Q2 2020 Loews Corp Earnings Call
Ladies and gentlemen, thank you for standing by welcome to Loews Corporation second quarter 2020 earnings Conference call.
At this time, all participants have been placed on mute to prevent any background noise.
It is now my pleasure to turn the call over to Mary Skafidas to begin. Please go ahead.
Thank you Maria good morning, everyone and it's very I said welcome to lose his corporation second quarter earnings Conference call.
A copy of our earnings release earnings supplement and company overview may be found on our website <unk> dot com.
This call. This morning, we have our Chief Executive Officer, Jim Tisch, and our Chief Financial Officer, David Wilson.
Following our prepared remarks. This morning, we will have a question and answer session.
Trial betting that has questions from our shareholders before we begin however, I will remind you. This conference call. My 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 RCC 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 statement.
It's disclaimers only with brief summary of the company's statutory forward looking statements disclaimer, which is included in the company's filings with the FCC. During the call. Today you might also we might also discuss non-GAAP financial measures. Please refer to our security filings and earning supplement for reconciliation to the most comparable GAAP measures.
A few minutes, our CFO, David Nicholson will walk you through the key drivers for the quarter.
For he does for sure CEO will kick off the table.
Over to you.
Thank you Mary and good morning, everyone.
Rather thin get into specifics adult the quarter I want to use the caught in this call today has an opportunity to get something off my chest.
Beyond frustrated was well below where the stock market has been pricing lows and she and I and I can't believe how undervalued stocks or.
What was it was market capitalization as of this morning is about $9.8 billion endorsed stake in phenotype, plus net cash alone accounts for more than $9.4 billion about number.
Leads the market valuation of our non publicly traded subsidiaries boardwalk, most hotels and altria at less than $500 million, which to my mind is constantly absurd.
I also think see a nice donohue is currently absurd, but more on that later.
Let's look at each of Linzess is privately held subsidiaries to see if I can demonstrate to you that collectively they are worth dramatically more than $500 million.
First let's look at Boardwalk pipeline.
In July of 20 team knows purchase the outstanding common units a boardwalk don't we didn't already known for one and a half billion dollars, putting the total equity value of Lowes is ownership stake in boardwalk and a $3 billion.
Keep in mind that lows isn't litigation over Boardwalk, where the trial date set for January of 2021, So we can get into too much detail.
However, since the time about purchase of boardwalks remaining public float nothing how's the card where the performance of the company that would lead us to reconsider that purchase.
Boardwalk has successfully made it through the challenge of re contracting and since going public that has reinvested a majority of its distributable cash flow in order to reduce the risk and volatility a future earnings.
Since July of 2018, EBIT dollar for the business is essentially flat.
Despite the significant re contracting headwinds accompanied how's experience.
Well future growth projects have become more difficult to complete in the current regulatory environment.
Boardwalk benefits from its base of 14 doesn't miles of pipe in the ground.
Boardwalk also benefits from stable fixed fee contracts. The company has over $9 billion of contractual backlog or seven times boardwalks annual revenues.
Essentially I'm comfortable with the guidance I gave last quarter for boardwalk.
Company is currently tracking slightly better than forecast for the first half of the year, it's low volume drops up the pipes are doing well and storage revenues are strong.
At the end of 2020 Boardwalk should continue to have a debt to EBITDA ratio below five times.
For all the reasons I just outlined I'm very disappointed by the market's implied value of Boardwalk clearly the company is worth <unk> worth much more than the market gives us credit for.
Yeah.
Let's take a look at Loews hotels.
At the risk of stating the obvious this year would be a wash out for the entire hotel in hotel and travel industry Loews hotels is no exception to the rule.
During my first quarter remarks, I'd made note or the so that there were only four loews hotels opened at the time today, many more bar hotels are operational but occupancy rates remain abysmally long.
Actually four properties located in city centers.
Oh resort hotels are doing a bit better but since many of them are located in cold and hot spots, there's plenty of room for improvement I.
I believe that over time, whether through a vaccine or other met against the travel industry will recover Loews hotels will once again be a growth engine for lows.
One last one on hotels.
As I mentioned the market currently values are privately held subsidiaries at about $500 million.
We make available on the pound company website Loews hotels is adjusted EBITDA and adjusted mortgage Doug.
When looking at these numbers however, keep in mind that the hotel company has invested equity and projects that have recently opened or have you have to open and the true earning power of these hotels has never been reflected in Loews hotels historical EBITDA.
It's clear that even if you did a bakken beyond the loved valuation for Loews hotels, you would see that any in any sort of hotel industry recovery. The equity we have been loews hotels would be measured in the billions of dollars.
Before getting to see a night, let me address a privately held subsidiary Olivia.
Opium became alone subsidy or in 2017.
At the time lowest paid $1.2 billion for all tier consisting of $600 million, an equity and $600 million in subsidiary Doug.
When we acquired the company all fields net sales were about $800 million now all teams net sales have grown to about a billion dollars driven mostly by six accretive acquisitions funded with internally generated cash flow and additional debt at the subsidiary level.
With everything we are seeing we think this will be a good year for all t. as year to date organic EBITDA has grown by about 13% and total EBITDA has grown about 35 person.
Judging from the increase in sales and improved earnings it's clear that aren't equity value an old T. M is worth more than what we paid for a few years ago.
After the slowing live or privately held subsidiaries and the description of how we think about each of them. Hopefully you will understand why I feel the market is a sleep at the switch when it comes to low stock.
Last but certainly not least I want to talk about our publicly held subsidiary C. N a.
So far in focus my remarks on how long the market has been in valuing our privately held subsidiaries but.
But that doesn't mean the market has gotten see an evaluation right.
CNH trades or the substantial discount to its peers. Despite its stellar underwriting performance and most DNA trades at a discount.
Believes the commercial property and casualty insurance industry itself is undervalued by the market.
Well the S&P trades at around 20 times next years earnings the commercial PNC industry trades in the high single to low double digits.
In a show will support for CNN and its management team and to signal our displeasure with the market's valuation of the company lows brought about a half a million shares of C. N a in the second quarter.
Speaking of the second quarter I want to take a moment to commence dnase management team on delivering strong underlying results, especially considering the challenging economic environment.
When you strip out all the noise in the quarter the Companys underlying combined ratio was 93.4%.
DNA continues to benefit from a strong premium rate environment.
Rates increased by three percentage points from the first quarter of 2022 about 11% in the second quarter and the company is actively managing its long term care business, taking actions to reduce risk now and into the future.
Today's portfolio investment portfolio also had a good quarter, reflecting the markets rebound the C. N a investment portfolio had $4.4 billion in unrealized gains at the end of the second quarter. The portfolio has bounced back nicely and it's unreal.
Hi, this gain was near its prior high.
The downside of such large unrealized gains is that the market yields I love.
The yield on 10 year Treasury notes is currently below 60 basis points friend to these like insurance companies don't make money on flowed such low rates can become a drag on earnings.
All else being equal 800 basis points increase in market yields would would reduce your knees unrealized gains by about $2.7 billion.
However investment income would go up dramatically in short cdna would have lower unrealized gains so would have higher earnings in the intermediate to long term.
Finally, I want to talk about capital allocation at Lowe's over the last quarter, we bought a little under a million shares of low stock and as I mentioned about a half a million shares of CNH.
We bought the C N a shares because we wanted to send a signal to the market now we think the company is trading a too steep discount.
With over $3.6 billion in cash and investments on our balance sheet. We are willing to continue to highlight how agreed usually our shares and cdna shares are being priced.
It means that share repurchase purchases are certainly not off the table, but we won't be buying in shares at the pace over the last two years right now as we experienced so much uncertainty in the world and the financial markets. Our focus is on maintaining a substantial cash position as our rainy day fund.
Yeah.
Lows, we are constantly reevaluating, our capital allocation strategy, and making adjustments Accordingly, and 2020 is no different.
And now I'd like to him the call over to our CFO David Allison.
Thank you Jim and good morning, everyone.
For the second quarter, those reported a net loss of 835 million or $2.96 per share compared to net income of 249 million or 82 cents per share in last year's second quarter.
This year second quarter included a net investment loss related to the deconsolidation of diamond offshore caused by its bankruptcy filing in late April this loss totaled 957 million after tax.
Two other items furthered the year over year Declawed.
Catastrophe losses at Santa Fe.
And losses at Loews hotels stemming from the severe impact of the pandemic on travel.
On a positive note CNH underlying underwriting results for excellence.
Investment results were favorable at both CNN and the parent company.
And operations at both Boardwalk pipelines and all jam packaging were strong.
Before I jump into the quarter and the ongoing impact of the Cobot 19 pandemic, Let me remind you what gave rise to the diamond related net investment loss.
Up to the bankruptcy filing date of April the 20 sets, we accounted for diamond on a consolidated basis, just as we have historically.
These results are shown on page four of our earnings release on the Diamond offshore line.
Once diamond filed for bankruptcy.
Those are no longer control diamond for GAAP purposes, as such we ceased consolidating diamond and began accounting for diamond at fair value.
Our net our net GAAP carrying value of Diamond was 988 million as of the bankruptcy date.
At quarter end, the carrying value of our state was 31 million.
Based on the fair value of our shares and a related deferred tax asset.
The difference between these two values are 957 million is included in the corporate segment as a net investment loss.
Now, let me turn to the performance of Cama Boardwalk, Loews hotels and LTM packaging.
CNH contribution to our net income declined 46% year over year to 135 million.
The PNC business performed well posting an underlying combined ratio of 93.4%.
And an average rate increase of almost 11%.
As a reminder, saturday's underlying combined ratio for full year 2019 was 1.4 points higher at 94.8%.
However, as pre announced on July the 15.
So in a booked 300 million of pretax 301 million pretax catastrophe losses in Q2 up from 38 million in last year's second quarter.
60% of these cat losses related to the covert 19 pandemic with civil unrest and weather related events accounting for about 20% each.
C. N. A is 182 million of Q2 covert related cat losses, combined with a 13 million booked in Q1.
Represent the company's current best estimate of its ultimate insurance losses, and loss adjustment expenses, including defense costs, resulting from the pandemic and the consequent economic crisis.
Second quarter Cat losses in total added 17, and a half points to seeing is loss ratio and reduced our net income by 212 million.
Last quarter, we discussed how cobot induce volatility in the financial markets reduce DNA is net investment income.
I was significant net investment losses and materially shrunk the unrealized gain in the company's investment portfolio.
In Q2 net investment income benefited from a strong quarter for equities and alternatives and net investment gains were significant largely thanks to the market appreciation on Santa is holdings of non redeemable preferred stock.
Moreover, as Jim described CNH net unrealized gain increased more than 100% from March 30, Onest to 4.4 billion.
Surpassing the year on level of 4.1 billion.
Moving onto boardwalk.
The company contributed 34 million to our net income in Q2 down from 53 million last year.
Last year second quarter included a $19 million net benefit from a customer bankruptcy and related contract cancellation.
Excluding this nonrecurring item boardwalks net income contribution was flat year over year.
As we have discussed previously boardwalk has experienced contract expirations in restructurings over the past few years related to pipelines placed into service between 20 year weight and 2010.
The net effect has been for contracts to be renewed or replaced at lower rates.
This re contracting activity essentially concluded by year end 2019.
This year second quarter results well they reflect the re contracting activity.
Net operating revenues in Q2, excluding last year's nonrecurring item was down less than 2% year over year with pipeline growth projects Park and loan and storage and other items almost fully offsetting the revenue loss from contract expirations and restructurings.
Natural gas throughput and liquid volumes increased more than 7% year to date in 2020 versus 2019.
Boardwalk management is actively monitoring the credit quality of its customers given the decline declines in crude oil and natural gas prices.
Thus far the impact has been de Minimis.
Boardwalk will have spent approximately 2 billion on growth projects during the 2016 to 2020 period.
These investments have helped the company compensate for the re contracting pressures faced over the last few years.
These investments has also allowed the company to execute on its strategy to diversify its revenue stream by increasing the percent of revenues coming from end user demand pull customers.
Now turning to Loews hotels.
The second quarter was tougher loews hotels as almost all its rooms were out of service for most of the quarter.
Operations were not suspended at only four properties.
The company posted a net loss of 72 million in Q2 as compared to net income of 12 million last year.
GAAP operating revenue was just $9 million down 94% from last year's second quarter.
Revenue at the company's JV properties, which is not included in GAAP consolidated operating revenue declined a similar percentage.
Adjusted EBITDA, which is defined in our earnings supplement and excludes nonrecurring items decreased 122 million year over year to a loss of 54 million.
13 properties resumed operations in Q2 spread out from May 29 through June 26.
And the lowest Kansas City opened on June Onest after its grand opening was delayed by cobot.
Five more properties resumed operations during July.
As of today four properties plus the yet to be open and last summer dockside property in Orlando are not operational.
We stated last quarter that during each month of suspended operations a fully suspended operations. The hotel company was expected to generate negative cash flow of about 25 million.
We explained that this amount should decline as properties resume operations since Loews hotels management intended to restart operations are properties only when doing so improved cash flow.
This has thus far proven to be the case as the hotel company is effectively and aggressively managing property level and management company expenses.
Turning to all seen in packaging.
All team continued to experience strong revenue and EBITDA growth as it benefited from its recent acquisitions, namely its pharmaceutical packaging business as well as increased demand for such core products as household chemicals water and beverages.
Conversely demand weaken somewhat in segments, including automotive commercial foodservice and institutional dairy.
All Tim contributed a slight net loss despite its robust EBITDA increase depreciation and amortization were up from the prior year driven by the recent acquisitions and by the accelerated amortization of the CCC Tradename all.
All in all all Tim is performing above plan and has been very successful in winning new business by demonstrating reliability and customer focus.
Across the board, we remain focused on ensuring that our subsidiaries implement effective policies and procedures to protect the safety and health of their employees.
Those as long term success rests on the success of our subsidiaries so the well being of their employees is our foremost concern.
Finally, a few words about the parent company.
As always we are focused on maintaining a strong and highly liquid balance sheet.
At quarter end, the parent company portfolio of cash and investments totaled 3.6 billion with about 80% in cash and equivalents and the remainder mainly in marketable equity securities and a small portfolio of limited partnership investments.
The parent company investment portfolio generated pre tax income of 110 million in Q2.
Up from 33 million in Q2, 2019, and well ahead of the 166 million dollar loss in Q1.
Equities drove the parent company investment results.
We received $90 million in dividends from CNH during the second quarter as a reminder.
Boardwalk has adopted an annual dividend policy and we have respect and we expect to recede a dividend in the fourth quarter approximating last years 100 million.
I'll now hand, the call back to Mary.
Thank you David.
As is our practice.
I have received several questions from shareholders that we will answer every quarter, we incurred shareholders to sentence questions that they like us to answer and we've received several for this quarter.
First question.
Has to do with DNA.
Those has more privately held scenario publicly held theories what is the benefit of DNA as a public company.
So.
We've always believed that having a public marker for CN, a beneficial for furloughs, especially for our shareholders.
And I Dare say that it's cneighty wasn't publicly would be clamoring for us to take a public.
However, it so it's really rail for CN, a could be treating as drastically undervalued as it is now.
The public my sense is that the public market today doesn't make much sense and certainly not an accurate reflection of the value of cnine.
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Also all PMC companies as we said in my remarks are undervalued.
Of course, there are lots of good reasons for keeping CNN as a public company and those out ways like.
Well I consider to be the short term problem of the undervaluation number one it's important to regulators and credit rating agencies, it's important for attracting talent to be able to give them long term incentive that is based on the stock and it's also in.
Important just for transparency.
As announced for the odd and added expense of keeping CN a public in the context of the size of loans ended Fiona there really aren't any significant expenses that can be saved.
Okay. Great. The next question has to do with the deal environment, Jim is loans looking to add another subsidiary right now.
No. We are not we're not actively looking at any deals right now in these uncertain times as I as I said in my remarks.
Our focus is on conserving cash both DNA Angelos are so cheap.
When we think the time is right, we'll continue to buy in low shares, but those aren't as I said all the time, we like to keep an open mind and if the relative values a rose and the deal markets change then it is very possible that we could switch from repurchase.
During our own shares to hunting for new businesses to buy.
Jim You said in your remarks that this year is probably a wash out.
How travel industry can you talk a little bit about what we're covering the whole linzess and the hotel industry it looks like.
A wash out it certainly is first let me start by saying something that.
I was told to me when I was in college, it's an old expression here, who lives by the Crystal ball must learn to eat ground glass and will not because I cannot.
Let me add that I think 2020 will be the bottom of the hotel industry in terms.
The effects of the pen dynamic and I believe that.
2021 will be dramatically better than 2020, and if I'm going to forecast longer than that I think the 22 will even be better than 21.
Oh currently we're seeing more of a pickup in driving leisure time travel at our resorts destinations business travel and hotels in city centers are lagging the resorts at this point in time.
My guess is that this will persist for some time those companies way employee safety and security as well is.
We assess their travel budgets, but.
I believe that in the fullness of time.
Those are not travel and those budgets will be come back at similar levels to where they were before this all began.
Keep in mind that we're seeing a pickup in occupancy from a few months ago, but occupancy is still very very low measure that 10, 2030 or 40% most of the time.
We opened the hotels, because we found that we lose less cash by keeping those hill hotels open rather than keeping them close but.
Yeah.
We are still losing money in those hotels.
Okay.
The next question has to do with capital allocation Loews has plenty of cash balance sheet.
And with low stock trading where it is why not use a billion or to share repurchases.
So upstarts a very good question, we keep but as you all know we keep our level of cash and investments above.
Our debt levels, because it's important for the company to maintain its bond ratings and the rating agencies like to see us have more cash and investments Linda.
The lows rating provides an uplift to some of our subsidiary ratings, giving them a more among other things.
Since the cheaper debt.
So under under exceptional circumstances.
Certainly consider allowing our cash and our investment balances to go below our debt levels.
But buying in low shows an exceptional price isn't yet include it in my definition of an exceptional circumstance.
Currently given the ongoing uncertainty in the World. We think it maintained it makes a lot of phones.
To be cautious and maintain ample liquidity.
But as lows shares continue to be remarkably undervalued.
Oh My calculus on this is very possible to change.
Okay.
And last question. We have is we just received this question even though you answered this topic earlier in the call. We wanted to ask it again. The question is the market is giving was almost no value for its privately held subsidiaries.
Investors think about as it stands out.
Well, you're right I did I didnt cover it in my opening remarks and for people that are just reading a transcript.
I'd recommend that you go back so just reading the tea, where they have the transcript I see our recommend that you go back and read those remarks, but I'll just.
I'll just go over this briefly.
Over the our purchase say two years ago of the outstanding common units of Boardwalk.
Not placed an equity valuation of about $3 billion on boardwalk and as I said previously nothing has occurred in the performance of the company that would lead us to reconsider the purchase at all.
Prior to the Kobin pandemic devaluation of our hotel business was measured in the billions of dollars.
And I still still feel comfortable that in the recovery from the pandemic, which I see coming certainly in the next year or so.
We will see valuation again, and and finally, our equity check for all Tim was $600 million as we've said in my remarks and due to the good results in the good investments at all Tim I believe the valuation should be higher now.
So when you add all that up in my mind, the market valuation of $500 million for all of our neuron publicly traded subsidiaries is to me ludicrous when they're clearly words dramatically more than that.
Okay great.
Thank you Joe Thank you David.
And thank everyone for listening that concludes blows call.
Please reach out any additional question.
Peter.
And the replay will be available on our website.
And approximately two hours.
Thank you ladies and gentlemen, this does conclude today's conference call you may now disconnect.
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