term. However, we believe that these plays, can in the long run, provide significant opportunities for growth especially now that the company is better positioned due to Boardwalk’s increased access to internally generated capital. As an example, Boardwalk has recently seen significant interest in moving natural gas north to south on a Texas gas pipeline. Last quarter, Boardwalk announced the Ohio to Louisiana access project and since then the company has strong interest for its second open season which concluded on April 22 to transport natural gas south. Boardwalk may have an opportunity to transport over one billion cubic feet per day of gas north to south should these combined projects go forward. In terms of Bluegrass, Sam mentioned on the Boardwalk call earlier today that so far we have been unable to obtain enough firm customer contract commitments to proceed with the project. Boardwalk will continue to consider all of their options. Before I turn the call over to Pete, I also want to add that the Cabana Bay Beach Resort opened 600 of its 1,800 rooms in March with the rest of the rooms and suites scheduled to open in June. Cabana Bay is Loews' fourth hotel in Orlando and a continuation of Loews’ Hotel’s very successful partnership with Universal Studios. Pete, over to you.

[Peter W. Keegan:]

As Jim mentioned, Loews Corporation today reported income from continuing operations for the first quarter of 2014 of $245 million or $0.63 per share compared to $234 million or $0.60 per share in 2013. Our first quarter results include the following unusual items

[James S. Tisch:]

Not only for your report on this quarter’s financials but for every report you’ve delivered over the past 17 years, this is Pete’s last time on the call and I want to take a moment to sing his praises. Pete Keegan has played a critical role here at Loews’ Corporation and as anyone who has been on these calls with us can confirm, he has played it magnificently. He has contributed significantly to our ability to create value for shareholders by always steering our financial course with a steady and experienced hand. Pete joined Loews in 1997 and I’ve been lucky enough to work closely with him as our CFO for all that time. I’ve known him since 1986 when he became the CFO at CBS. All of us at Lowes, along with our shareholders, have benefitted from his financial expertise, his wisdom, his unflappable demeanor, and his extensive understanding of our businesses. Luckily, we won’t have to give up any of that since Pete has agreed to stay on as a senior advisor. That being said however, next quarter you listeners will transition from the reassuring base vocals of Pete Keegan to the mellifluous tons of David Edelson who we are delighted to remind you, will take over as CFO in May. Don’t say we didn’t warn you. Now, I’ll turn the call over to Mary.

[Mary Skafidas:]

At this time we’d like to open up the call for questions. Can you please instruction the participants on how to do that.

[Operator:]

(Operator Instructions) Your first question comes from David Adelman – Morgan Stanley.

[David Adelman:]

Jim, three questions. First, with the write off of the cost associated with the Bluegrass project, going forward prospectively can something be done differently to minimize the potential write offs when there’s ambiguity surrounding the prospects for projects like that?

[James S. Tisch:]

It’s a cost of doing business. The project, if it were built and I do believe that there will be what we call a wide range pipeline built from the Marcellus down to Louisiana or Texas, if it’s built the payoff would have been enormous and the cost to be incurred were simply the entrance fee in order to be able to put together a serious enough proposal to customers that it’s taken seriously. This proposal was taken very seriously but my guess is that it was a year or two before its time.

[David Adelman:]

Does the current status of it versus what it might have been, or the prospects for building it, or committing a lot of capital six months ago, does that alter at all your thinking about the necessary or appropriate level of cash you want to have at the holding company level?

[James S. Tisch:]

Yes, it does free up some of the cash that we have. There would have been a significant amount of cash that would have been needed for the Bluegrass project and now that is looking much less likely.

[David Adelman:]

Then lastly, with Diamond’s decision to buy back stock can you talk not just in that instance but with your publically traded subsidiaries how sort of the balance or the potential interaction, how it exists and how it operates when a subsidiary is going to buy back stock? In other words, with respect to Lowes’ own independent prospects is thinking about buying stock to increase its stake in that subsidiary.

[James S. Tisch:]

First of all, the subsidiary always goes first so if Loews wanted to buy stock and if the board of Diamond decided it wanted to buy stock, Diamond would go first. This was a decision that was reached by the board of directors of Diamond because they felt that the price of the stock did not reflect the value of Diamond Offshore and thought that that was a good use for the cash of Diamond Offshore. Having said that, the dividend, both regular and special dividends, are a top priority for Diamond and the board felt that making these purchases would not interfere with the ability to pay dividends or the ability in the future to possibly buy rig assets in the market.

[Operator:]

Your next question comes from Josh Shanker – Deutsche Bank.

[Josh Shanker:]

As you know, I’m an insurance guy and we operate as well as we can, but if you like the value of Boardwalk in the 30s, why wouldn’t you have increased your stake down here?

[James S. Tisch:]

We do not comment on why we buy assets or don’t buy them. There are lots of reasons for us not buying an asset other than we don’t think the price is appropriate. We just as a rule don’t try to justify the lack of action.

[Josh Shanker:]

That makes sense clearly however, you think the price of Boardwalk is terribly undervalued at the moment?

[James S. Tisch:]

Yes.

[Josh Shanker:]

In terms of now the cash that might have been used towards building the Bluegrass pipeline, you have more cash than you expected to have at this time. Do you feel cash heavy at Loews or do you feel comfortable with the position right now?

[James S. Tisch:]

I feel very comfortable with the amount of cash we have. We’ve had more cash. In the future we still stand ready to help Boardwalk should they need help on financing some of their capital projects. But as I said in my comments, Boardwalk now has substantially more internally generated capital that will allow it to finance these projects on its own. The thing that I am not surprised about is that Boardwalk is now seeing lots of opportunities for growth projects along its system as we see the flow of gas that previously had gone south to north now starting to move north to south and so I feel good about the investment prospects for Boardwalk.

[Josh Shanker:]

I realize it’s a small part, but it is not publicly traded, can you talk about hotels a little bit? Given the opening of the New York hotel, are you seeing any economies of scale benefits as you expanded properties and the flagship property opens? Is there a way for you to cut expenses across the system?

[James S. Tisch:]

Our system is actually increasing pretty significantly. We added hotels in Boston, in Washington, we have the new Cabana Bay Beach Resort in Orlando, we have a new hotel that’s going to have the Loews name in a few months in Minneapolis, so while the system is expanding our overhead expenses are not so yes, that should help us very much with our efficiency.

[Josh Shanker:]

Can you talk a little bit about margin, what you margin is today versus what you think is an appropriate margin?

[James S. Tisch:]

As you may or may not know, we tend not to give forecasts on our calls.

[Josh Shanker:]

That’s sure. I am thinking not a forecast, but what you think your kind of business ought to be operating at. There’s no forecast, there’s no timeline associated with it but the kind of business you’re in where you think it would be running at efficiency if it were running at that level.

[James S. Tisch:]

I’m just not going to answer that question. I’ll just say that we have high hopes and expectations for the earnings of our hotel company.

[Operator:]

Your next question comes from Michael Millman – Millman Research Associates.

[Michael Millman:]

If you can give us the [inaudible] a little bit more for starting with Diamond, you indicated that it is a cyclical business and prices have gone down but there would seem there’s got to be some driver? Is it that there’s too much capacity, is it that there’s concern from potential oil drillers that the amount of gas coming out is going to keep prices and demand for oil flat, or other things? Then I’d kind of like to go through Boardwalk and maybe HighMount as well.

[James S. Tisch:]

With respect to Diamond I think your question is what are the reasons why day rates have moved down off of their peak and the answer, I think you hit both answers in your question. Number one, there is an increasing number of high step drilling rigs that continue to be delivered into the marketplace so the supply of rigs is continuing to increase. There is three year visibility on that because it takes three years from the time a rig is ordered until the time a rig is delivered. So, we can expect for the next several years to see an increasing number of high spec rigs on the market. Number two, going back about six months now, oil companies have been cutting their capital budgets. Many oil companies were operating at negative cash flows and like all of a sudden they all realized that they can’t continue doing that and so they have pulled back somewhat from the rig market. They’re not chartering as many rigs as rapidly and as a result of the increase in the supply and the lessening of demand we’ve seen day rates go down. This is what always happens in this industry. It is, as you know, a cyclical industry and at some point in time day rates will stop going down and move up again.

[Michael Millman:]

On Boardwalk, it seems you talk about the potential of lots of projects. How close are we to actually getting a project or projects started and how long before those may pay off?

[James S. Tisch:]

Well, for example, just a few months ago Boardwalk had an open season and is moving forward with moving gas out from the Marcellus down towards Louisiana. Then just last week, the second open season for that came to an end and that seems to have been a successful open season. I can tell you that Boardwalk’s drawing board there are lots of plans for expansion of its system in all types of places. None of those projects has been announced yet but our development people are keeping very busy with new ideas and opportunities for growth.

[Michael Millman:]

Can you give us a timeline when we can expect the company to feel comfortable, and I suppose to getting back to paying the dividends it had been paying?

[James S. Tisch:]

I can’t give you a timeline. What I can say to you though is that Boardwalk is now operating more like a C corp where they generate their own internally generated capital to finance a lot of their growth projects. There is no doubt that at some point in time Boardwalk would like to move back to what I would call the MLP model where they pay out most of their distributable cash flow as distributions but, for the foreseeable future, they are going to continue as they are now.

[Michael Millman:]

What’s the reason for doing it that way?

[James S. Tisch:]

The reason is that if most of the distributable cash flow were paid out as distributions then in order to fund its capital program, Boardwalk would have to sell shares at prices that would be very dilutive to the existing shareholders. So instead, the board of Boardwalk has decided not to undergo that dilution but rather to dramatically reduce the distribution so that these projects could be internally funded so that the leverage in the company could be brought down and that this strategy would provide the best results for the people that are holding for the intermediate to long term.

[Michael Millman:]

Are we talking two years or are we talking more like five years?

[James S. Tisch:]

I can’t give you a time.

[Michael Millman:]

HighMount, it’s basically all about getting gas prices to rise?

[James S. Tisch:]

It’s two things

[Operator:]

(Operator Instructions) Your next question comes from Bob Glasspiegel – Janney Capital Markets.

[Bob Glasspiegel:]

Periodically you’ve given an update on your view of what the sum of the pieces were and I was wondering if you have a sort of rough analysis that you can share with us today?

[James S. Tisch:]

We provide that in our annual report. We provide it graphically. It’s pretty easy for anyone to do, all you do is take the outstanding number of shares of Loews and you look at how many shares of each subsidiary we have and that tells you how much per share of Loews we have in each subsidiary. Just roughly speaking, for every share of Loews there are about .62 of CNA, there are about .18 shares of Diamond, and about .32 shares of Boardwalk. Like I said, that’s simple division. That’s number of shares of each subsidiary that we own divided by the number of Loews shares outstanding.

[Bob Glasspiegel:]

I’ve done that for 20 years that way but what I was looking for was help on the private pieces, how you valued the hotels, HighMount, and the Boardwalk that doesn’t trade?

[James S. Tisch:]

Well, you know how much cash we have which is at last report about $4.7 billion, you net that against the debt and then I leave it to you to come up with your own fearless forecast for the value of Loews Hotel, the value of HighMount and the value of the Boardwalk general partner.

[Bob Glasspiegel:]

I guess HighMount do you think its conservative, liberal, or accurately at cost? Is there some hidden value there?

[James S. Tisch:]

I’m sure you can tell I don’t want to provide managements’ estimates of the value of the non-public pieces. It’s just something that we don’t like to do.

[Bob Glasspiegel:]

In the past at the investor days you have given us sort of a rough way to think about those but we should do that on our own from here on out?

[James S. Tisch:]

Yes.

[Bob Glasspiegel:]

You reinstituted a buyback program which had been sort of dormant and you hinted that the bluegrass was behind that, how close were you to making the full contribution given you think it’s a great idea but a year or two early? What would be the arguments against funding it yourselves?

[James S. Tisch:]

Funding what ourselves?

[Bob Glasspiegel:]

The Bluegrass project. How close were you to making a decision to fund it? Was it a layup to not do it?

[James S. Tisch:]

I would say this, that the producers in the Marcellus currently have enough takeaway capacity for the next two years and they seem not to be thinking above that timeframe for what to do with their natural gas liquids. So like I said, my guess is that we were a year or two early, we being Boardwalk.

[Bob Glasspiegel:]

So it was a pretty clear decision not to go forward from your perspective based on that?

[James S. Tisch:]

Yes.

[Operator:]

We have reached the allotted time for questions and answers. I will now return the call to Mary Skafidas for any additional or closing remarks.

[Mary Skafidas:]

Thank you all for your continued interest. A replay will be available on our website in about two hours. That concludes today’s call.

[Operator:]

Thank you for participating in the Loews’ first quarter earnings conference call. You may now disconnect.