Loews Corporation

Good day, everyone, and welcome to today's Lowe's Corporation Q3 2022 earnings conference call. At this time, all participants are in a listen-only mode. Please note this call is recorded. I will be standing by if you need any assistance. It is now my pleasure to turn the conference over to Mr. Chris Nugent.

Thank you, Shelby. Good morning, everyone, and welcome to Lowe's Corporation's third quarter earnings conference call. A copy of our earnings release and investor presentation may be found on our website, Lowes.com. On the call this morning, we will have our Chief Executive Officer, Jim Tisch, and Chief Financial Officer, Jane Wong. Following our prepared remarks this morning, we will have a question and answer session with questions from our shareholders. Before we begin, however, I will remind you that this conference call may 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 statement 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 the call today, we may also discuss non-GAAP financial measures. Please refer to our security filings and investor presentation 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, Chris, and good morning. Before I discuss our financial results, I'd like to tell you about some executive changes that are taking place at Lowe's Hotels. On January 1st of next year, John Tisch will become the executive chairman of Lowe's Hotels, and Alex Tisch will assume the role of president and CEO. John will also continue to be a member of the Office of the President of Lowe's Corp and the co-chairman of the Lowe's Corporation Board of Directors, along with Andrew Tisch. In his 43 years at Lowe's Hotels, John has engineered the company's expansion and emergence as a leading hotel business. In particular, John was instrumental in building Lowe's Hotels' longstanding partnership in Orlando with Universal Studios, while also having the foresight to develop the iconic Lowe's Miami Beach Hotel. As a result, Lowe's Hotels now has nearly 10,000 rooms in the sought-after Florida market. Additionally, John created a corporate culture that places a high value on empowering team members, satisfying customers, and contributing to communities. John has successfully guided the company through several of the most turbulent periods in the hospitality industry, most recently the COVID pandemic. Lowe's Hotels is now stronger than it has ever been, as evidenced by the company's outstanding financial results. We are deeply grateful for John's contributions to the company and his continued presence will be of tremendous value to Lowe's Hotels. Alex Tisch joined Lowe's Hotels in June of 2017 after working at Lowe's Corp since 2008. Over the last five years, Alex has been instrumental in the creation and execution of the company's highly effective growth strategy and has proven himself to be a dynamic leader and a talented hotel executive. Alex oversaw the development of Lowe's Hotels' 800-room property in Kansas City and was integral in developing key partnerships, such as the company's partnership with the city of Arlington, Texas. I'm confident that Alex will continue to chart a course for sustained growth at Lowe's Hotels, and we are excited to welcome him into this new leadership role. Moving on to our third quarter financial results, Our subsidiaries performed very well this quarter, which led to good consolidated results for the company. Before we discuss the financials, I'd like to acknowledge our employees who were impacted by Hurricane Ian and thank them for their strength and dedication during these trying times. In particular, I want to give a big shout out to the almost 2,000 employees who moved into our properties in Orlando in order to help our approximately 20,000 guests and displaced residents on the Universal Campus who are fleeing the storm. Thank you very much, guys. I'm happy to report that Lowe's Hotels experienced minimum financial impact from Hurricane Ian. Both leisure and group travel have bounced back dramatically from the pandemic levels, and the company continues to benefit from its five resort and convention properties that opened during the past few years. Very soon, we'll be able to add the Lowe's Carl Gables Hotel to that list. The new property will formally open in November, adding to Lowe's Hotels' presence in South Florida. With the addition of Carl Gables, the company will have approximately 16,500 guest rooms. Lowe's Hotels has adjusted EBITDA for the third quarter with $77 million. up $18 million compared to the third quarter of 2021. And for the nine months ending September 30th, Lowe's Hotels reported $261 million of adjusted EBITDA, which is higher than the company's pre-COVID full-year 2019 adjusted EBITDA of $227 million. In Texas, construction continues on schedule and on budget for the nearly 900-room Lowe's Arlington Hotel, Related to open in the first quarter of 2024, this property epitomizes Lowe's Hotel's strategy of owning and operating hotels with high-quality meeting and event space that also have built-in demand generators. The Lowe's Arlington will be within walking distance of three professional sports and performance venues, as well as the National Medal of Honor Museum, among other attractions. We remain committed to growth in this area of the hotel and hospitality industry. Moving on to CNA, CNA's core income of $213 million during the third quarter includes $87 million in pre-tax catastrophe losses related to Hurricane Ian. Results continue to be strong, with CNA reporting an underlying combined ratio of 91.1 during the third quarter. CNA's all-in combined ratio, including catastrophe losses, was 95.8, an improvement of 4.2 points over the prior year. Net written premiums grew by 8% due to improved retention and new business. Despite CNA's stellar performance over the past several years, we believe the company still trades at a substantial discount to its peers. Furthermore, I believe the property and casualty insurance industry itself is undervalued by the market. While the S&P 500 trades at around 17 times 2022 earnings, the commercial P&C insurance industry trades in the low double digits. In a show of support for CNA, its strategy, and its management team, in the third quarter, Lowe's bought about 670,000 shares of CNA common stock for approximately $26 million. As for Boardwalk Pipelines, the company continues to perform well and grow revenue. We look forward to the resolution of our litigation, whose appeal is currently pending in the Delaware Supreme Court. That case was heard on September 14th. We continue to have every hope that this case will be resolved positively by the end of this year. If you'd like to know more about our thoughts on the boardwalk litigation, I refer you to my remarks from the first quarter earnings call of this year. Our plastic packaging company, Altium, completed the $270 million acquisition of Plastic Industries in the second quarter, which was funded with $150 million of equity, including $79 million from Lowe's, and $120 million of debt. Plastic Industries is a blow molding packaging manufacturer that was headquartered in Nashua, New Hampshire. Altium purchased the company for approximately nine times EBITDA, and we anticipate that that multiple will be several turns lower after operational synergies are realized. Concerning shale repurchases, from July 29th The last day we reported share repurchases until today, we have repurchased approximately 3.5 million shares of Lowe's common stock for $193 million. Year to date, we've bought back 4.5% of our outstanding shares for $652 million. Since we believe that Lowe's trades at a significant discount to our view of its intrinsic value, we are very enthusiastic about purchasing our shares at these levels. However, with the boardwalk litigation pending, we believe it's prudent to moderate our share repurchase activity until the case is fully resolved. Finally, we understand that most of you are reading a transcript of this call as opposed to listening to the live broadcast. For this reason, we are considering simply posting a transcript and discontinuing the call in the future. We welcome your feedback on this option. Thank you and stay tuned for more details. And now I'd like to hand the call over to our CFO, Jane Wong.

Thank you, Jim, and good morning, everyone. For the third quarter of 2022, Lowe's reported net income of $130 million, or 54 cents per share, compared to the net income of $220 million, or 85 cents per share, in last year's third quarter. This year-over-year decrease was driven mainly by CNA's lower net investment income and higher investment losses. While Hurricane Ian impacted C&A and hotels, both companies posted another quarter of strong profitable growth. Boardwalk continued its consistent, robust performance, and the Lowe's parent company navigated through volatile equity capital markets. Book value per share declined from $71.84 a year in 2021 to $58.14 at the end of the third quarter. due to the effect of higher interest rates lowering the market value of CNA's fixed income investments. Excluding accumulated other comprehensive income where this unrealized loss sits, book value per share actually increased from $71.09 a year end to $74.11 on September 30th. This increase was driven by our current year's earnings and accretive share repurchases. Turning to our largest subsidiary, CNA contributed a net income of $115 million to Lowe's this quarter, compared to $229 million last year. The year-over-year decline primarily reflects a $68 million decrease in net investment income attributable to Lowe's, driven by lower net investment income from LPs and common stocks, partially offset by higher earnings from the fixed income portfolio. During the third quarter, LPs and common stocks together returned negative 2.1%, versus the S&P 500, which had a negative 4.9% return. In comparison, in last year's third quarter, LPs and common stocks returned a positive 3.8%. In addition, investment gains and losses declined, driven in part by realized losses from the sale of short-dated bonds to strategically buy longer-dated bonds at higher rates. On the underwriting side, CNA again posted another quarter of strong profitable growth, contributing $61 million of incremental underwriting income to Lowe's. Net written premiums grew 8%, driven by several factors. First, new business grew by 12%. Second, retention increased four points to 85%. And third, while net written rate increases decelerated to 5%, exposure growth has increased to 3.3%. The all-in combined ratio of 95.8% was 4.2 points better than the third quarter of 2021. This included 5.5 points of catastrophe and 0.8 points of favorable development. So the underlying combined ratio was 91.1%, flat to last year's third quarter. Underwriting actions and incremental reinsurance have served CNA well. Even with the $87 million impact from Hurricane Ian, catastrophe losses were lower year over year, as last year's quarter was impacted by Hurricane Ida and incremental losses from Winter Storm Yuri. The expense ratio was steady at 30.8%. In the life and group segment, CNA continues to proactively manage its runoff long-term care business. The annual gross premium reserve valuation performed in the third quarter resulted in an increase in the active life reserve margin from $72 million last year to $125 million this year. The long-term care claim reserve review also resulted in a pre-tax net reserve release of $25 million. We are highly confident in CNA's prudent reserving philosophy in active management to further reduce the risk profile of this block. CNA's unrealized loss position has increased to $4.1 billion from $1.8 billion last quarter as higher interest rates and wider spreads continue to lower the market value of CNA's fixed income investments. As we discussed last quarter, this decline does not imply any deterioration in the credit quality of the portfolio. In fact, the increase in rates is favorable. as CNA is able to continue reinvesting at higher rates while also extending the duration of the life and group portfolio. These are the highlights of CNA's performance this quarter. Please refer to CNA's investor relations website for more details on their quarter. Moving to our natural gas pipeline business, BoardWalk contributed EBITDA of $192 million this quarter compared to $184 million last year. Revenue increased due to recently completed growth projects, higher recontracting rates, and higher utilization of its pipeline and storage assets. That revenue growth has been largely offset by higher costs for maintenance projects due to revised pipeline safety requirements. The decrease in net income from $38 million in last year's third quarter to $34 million this quarter was driven by higher depreciation expense from recently completed projects. and a $5 million impairment due to the retirement of an old asset. Turning to Lowe's Hotels. Despite facing Hurricane Ian at the end of September, the company had another strong quarter, growing adjusted EBITDA from $59 million in last year's third quarter to $77 million in this year's third quarter. As a reminder, adjusted EBITDA is reconciled in our investor presentation posted to the website. The company contributed $25 million of net income to Lowe's this quarter versus $13 million in the third quarter of last year, driven by continued strong performance across the board due to robust leisure demand, a significant pickup in group travel, and the return of business travel. Occupancy has increased from 71.5% in last year's third quarter to 84.7% this quarter. The financial impact from Hurricane Ian was very minimal. Wrapping up with the corporate segment, Lowe's recorded an after-tax impairment loss of $15 million in the quarter compared to a $23 million loss in the prior year's quarter. Both losses were driven by declines in our equity portfolio. The corporate segment also includes our proportionate share of Altium's earnings, which is accounted for under the equity method. Our share of Altium's income improved this quarter, driven by a favorable lag in passing through lower resin prices versus last year's quarter, where increasing resin prices resulted in an unfavorable resin lag. Pricing initiatives helped to offset inflationary cost pressures and lower volume demand. From a cash flow perspective, we received $97 million in dividends from CNA this quarter and $778 million year-to-date consisting of three regular quarterly dividends of $0.40 per share and a special dividend of $2 per share. Since June 30th, we have repurchased an incremental 4.8 million shares of Lowe's at a cost of $268 million. That brings our total year-to-date share repurchases through last Friday to 11.2 million shares at a total cost of $652 million. As Jim mentioned, we also purchased 670,000 shares of CNA for a total of $26 million. Lowe's ended the quarter with $3.2 billion in cash and short-term investments. The majority of these funds are held in Treasury bills, and less than 20% are held in equities and limited partnerships. I will now hand the call back to Chris.

Thank you, Jane. Moving on to the Q&A portion of the call, we have a number of questions from our shareholders. Every quarter, we encourage shareholders to send us questions in advance that they would like us to answer on our earnings call. Our first question is for Jane. Jane, Jim provided an update on the BoardWalk litigation and referred us to his prior comments earlier in the year. Are you able to give us any further updates on this litigation?

Well, as Jim mentioned, we argued our case before the Delaware Supreme Court on September 14th. We really appreciate the support of our legal team of advisors, and along with them, we're hopeful that a decision will be released by the end of the year.

Thanks, Jane. Our next question is for Jim. Jim, does Alex's promotion to president and CEO of Lowe's Hotels signal any shift in Lowe's Hotels' strategy?

No, there is no change in Lowe's Hotel's strategy. The leadership change is seamless and will support the hotel company's current growth strategy. Let me repeat, that strategy is based on two core pillars. First, catering to group travel at high-quality destinations. And second, developing and operating hotels in immersive destinations. The first pillar focuses on hotels with 300-plus keys and ample meeting space that also offer a unique experience to attract group and transient customers alike. We are very encouraged by the recent pickup in group travel at these locations and all our locations with significant meeting space. The properties that Lowe's Hotels owns in partnership with Universal Orlando are a great example of the second pillar of the Lowe's Hotel strategy, immersive destinations with built-in demand generators. The Universal Orlando partnership has been highly successful, spanning more than two decades and currently including eight hotels with 9,000 rooms. Regarding Alex, he assumed the position of president in September of 2020 and has been instrumental in executing the strategy that I just laid out and is driving our strong results for Lowe's Hotels. Under his leadership, Lowe's Hotels strengthened the partnership with Universal and made advances in leveraging data analytics to drive growth. His promotion recognizes the many contributions he's made over the last several years and reflects our confidence in his ability to lead those hotels' future growth.

Thank you, Jim. Our final question is also for you. Would you like to update us on your thoughts about interest rates, inflation, and the economy as we head into the final quarter of 2022? Sure.

When I started sharing my observations about inflation and the economy in the first quarter of 2021, it was very obvious, at least to me, that the Fed should be tightening monetary policy. At that time, the economy was running very hot and interest rates were ridiculously low. Twelve months ago, year-over-year CPI was running at over 5%. And so far this year, it's running at over 8%. At the end of the first quarter of this year, the Fed abandoned the word transitory and finally kicked into gear. The Fed started to steadily increase the Fed funds rate and more recently to shrink its balance sheet. In the past seven months, Fed funds have moved from almost zero to more than 3% with expectations of another 125 basis point increase in the next two months. And the bond market, as exemplified by the 10-year note, has moved smartly higher from 1.5% at the beginning of this year to around 4% now. There's no doubt in my mind that the rate increases we have seen in the past year will translate into a slower economy and likewise a reduction in the inflation rate. Home mortgage rates have moved up from 3% at the beginning of the year to over 7% now. This increase in mortgage rates means that the monthly cost of buying a new home has more than doubled in the past 10 months. As a result of the increase in the cost of home ownership, we will begin to see a significant reduction in home prices and the fall in the number of housing starts will continue to accelerate, all leading to a weakening GDP. Likewise, other sectors of the economy will react negatively to higher interest rates as well. So far, we haven't seen that reduction in inflation. But as you know, inflation tends to respond to increases in interest rates with a lag. And my guess is that the end of that lag is almost upon us. So I would expect to see weaker GDP numbers in the coming quarters. along with a slowing of inflation as measured by the CPI. In the meantime, a number of commodity prices are declining as a result of tightening by the Fed. Copper prices are down 25%. Lumber prices are down almost 60% from their highs in March. And oil prices are almost 30% from their peak in June. In my mind, the easy part of the Fed's tightening process will be complete by the end of the year. At that point, the Fed funds rate will be over 4%, and the Fed will have clawed back some of their inflation-fighting credibility. The big question for everyone is whether the increases in short rates in 2022 will be enough to quell inflation or whether the Fed will feel it has to continue to raise short rates in 2023. I'm not alone in my opinion that the Fed should pause at the beginning of 23 and see how effective their tightening has been. They will still be in quantitative tightening mode, which means they will be selling term government securities at a rate of more than a trillion dollars a year. And as I said before, the lags in Fed policy are unknown even to the wisest economists. Additionally, over tightening by the Fed can cause a financial calamity that makes a recession much worse. So it would not be unreasonable for the Fed to say after their December FOMC meeting that they will be pausing rate hikes for three months to assess the effects of their 400 basis point increase in short rates. They can warn that if inflation does not begin to come down in that period, tightening will continue. but I expect we will see a slowing of economic indicators and a reduction in the rate of increase in prices. In terms of my fearless forecast, as I said previously, I foresee what I call a full employment recession, whereby economic growth will be negative for a few quarters, but unemployment will remain below 5%. This can happen because labor will be earning less than the rate of inflation, so that workers collectively will have less real income, which will be the cause of the recession. I don't think the recession will be cataclysmic like in 08 and 09. While government spending has been enormous in the past two years, we don't have the private sector excesses that can cause a deep and extended recession. I know I've changed my view of the Fed in the past year and a half, but that's because eight months ago, the Fed finally became serious about fighting inflation, and they are now on the path to a slowing economy and reduced inflation. As I said, I feel a pause in tightening short-term rates at the beginning of 2023 is warranted, and hopefully the Fed won't be badgered into excessive tightening, which could have serious negative ramifications for the economy. If they were to follow my advice, the Fed should make clear that it is pausing the move to higher short rates in order to evaluate the economy for a few months before possibly resuming tightening if necessary. So that's the way I see things as of now. Stay tuned next quarter for any changes or reactions to the ensuing events that I may have.

Thank you, Jim. We have no further questions, so that concludes our call for today. As always, we appreciate your continued interest. Please feel free to reach out to me with any questions. My email is cmugent at lowes.com. A replay of this call will be available on our website, lowes.com, in approximately two hours. Thank you again. You may now all disconnect.

That concludes today's teleconference. Thank you for your participation. You may now disconnect.