Icahn Enterprises LP

NASDAQ:IEP

Earnings Call Transcript 2019-Q1

[Operator]

Good morning and welcome to the Icahn Enterprise LP Q1 2019 Earnings Call with Jesse Lynn, General Counsel; Keith Cozza, President and CEO; and SungHwan Cho, Chief Financial Officer.

As a reminder, this conference call is being recorded. I’d like to hand the call over to Jesse Lynn who will read the opening statements.

[Jesse Lynn, General Counsel]

Thank you, operator. Good morning. The Private Securities Litigation Reform Act of 1995 provides a Safe Harbor for forward-looking statements we make in this presentation, including statements regarding our future performance and plans for our businesses and potential acquisitions. These forward-looking statements involve risks and uncertainties that are discussed in our filings with the Securities and Exchange Commission including economic, competitive, legal and other factors.

Accordingly, there is no assurance that our expectations will be realized. We assume no obligation to update or revise any forward-looking statements should circumstances change, except as otherwise required by law. This presentation also includes certain non-GAAP financial measures. A reconciliation of such non-GAAP financial measures to the most directly comparable GAAP financial measures can be found in the back of this presentation.

I’ll turn it over to Keith Cozza, our Chief Executive Officer.

[Keith Cozza, President and Chief Executive Officer]

Thanks, Jesse. Good morning and welcome to the first quarter 2019 Icahn Enterprises earnings conference call. Joining me on today’s call is SungHwan Cho, our Chief Financial Officer. I will begin by providing some brief highlights. Sung will then provide an in-depth review of our financial results and the performance of our business segments. We will then be available to address your questions.

For Q1 2019, we had a net loss attributable to Icahn Enterprises of $394 million or $2.02 per LP unit compared to net income of $132 million or $0.74 per LP unit in the prior year period.

Adjusted EBITDA attributable to Icahn Enterprises for Q1 2019 was a loss of $194 million compared to a gain of $325 million for Q1 of 2018.

Our Investment segments had a negative return of 5.8% in Q1 2019 compared to a positive 5.3% for the prior year period. Our negative performance in Q1 2019 was driven by net losses in our short equity index positions, offset in part by net gains in our core long equity positions. The investment funds are well positioned to withstand the market correction, finishing the quarter with a net short exposure of 43%.

In our Energy segment, our Q1 2019 net sales were $1.5 billion and consolidated adjusted EBITDA was $230 million. CVR Refining had a solid first quarter led by wide Brent-WTI differentials, rising crude oil prices, hedging gains and lagging crude oil differentials. In Q1, CVR Energy purchased the remaining common units of CVR Refining, not already owned by CVR Energy, simplifying its capital structure. CVR Partners performance was impacted by weather conditions which delayed the start of the spring fertilizer application.

Net sales and service revenues for our automotive segment in Q1 2019 were $693 million compared to $686 million in the prior year period. The increase was primarily due to higher automotive service revenues, offset in part by a decrease in aftermarket part sales. As a reminder, Icahn Automotive Group is in the process of implementing a multi-year transformational plan to restructure the operations and improve profitability.

This morning we announced our intention to enter into an open market sales agreement to which IEP may sell depository units from time to time up to $400 million in the aggregate sales proceeds. The proceeds from these transactions, if any, will be used to fund potential acquisitions and general limited partnership purposes. We also believe any potential sales will strengthen our credit profile, expand our unit holder base and improve daily trading liquidity. We closed the quarter with a strong balance sheet and are actively seeking new investment opportunities.

With that, let me turn it over to Sung.

[SungHwan Cho, Chief Financial Officer]

Thanks, Keith. I will begin by briefly reviewing our consolidated results and then highlight the performance of our operating segments and comment on the strength of our balance sheet.

In Q1 2019, net loss attributable to Icahn Enterprises was $394 million compared to net income of $132 million in the prior year period. A $34 million of net income from Q1 2018 was from discontinued operations.

As you can see on slide 5, in Q1 2019, the performance of our investment funds was the primary driver of our net loss for the quarter. In addition, the decrease in the value of Tenneco stock received as a part of the Federal Mogul transaction in 2018 drove losses at our holding company level.

Adjusted EBITDA attributable to Icahn Enterprises for Q1 2019 was a loss of $194 million compared to a gain of $325 million in Q1 2018.

I will now provide more detail regarding the performance of the individual segments. Our Investment segment had a loss attributable to Icahn Enterprises of $295 million in Q1 2019. The investment funds had a negative return of 5.8% in Q1 2019 compared to a positive return of 5.3% for Q1 2018.

Long positions had a positive performance attribution of 7% for the current quarter while short positions and other expenses had a negative performance attribution of 12.8%. Since inception in November 2004 through the end of Q1 2019, the investment funds’ gross return is 124% or approximately 5.8% annualized.

The investment funds continued to be significantly hedged. At the end of Q1 2019, net short exposure was 43% compared to a net short exposure of 24% at the end of 2018. IEP’s investment in the funds was $4.8 billion as of March 31, 2019.

And now to our Energy segment. For Q1 2019, our Energy segment reported revenues of $1.5 billion and consolidated adjusted EBITDA of $230 million.

Revenues were flat with the prior year, while adjusted EBITDA improved by $25 million. CVR Refining had a solid first quarter performance led by wide Brent-WTI differentials, rising crude oil prices, hedging gains and lagging crude oil differentials. The Wynnewood refinery also completed its planned maintenance turnaround safely and on-time and under budget.

CVR Refining reported Q1 2019 adjusted EBITDA of $209 million compared to $192 million in the prior year period. Combined total throughput was approximately 213,000 barrels per day for the quarter, which was 12% higher than the prior year period. Refining margin per total throughput barrel was $16.55 in Q1 2019 compared to $17.58 per barrel in the prior year period.

CVR Partners reported Q1 2019 adjusted EBITDA of $26 million compared to $13 million in Q1 2018. Increased profitability was driven by improved pricing with UAN pricing up 45% and ammonia pricing up 14% from Q1 2018.

Sales volume was impacted by weather conditions which delayed the start of the spring fertilizer application. Demand, however, has picked up recently with the start of the spring application season.

Now turning to the Automotive segment. Q1 2019 net sales and service revenues for Icahn Automotive Group were $693 million, up 1% from the prior year. The increase was attributable to higher automotive service revenues due to do-it-for-me and fleet businesses.

Overall, parts sales were flat with a positive 6% commercial same-store sales comp, offset by weakness in DIY retail sales. Adjusted EBITDA attributable to IEP for the Automotive segment was a loss of $22 million in Q1 2019 compared to a loss of $10 million in the prior year period. Profitability was lower due to expenses related to the transformation of the business and additional costs related to the investment in the commercial business.

Now turning to our Food Packaging segment. Net sales for Q1 2019 decreased by $2 million or 2% compared to the prior year period. The decrease was primarily due to lower sales volume and an unfavorable effects of foreign exchange.

Consolidated adjusted EBITDA was $11 million in Q1 2019, which was consistent with the prior year period. Gross margin as a percent of sales was 21% for Q1 2019, which was also flat with the prior year.

And now to our Metals segment. Net sales for Q1 2019 decreased by $25 million or 21% compared to the prior year period. The net sales decrease was primarily due to lower volumes and lower average pricing for almost all product lines.

Non-ferrous shipment volumes continued to be impacted by the ongoing trade dispute with China. Adjusted EBITDA was $2 million in Q1 2019, which was $6 million below the prior year period.

And now to our Real Estate segment. Real estate operating revenues were $21 million in Q1 2019, which was $1 million below the prior year period.

Revenue from our real estate operations for both Q1 2019 and Q1 2018 were substantially derived from income from club and rental operations. The Real Estate segment generated $6 million of adjusted EBITDA in Q1 2019.

Now turning to Home Fashion. Q1 2019 net sales for our Home Fashion segment were down 7% compared to the prior year. Adjusted EBITDA was a loss of $2 million for the quarter compared to a loss of $1 million in the prior year period. Gross margin as a percent of net sales was 15% for Q1 2019 as compared to 14% in Q1 2018.

Now to our Mining segment. Our Mining segment has been concentrating on sales in Brazil. The Company has largely completed its investment to produce higher quality iron ore. The new production currently sells for significant premiums compared to the benchmark 62% ferrous iron ore.

In Q1 2019, sales increased $15 million compared to the prior year period, primarily due to iron ore price and volume increases. Consolidated adjusted EBITDA was $11 million for Q1 2019, which was $10 million higher than the prior year period.

As we announced in 2018, we entered into a definitive agreement to merge Ferrous Resources with a wholly owned subsidiary of Vale. Total consideration will be approximately $550 million, including indebtedness that will be repaid at closing. We expect this transaction to close during 2019.

Now, I will discuss our liquidity position. We maintain ample liquidity at the holding company and at each of our operating subsidiaries to take advantage of attractive opportunities. We ended Q1 2019 with cash, cash equivalents, our investment in the funds and revolver availability totaling approximately $8.1 billion. Our subsidiaries have approximately $600 million of cash and $600 million of undrawn credit facilities to enable them to take advantage of attractive opportunities.

In summary, we continue to focus on building asset value and maintain ample liquidity to enable us to capitalize on opportunities within and outside our existing operating segments. Thank you.

Operator. Can you please open the call for questions?

[Operator]

Thank you. We’ll now take questions as part of the Q&A session. First question from the line of Dan Fannon, Jefferies. Your line is open.

[Dan Fannon, Jefferies]

Thanks, good morning guys. So I just wanted to talk about the environment, I mean, you talked about being over 40% net short in the fund, but also on the market for new investment opportunities. So just want to get, I mean, as valuation where you’re concerned just over the overall market or are there certain sectors that you’re a little more bearish on. I know historically your shorts have been in high yield or other areas or certain asset classes. So just kind of want to get a broader sense of kind of your outlook.

[Keith Cozza, President and Chief Executive Officer]

Sure. Hey, Dan. It’s Keith. I would describe it as, we’re pretty cautious on overall market multiples, again, a lot of our hedging activities are through broad-based market indices like the S&P 500.

So from that perspective, we obviously have a cautious outlook on the market overall. I would opine at the same time picking – we’re trying to find our spots where we think there is undervalued situations. I mean, you saw in the first quarter, this is all publicly disclosed. We deployed over $1.5 billion into the [indiscernible] investment, it’s a situation where we think an activist can play a role and stock trading at a significant under evaluation versus the comps.

And so we’re – that’s just an example, but we’re not afraid to deploy capital in certain situations. But overall, just from a market perspective, we’re positioning the portfolio fairly conservatively, it’s been a very long bull market run here, approaching 10 years or 11 years and these things typically don’t last forever.

[Dan Fannon, Jefferies]

Yes, that makes sense. And I guess just in terms of the process and how you guys have gone through and cycled through investments previously, from the fund kind of separate category, separate segments, is there any different, is there any change in strategy. So anything if we think about the evolution of the segments and adding of a new one potentially, should it also manifest in the originally in the fund and then potentially become a wholly owned separate subsidiary?

[Keith Cozza, President and Chief Executive Officer]

Yes, I think the way to look at it is that simplistically put in non-controlling positions which in our mind are typically less than 50% ownership or lower are going to originate in the fund and – but to the extent where we obtain control by the full company, that’s when it basically gets moved out of the funds and becomes its own operating segment.

I think of it more of like the Investment segment is the 10% positions of the world. And once we kind of buy majority control of the company, which is 51% to 100%, it shifts more to a private equity model where we’re running the whole Company and that’s when it gets its own segment.

[Dan Fannon, Jefferies]

Got it, okay. That’s all my questions. Thanks.

[Keith Cozza, President and Chief Executive Officer]

Okay. Thanks, Dan.

[Operator]

Our next question comes from the line of Robert Sullivan from MidOcean.. Your line is open.

[Robert Sullivan, MidOcean]

Open market sales, stock in terms of how you’re thinking about that, is it to improve the liquidity of the stock, is it to give yourself more flexibility on the investment side for control and non-controlling investments, is it to delever, you guys are obviously sitting on a lot of cash right now. So I was a little curious in terms of what your intention was there.

[Keith Cozza, President and Chief Executive Officer]

Yes, sure. I think a number of reasons you stated are valid. So from building an even bigger war chest, we obviously endeavor to have as much firepower as possible and it could be used for potential acquisitions, new investments, but broadly speaking there is no assurances that we’ll actually sell all of that stock or we’re going to be very judicious about it, but we also think, hey, it further improves the credit profile and we’re certainly looking to expand our investor base as well as improve the daily liquidity of the underlying trading volumes. So we think it ultimately can lead the positives of all that.

[Robert Sullivan, MidOcean]

Got it. And why wouldn’t you just engage in kind of normal stock sale process in terms of how you’ve done in the past in terms of offering in a more traditional offering?

[Keith Cozza, President and Chief Executive Officer]

Well, I think we evaluate all the methodologies to effectively raise capital and we think this is a better path to give us more optionality. We don’t think – we don’t want to – in a traditional offering, I think you’ll have to sell the stock at some discount and we like the flexibility of this. So we don’t think the stock should be sold at a discount. The stock is paying $8 a year dividend, it trades under $80. So, obviously, by definition mathematically that’s greater than a 10% yield.

And if it trades lower, we like having the optionality of not selling stock and if it trades at what we think is a fair entry point or a fair level to raise capital, we may sell some stock. But doing it the traditional way generally historically required a large discount. We’re willing to do that in years past in order to get some flowed out there and try to improve the liquidity. But this we think is a better option for all unit holders.

[Robert Sullivan, MidOcean]

Okay, thanks. And final question on your 6% notes call steps down August 1st. Just wondering if you could give us a little, just in terms of how you’re thinking about that. Thanks.

[Keith Cozza, President and Chief Executive Officer]

We are aware that they step down August 1st, no internal decisions have been made, but I can obviously certainly commit that they will be paid back sometime between – I don’t expect them to be paid down earlier than August 1st, given the call premium, but I – obviously they will be paid down sometime between August 1st and maturity.

[Robert Sullivan, MidOcean]

Okay, thank you very much.

[Keith Cozza, President and Chief Executive Officer]

You’re welcome.

[Operator]

Currently, we have no more questions in queue.

[Keith Cozza, President and Chief Executive Officer]

Okay, thanks everybody. We will look forward to talking to you about second quarter results. Have a good day.

[Operator]

Thus concludes today’s conference call. Thank you for joining. Have a wonderful day. You may all disconnect.