Q1 2020 Earnings Call
2020 earnings conference call.
This time, all participant lines have been placed in listen only mode.
Thank you and it's now my pleasure to turn the call over to Mary Skafidas did again. Please go ahead.
Thank you very good morning, everyone and welcome to those corporations first quarter earnings conference call.
A copy of her earnings release earnings supplement in company overview it'd be found on our website <unk> dot com.
On the call. This morning, we have our Chief Executive Officer, Jim Tisch, and our Chief Financial Officer, David Edelson questions that have been committed by shareholders be addressed during this call.
Before we begin held wearable 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.
Neutral wide range of risks and uncertainties, including those set forth in or as you see filings forward looking statements reflect circumstances at the time there me.
The company expressly disclaims any obligation to update or revise any forward looking statements.
It's disclaimers only a brief summary, the company statutory forward looking to see statements disclaimer.
Which is included in the company's filings with the FCC.
During the call today, you May also discuss.
We may also discuss non-GAAP financial measures. Please refer to our security filings and earning supplement for a reconciliation to the most comparable GAAP measures now let me hand, the call over to Jim Tisch, Our CEO, who will kick off the call Jim already.
Thank you Emily and good morning.
Before we discuss how close is addressing the many challenges presented by the cone virus I want to take a moment to acknowledge everyone on the front lines of the fight against this pandemic. They are true HEALOS I speak for all the most recent news corp. when I thank them for their Blue Moon. So there's some food.
Oh I'm for everything we're doing to save lives to express on things a bit more concretely.
I'm proud to announce those loans has donated a million dollars that has been allocated between something different phones that provide good luck support to these splunk line called scales yours.
I'm glad we're able to help because individuals who risking their own logs to help others.
It's establishing how quickly the cooling the virus has altered all lives.
Lowes is 29 team letter to shareholders is dated February 11th of the Sheila.
And as we described the much the dramatic changes, Florida belt over the last decade by disruptive technologies shifting trade relations and in a way of Morgan and geopolitical forces.
Did I know when we completed on what are the most dramatic change was directly ahead.
What started out as a promising your has quickly and dramatically morphed into a global economic fruitful.
Like so many other companies lows and its subsidiaries started operating remotely overnight as trabi restrictions and shelter in place orders were issued by governments around the world.
Since Rosano subsidiary for always put into place the enhanced IP infrastructure required for a quick and efficient transition to remote operations or companies move to working from home when even more smoothly. Some I would've expected or employees rose for the challenge with the resilience and focus.
I want to find some old for their dedication, which has enabled loans to move forward.
So back to operations.
Kona bond was has impacted each of those businesses in different ways.
Almost <unk> subsidiaries have been hard hit.
Others have not.
Specifically diamond offshore and learn from the told I felt the most printing.
Let me lead off with Diamond offshore and the sequence of events resulted in the Companys chapter 11 announcements on April 26.
It's no secret that the offshore drilling industry has been experiencing a protracted downturn since 2014.
It's been a long hard road for the offshore drillers plagued by an oversupply of rigs coupled with persistently low oil prices.
Earlier this year. However, we thought we saw the funds started to break through the clouds.
At the beginning of January Oreo was priced at $60, a bowl and global oil demand was expected to grow.
Unfortunately, that's sunny moment, we're short lived.
Over the first quarter, Saudi Arabia, and real short film to reach a production agreement and global demand experienced a sudden and chronic cataclysmic decline due to the spread of cold but mine team.
These factors caused oil prices to drop to about $20 per barrel. That's a two thirds decline in twice in a three month period.
In response, we don't companies significantly reduce their capital budgets travel ban further complicated offshore drillers ability to staff no rigs and GMP company used every opportunity, we could to cancel or renegotiate contracts.
Talk about impeccably bad timing.
Keep in mind that even before this unfortunate confluence of events most exposure to Diamond was limited to aren't equity stake, which by mid March how the market value between 100 and $200 million.
Later in this call on CFO, David Edelson.
Walk you through the gap to loans of the Diamond Chapter 11 filing.
It's important to remember that wall. The gap deconsolidation was insignificant. It's a noncash loss. Most is balance sheet remains strong ending the quarter with $3.1 billion in cash and investments.
Well, we're incredibly disappointed about the frequency of world events would love Diamond to make its April 26 announcement.
I'm very proud of the work that diamond offshore has done over the years.
Simon has been a leader in the offshore drilling industry. The company's CEO Mark Edwards has been outstanding and his team has worked hard in a very tough environment.
I mean is comprised of tone to it and resilient individuals basically extraordinary circumstances, we hope for a brighter future for the company in the years to come.
Moving onto the rest of loans portfolio I'd like to do a quick review board businesses and their operations today.
Well they are faring functioning in the summer training new normal world.
As you know for the last couple of years. It has been ordered practice to pay questions from shareholders. Since the questions. We have received over the last month has been very consistent I'm going to address them as part of my prepared remarks and in the context of this review.
First off the Santa Fe.
Operational synergies performance has been quite strong.
Companies underlying combined ratio for the corner slightly better than in the first quarter 2019.
Driven primarily by a reduction in the expense ratio.
Soon I also had solid rate increases of 8%.
The hard market continued or no cdna has the balance sheet the business mix management team and infrastructure to manage adeptly through this crisis.
In terms of the Pandemics impact on seasons future earnings it's too early to me concrete statement.
But we imagine that the PNC industry will face some headwinds.
These will include low interest rates and lower premium levels as a result of the decline in GDP.
Cnos monitoring the situation closely as it unfolds and we have a lot of confidence in the expertise and judgment of C. N. A CEO Dino would boost though and as senior management team.
Well shareholders questions. The CNS focused on two topics business interruption insurance and the effects of the turbulent markets on fewer days investment portfolio.
Let me address each one of these.
On their call earlier. This morning, Dino made some very clear statements regarding business interruption insurance, which I will reiterate here.
You know said and I quote.
Since property policies require direct physical damage to the property from a covered poll for coverage to touch.
Additionally, the problem property policies, whether you're shoot in United States or internationally, how the exclusion borrowing coverage for viruses.
There are very few policies were coverage may exist on small participations in on those operate lords operations, but the total limits exposed or diminimus.
So with respect to property business interruption insurance.
Ladies policy language does not cover Colbert 19 in virtually all cases, and the company never collected premiums for it.
Quote.
In terms of synchronize investment portfolio in the first quarters see nave unrealized gain position declined from $4 billion at the end of 29 team to $2 billion at the end of the first quarter.
To put this in context.
Your name is unrealized gain position has typically varied between $2 billion and $4 billion since 2011 were $4 billion being the high watermark.
Since the end of this year's first quarter, the unrealized gain in CNS portfolio has rebounded halted flows and is now about $3 billion.
Interest rates across asset classes other than treasuries went up at the end of the first quarter due to spread widening that provided finian o'shea with a rare opportunity.
Hi quality assets at attractive yields.
This opportunity huson diminish somewhat as the fixed income markets have come Roaring back.
Over the last several years DNA has been reducing its exposure to risk assets, including equities hedge funds and below investment grade securities to the lowest level in over a decade.
Next up is boardwalk pipeline the company is operationally sound and benefiting from growth projects coming online.
Revenue declined slightly in the first quarter. The decline was due to the now completed re contracting aboard walks expansion projects placed in service in the 20 year weighed to 2010 timeframe.
Shareholders have asked us about the effect of lower oil prices on boardwalk. Additionally, we've gotten questions about the financial stability of boardwalks customers.
Let me address both of these clearance.
Boardwalks business has not been food significantly impacted by the drop in oil prices in the first quarter of 2020 boardwalk natural gas throughput and liquid volume increased slightly from the comparable period last year.
Since the crisis hit in mid and large boardwalk has maintained uninterrupted service to its customers well also taking measures to ensure the safety of its employees and to maintain efficient operations.
At the under the first quarter Boardwalk had a backlog of well over $9 billion in contracted revenues with about $370 million a new contracts did in the first quarter.
More than 70% boardwalks revenue backlog is derived from investment grade companies.
Boardwalk has letters of credit from some of its customers that will not indefinitely grade or not rated which provide an additional measure of security.
To reiterate.
So from a boardwalks operations and financial performance have not been materially impacted by the Corona virus or the drop in oil prices.
Well walk anticipate another solid year financial performance, almost 90% of boardwalks revenues or back spot backed by fixed fee take or pay agreements.
Revenue in 2020 is expected to be about $60 million more than 29 team due primarily to the expiration of the legacy contracts.
And of 2020 Boardwalk should have a debt to EBITDA ratio below five times leverage.
We have industry veteran Stan Horton at the home, leading a seasoned team of senior managers the company expects to finance. It's kampelman means this year, primarily by using internally generated cash flow.
Let's move on told him a plastic packaging manufacturer.
ULTEM is actually benefiting from the ongoing surge in your consumer retail segments, primarily due to increased purchases.
Page and cleaning products.
Under the top notch leadership of the company's Ceos, Sean for woman Opium has taken a number of precautions to ensure the safety of its employees and its manufacturing plants.
There's precautions include making sure employees complying comply with social distancing protocols.
Following sanitizing station distributing mass conglomerates, taking temperatures pre shift and increasing employees sick days.
These new measures have helped olympians manufacturing plants operate smoothly, even with the increase in volume.
We expect Olympians EBITDA ought to be up nicely. This year with a good portion coming from completed acquisitions as well as from organically.
Finally, let me comment on Loews hotels, we had great who we are great expectations for old hotel business in 2020.
But today's reality couldn't be further from where we had envisioned traveling travel bans shelter in place orders and social distancing protocols.
On a profound effect on loews hotels as well as on all of its competitors.
The company went from being in growth mode to being forced to do everything you could to contain costs.
Due to the colder than 18, pandemic, and resulting government mandates to halt the spread of the virus. Most the loews hotels most of Loews hotels have temporarily suspended operations only four hotels remain operational and those are very limited occupancy.
Unfortunately.
Catastrophic losses business, maybe necessary to further.
Nearly 90% of Loews hotels employees.
This was a painful decision made in order to ensure that the company could continue to operate over the long term.
Having taken this tough stuff those hotels, then followed up with significant assistance for its furloughed team members.
The company has set up a multimillion dollar really fun for affected employees and there's also continued to cover medical insurance calls for up to three month for employees enrolled and company benefits.
Additionally, in solidarity with all Loews hotels team members, who are being impacted financially by the crisis. The members of the office Im the President me.
Drew Tisch, Loews hotels, CEO, John fish reduced our salaries by 50% as of April 1st and reduced our bonuses by 50% for the entire year.
At this point in time, it's difficult to predict when Loews hotels will resumed normal operations. We expect that circumstances will vary by hotel property with occupancy at hotels, increasing gradually.
The industry recoveries from the effects of the pandemic.
Before turning the call over to David I want to comment on the parent company and our current view of the world.
We've always said that we'd like to sleep at night and that is still true today.
And our current circumstances as we experience so much uncertainty we plan to maintain a substantial cash position as our rainy day fund.
With over $3 billion in cash and investments and no significant calls on those resources.
Those remains strong we will reevaluate our capital allocation strategies once we have more clarity as to the path forward for our company, our subsidiaries and our country.
And now I'd like to handle the coal overdrawn CFO David Nelson.
Thank you Jim and good morning, everyone.
For the first quarter Loews reported a net loss of 632 million or $2.20 per share.
Compared to net income of 394 million or $1.27 cents per share in last year's first quarter.
This years first quarter loss and the substantial year over year Declawed had two main causes.
Investment losses at CN, a and the parent company, which were caused by financial market disruptions as the cobot 19 pandemic spread.
And Greg impairments at Diamond offshore.
Also worth noting as Jim did is the dramatic falloff in results at Loews hotels caused by the pandemic.
Let me start by providing more details about the quarter focusing on these three items.
I will also discuss the accounting implications.
Hi, Mins recent chapter 11 bankruptcy filing.
As well as some of the issues, we are monitoring as a pandemic impacts our businesses.
The financial markets experienced tremendous volatility in March in response to the spreading corona virus pandemic and its economic Paula.
Equity markets plummeted and credit spreads widen.
Both CNN and the parent company suffered investment losses as a result.
At Santa Fe.
After tax net investment income declined 186 million from last year.
With common stocks and limited partnership investments accounting for almost 95% of that amount.
Common stocks and Lps.
Earned 96 million pretax in Q1 2019.
But lost 125 million in this years first quarter.
Additionally.
CNH swung from net investment gains of 24 million Aftertax last year.
Two losses of 169 million this year.
This year's losses were mainly attributable to the decline in market value of non redeemable preferred stock as well as impairment losses on corporate bonds.
The parent company's investment portfolio generated net after tax loss of 130 million in the quarter versus income of 67 million last year.
Driven by declines in public equities.
In total investment activities at CN, a and the parent company.
Were responsible for Threeq 536 million of the year over year decline in our first quarter net income.
I would hasten to point out that some of these losses were recouped in April as financial markets became more favorable.
Diamonds financial outlook deteriorated as the quarter progressed, ultimately, causing diamond to impair four of its drilling rigs and take a 774 million pretax impairment charge.
Steep and rapid decline in oil prices during the quarter.
Especially since early March.
Has pushed diamonds customers to slashed their capital budgets, including their offshore drilling programs.
This chain of events caused diamond management to take a more pessimistic view of the prospects for these four rigs.
Diamonds impairment charge reduced our first quarter net income by 408 million.
No rig impairments during last year's first quarter.
Those hotels business was strong during January and February and into the first week of March only two declined precipitously thereafter.
So precipitously in fact that most of their properties temporarily suspended operations between March 19, and the end of the corner.
By way of example.
The Universal Orlando theme Park closed on March 15, and our hotels on that campus suspended operations on March 20th.
The lowest Miami Beach Hotel suspended operations on March 23rd pursuant to a requirement to close issued by the county and city.
After outperforming its plan during the first two months of the quarter Loews hotels posted a quarterly net loss of 25 million.
As compared to net income of 13 million last year.
For a negative swing at 38 million.
The hotel companies adjusted EBITDA, which is defined in our earnings supplement.
Decreased 44 million year over year to 17 billion.
Stepping back these three items.
Besner results at CN and the parent company.
Reagan parents of Diamond and Loews hotels.
Comprised 96% of the sizable year over year to cost.
Our first quarter net income.
Turning to Diamonds chapter 11 filing.
Diamond and certain of its subsidiaries filed voluntary petitions for relief under chapter 11 of the U.S. bankruptcy code on April 26.
Loews has determined that as of that date.
We no longer control Diamond and thus, we will no longer consolidate diamond for GAAP purposes.
Going forward.
We will account for diamond on the cost method and hold our stake in diamond at fair value.
Our diamond stake will be included in parent company cash and investments just as we do with all our non control equity holdings.
Our second quarter results will include a significant loss related to diamond.
Let me briefly explain the main moving pieces in the second quarter.
We will consolidate our share of diamonds losses through the bankruptcy filing date.
We will then Deconsolidate Diamond effective April 26.
Which time, we were recorded a loss equal to the difference between our then carrying value of diamond.
And the fair value of our interest in Diamond immediately following the bankruptcy filings.
Our GAAP carrying value of diamond at quarter end was approximately 1 billion.
Fair value of our stake immediately after the filing was about 15 million.
If the fair value remains the same through June 30, our net loss in Q2 attributable to diamond will be around 1 billion.
Importantly, this will be a noncash loss.
Jim previously highlighted several bright spots in the quarter, let me reiterate just a few.
PNC underwriting results at CN, a continued their positive momentum.
Rates increase in average of 8% across the book.
The underlying combined ratio was 93.9, which was better than full year 2019.
And new business was robust.
Boardwalk natural gas throughput and liquid volumes increased more than 10% from the first quarter 2019.
Revenues were down slightly due largely to expiring contracts being re contracted at lower rates. The company has essentially completed the process of re contracting its pipeline projects placed in service 10 to 12 years ago.
Boardwalks EBITDA and income.
We're slightly ahead of management's expectations and as debt metrics improved during the quarter.
And LTM experienced strong growth in EBITDA as it benefited from its recent acquisitions, namely its pharmaceutical packaging business as well as increased demand for such core products as water.
Milk.
Oh products and specialty chemicals.
Volume was robust it LTM rising about 8% in the quarter over the prior year period.
Before I conclude my remarks, I wanted to add briefly to Jim's comments about the covert 19 pandemic.
All our subsidiaries have that and we'll continue to be affected by covert 19, and the related economic impacts.
We are focused on ensuring that our subsidiaries implement effective policies and procedures to protect the safety and health of their employees.
Those is long term success rests on the success of our subsidiaries so the well being of their employees is our foremost concern.
We're also focused on ensuring that our subsidiaries identify and manage the risks and opportunities caused by this terrible pandemic.
On its call today, CNH discussed many risks, including risks to the investment portfolio and underwriting risks, including pressure on premiums and covert related losses.
Of course CNN is also looking for opportunities to better serve its client its clients in this changed world.
As Jim mentioned boardwalks business has thus far in relatively unaffected by the pandemic yet management is actively monitoring such risks as the credit quality of its customers as the declines in crude oil and natural gas prices could cause the financial condition of one or.
Or more of its producer customers to deteriorate.
Loews hotels took dramatic action to temporarily suspend operations at most of its properties in response to the pandemic.
Going forward the critical decisions for Loews hotels will be when to reopen those properties and how to refine its operations to ensure that continued health and safety of its employees and guests while meeting guest expectations.
Decisions to reopen properties will be made case by case, considering such factors as governmental public health restrictions and when management believes enough demand exists to resume operations rather than remain suspended.
Even though loews hotels has aggressively reduces cost structure huge revenue decline has caused the company to begin generating negative cash flow.
As such we will invest cash in most hotels this year.
Although the exact amount is uncertain.
Given the unknowns around property reopening and ramp up schedules.
What we do know is this.
During each each month operations are almost completely suspended as they are now.
Management forecast that the hotel company will generate negative cash flow of about $25 million.
Once properties been begin reopening however that monthly him out should decline as management intends to reopen properties only when doing so improves cash flow.
So while the covert related negative cash flow situation at Loews hotels is unfortunate it is entirely manageable given our parent company liquidity.
All GM has on that.
Benefited from increased demand for certain of its products as the pandemic reach North America.
The company is focused on serving its customers with packaging solutions. So its customers can meet today's demand while also being prepared for an uncertain future.
Finally, a few words about the state of the parent company.
As always and as Jim mentioned, we are focused on maintaining a strong and highly liquid balance sheet.
At quarter end.
The parent company.
Portfolio of cash and investments totaled 3.1 billion with about 80% in cash and equivalents and the remainder mainly in marketable equity securities and a small portfolio of limited partnership investments.
We received 575 million in dividends from CNH during the first quarter.
Which includes the 37 cents regular quarterly dividend.
And the two dollar special dividends.
As a reminder.
Boardwalk has adopted an annual dividend policy.
We repurchased 9.7 million shares of our common stock during the first quarter.
Total of $445 million, we repurchased no shares following quarter.
As Jim mentioned, we are proud that we are prioritizing liquidity.
During these uncertain times.
I will now hand, the call back to Mary.
Thank you David.
Thank you for your continued interest please feel free to reach out to me, but any additional questions and fetus Atlas Statcom.
Replay will be available on our website those dotcom and approximately two hours with no question waiting in queue, we can drill those costs.
Thank you.
Thank you ladies and gentlemen, this does conclude today's Loews Corporation first quarter 2020 earnings Conference call you may now disconnect.
[music].