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#Thank you, Crystal.
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 <UNK>; and our Chief Financial Officer, <UNK> <UNK>.
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, <UNK> <UNK>, will walk you through the key drivers for the quarter.
But before he does Jim <UNK>, our CEO, will kick off the call.
Jim, over to you.
Thank you, <UNK>.
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 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 check boxes 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 is the ---+ 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 nondiscretionary 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.<UNK> 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 kicked a lot of tires in this process, and we have yet to come across a management team as ready for prime time 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 will 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 will 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, <UNK> <UNK>, will now provide more details.
Over to you, <UNK>.
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 3 items: realized investment losses, which reduced our net income by $17 million; losses on LP investments, which reduced our net income by $7 million; and a retroactive reinsurance charge, which reduced our net income by $74 million.
The charge was related to the transfer of the company's asbestos and environmental pollution liabilities to National Indemnity in 2010.
Taken together, these 3 items lowered CNA's contribution to our first quarter 2016 net income by $98 million.
Conversely, in this year's first quarter, CNA posted realized investment gains, not losses, which benefited our net income by $20 million.
CNA's LP investments returned 3.8%, benefiting our net income by $54 million.
And while CNA booked a noncash retroactive reinsurance charge again this year, it was far smaller than last year's, reducing our net income by only $12 million versus last year's $74 million.
So on a year-over-year basis, these 3 items accounted for $160 million of the $174 million increase in CNA's contribution to our net income in Q1 2017.
Away from these items, CNA showed improved results from current accident year P&C underwriting and from the Life & Group segment, offset in part by a lower level of favorable prior year development.
Beyond CNA, our year-over-year earnings improvement was driven by Boardwalk, Loews Hotels and parent company investments, offset by earnings declines at Diamond.
Boardwalk's contribution to our net income increased year-over-year by 19% or $6 million, as revenues were up from recently completed growth projects as well as favorable market conditions for the company's storage and parking & lending services.
Boardwalk's excellent performance was highlighted by its net revenues being up 7% and EBITDA up 11%.
Loews Hotels also had a good quarter, with net income of $10 million.
During the quarter, the company booked a gain on the sale of the JV property and wrote down its equity investment in another non-Orlando JV property.
These 2 onetime items netted to add $6 million to Q1 2017 net income.
Setting aside these items, net income at Loews Hotels increased $1 million year-over-year.
The main downdraft in the quarter was from Diamond Offshore as the depressed conditions in the offshore drilling space continued.
Diamond's contribution to our Q1 net income declined from $43 million last year to $12 million in this year's first quarter.
This $31 million negative swing was largely attributable to 2 factors: Diamond received a onetime demobilization fee last year that increased Diamond's contribution to our Q1 2016 net income by $13 million; and Diamond's contract drilling revenue declined 10%, excluding this demobilization fee, primarily due to fewer revenue-earning days.
It is simply not possible for Diamond management to reduce expenses enough to compensate for the significant revenue declines it has experienced.
Turning to the parent company.
Net investment income was strong in Q1 2017 as alternative investments and equities, including gold-related equities, drove $59 million of pretax investment income.
In comparison, the parent company portfolio generated a loss in last year's first quarter as favorable results from gold-related equities were more than offset by unfavorable results from alternatives and other equities.
Let me explain briefly the bump-up in our corporate expenses in the first quarter.
Two items, expenses related to acquisition activity and the timing of bonus accruals, accounted for the lion's share of the increase.
We expect to have additional acquisition-related expenses in the second quarter.
As for bonuses, we will be accruing them ratably throughout the year this year, so this is simply a timing difference.
Loews continues to maintain an extremely strong and liquid balance sheet.
At March 31, the parent company portfolio totaled $5.6 billion, with 2/3 in cash and short-term investments and the remainder in fixed maturities, marketable equity securities and a diversified portfolio of limited partnership investments.
The parent company portfolio will decrease by just over $600 million upon the closing of the Consolidated Container transaction in May.
During the first quarter, we received $559 million in dividends from our subsidiaries, $546 million from CNA and $13 million from Boardwalk.
Dividends received from CNA included a $2 per-share special dividend, which itself totaled $485 million.
We had no share repurchase activity during the first quarter.
I will now hand the call back to Jim.
Thank you, <UNK>.
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 <UNK>.
Thank you, Jim, and thank you, <UNK>.
Crystal, 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, "Jim, how did you think about the Consolidated Container acquisition versus buying shares of Diamond, which is trading at 20-year lows.
Has your view on the secular versus cyclical challenges at Diamond changed.
"
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-a-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 noncyclical 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.
Great.
Thank you, Jim.
Crystal, we'd like to hand it back over to you so that you could give participants on the call instructions for asking questions.
No, we've ---+ they're good to go for us as soon as they close.
There'll 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.
Look, what I have said publicly is that we're acquiring CCC at just over 8x EBITDA and that we foresee that we will have close to double-digit cash-on-cash returns in the first year from the investment, both of which, we think, is very compelling for us.
Yes.
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.
I should say no, the management of CCC doesn't have any investments teed up at this point in time.
No, 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.
I think if I had to say it, 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.
So the team ---+ first of all, we like very much the team at CCC.
We think they've ---+ 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 prime time.
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 our earnings and the value of the enterprise grows over the next 3 to 5 years, Loews shareholders will benefit, as will the CCC management team.
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 don't 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.
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, which 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.
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.
Great.
Thank you, Crystal.
Thank you, Jim and <UNK>.
And as always, thank you all for your continued interest.
A replay will be available on our website, loews.com, in approximately 2 hours.
That concludes the Loews call.
