Loews Corporation

Good day everyone and welcome to today's Lowe's Corporation Q1 earnings conference call. At this time all participants are in a listen-only mode. Later you will have the opportunity to ask questions during the question and answer session. You may register to ask a question at any time by pressing the star and 1 on your touchtone phone. You may withdraw yourself from the queue by pressing the pound key. Please note that this call may be recorded and I will be standing by if you need any assistance. It is now my pleasure to turn the conference over to Mary Scafidis, Vice President of Investor Relations and Corporate Communications.

Great. Thank you, Katie, and good morning, everyone. Welcome to Lowe's Corporation's first quarter earnings conference call. A copy of our earnings release, earnings supplement, and company overview may be found on our website, lowes.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 with questions from 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 the 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 the 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. With that, I'd like to turn the call over to Jim. Jim, over to you.

Thank you, Mary, and good morning. Lowe's is off to a tremendous start in 2022, with each of our consolidated subsidiaries continuing to produce solid results in the first quarter. Before we talk about the financial performance of our subsidiaries, though, I want to give you an update on the ongoing boardwalk litigation in Delaware. As some of you already know, four months ago, the Delaware Court of Chancery found that Lowe's improperly utilized a call right embedded in BoardWalk's master limited partnership agreement when we bought in the minority unit holder shares of BoardWalk. Astoundingly, we were found liable for damages of almost $700 million plus interest which amounts to more than a 60% premium to the unaffected price of Boardwalk in 2018. I've been told that this is the largest class damages award in Delaware court history. We were shocked by the decision. Why? There are three basic reasons. First, The decision disregarded and dismissed a well-supported opinion of counsel, a document to which the Delaware courts traditionally give great deference. Second, the numerous well-reputed lawyers who advised us on this matter were found to have participated in a corrupt scheme to deliver what was called a contrivance. And finally, we will assess the damage number that in terms of both dollars and premium flies in the face of established Delaware precedent that market price should serve as a barometer in assessing the value of a public company. Those who know me and know Lowe's will understand why I'm outraged and frustrated by this outcome. At Lowe's, we have always believed that operating ethically and with integrity is paramount. The notion that we might have been so duplicitous in our dealings with the minority unit holders of Boardwalk is simply not true. So where do we stand now? Currently, our case is on appeal at the Delaware Supreme Court, and we have every reason to believe the court should be taking this appeal very seriously. there are numerous precedent-setting legal findings made in our case that, in our opinion, would create significant difficulties for corporations and their lawyers in the state of Delaware if they were to be upheld. We believe the Delaware Supreme Court has spoken loudly and clearly in previous cases on the issue of damages and that throwing out years of precedent would create uncertainty and confusion for companies that rely on the Delaware courts to provide consistent and thoughtful rulings. On timing, we've already filed our appeal brief and reply brief, and we expect to argue our case before the court in the third quarter. We anticipate a decision hopefully by the end of the year. I don't think we'll have too much more to report before then. Today, I simply wanted to let you know where we stand and how I feel. Moving on to happier topics, on today's call, I'd like to focus on the performance of CNA and Lowe's Hotels. CNA continues to be a success story for Lowe's. CNA had an outstanding quarter, delivering its strongest property and casualty combined ratio and underwriting profit since the third quarter of 2016. The underlying loss ratio is flat compared to the underlying loss ratio of the prior year's quarter, and generally flat for all of 2021. Total renewal premiums increased by 9% for the quarter, driven by seven points of rate and two points of exposure growth. Rates continue to be ahead of lost cost trends, and exposure growth is up as the economy expands. CNA's keen focus on underwriting has served them well, and their balance sheet remains strong and stable. We continue to be extremely pleased with the company's performance. While higher interest rates will have a negative effect on the market value of CNA's fixed income portfolio, those same higher rates will be beneficial over the long term. The good news is that the company is now able to invest at significantly higher yields. And while book value per share has suffered a decline due to those higher interest rates, this does not imply that there's been any impairment of the timely collection of principal and interest. Higher interest rates have also been favorable for CNA's long-term care book of business, allowing CNA to buy long-term securities at higher yields than was previously available. The company is now beginning to lengthen the duration of its long-term care portfolio. As for Lowe's Hotels, the company delivered its highest first quarter adjusted EBITDA ever, clocking in at $68 million as pent-up demand for post-COVID leisure travel coincided with this year's timing of spring break. When comparing first quarter results with those from the first quarter of 2019, adjusted EBITDA is $7 million higher. Those hotels' favorable performance is, of course, partially impacted by the mix of hotels in the portfolio, as several more resort hotels have opened over that three-year time period. Additionally, we have exited several urban market hotels with minimal meeting space. Resort destinations continue to lead the way, and we are seeing a steady return of group business. The missing piece of the puzzle is a rebound in corporate travel, the lack of which continues to negatively affect hotels in urban centers. And while occupancy rates still lag pre-COVID levels in some locations, for most of our hotels, the average daily room rate is on par with or exceeds pre-COVID levels. Next, I want to update you on our share repurchases. During the first four months of the year, the company repurchased about 1% of our shares outstanding, or a bit more than 2.4 million shares for approximately $148 million. Before I hand the call over to David, I want to mention that this will be his last earnings call as CFO of Lowe's Corporation. However, don't rush to say goodbye. He's staying on through the end of June to ensure a smooth transition and will then continue with the company as a senior advisor. I thank David for his tremendous efforts on behalf of Lowe's over the past 17 years, during which time he has been an invaluable member of Lowe's senior leadership team. His sound judgment, strategic acumen, and laser-like attention to detail have been an enormous benefit to Lowe's, and we've been fortunate to have him as a colleague and as a friend. Jane Wong will officially take over as CFO on May 10th. Jane joined the company in 2006 and has steadily and brilliantly worked her way up the ranks at Lowe's, and I look forward to hosting our next earnings call with her.