Icahn Enterprises LP

NASDAQ:IEP

Earnings Call Transcript 2020-Q1

[Operator]

Good morning, and welcome to the Icahn Enterprises L.P. Q1 2020 Earnings Call with Jesse Lynn, General Counsel; Keith Cozza, President and CEO; and SungHwan Cho, Chief Financial Officer.

I would now like to hand the call over to Jesse Lynn, who will read the opening statements.

[Jesse Lynn, General Counsel]

Thank you, operator. 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.

Forward-looking statements may be identified by words such as expects, anticipates, intends, plans, believes, seeks, estimates, will, or words of similar meaning and include, but are not limited to, statements about the expected future business and financial performance of Icahn Enterprises L.P. and its subsidiaries.

Actual events, results and outcomes may differ materially from our expectations due to a variety of known and unknown risks, uncertainties and other factors that are discussed in our filings with the Securities and Exchange Commission, including economic, competitive, legal and other factors, including related to the severity, magnitude and duration of the COVID-19 pandemic. 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 now 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 2020 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 2020, we had a net loss attributable to Icahn Enterprises of $1.4 billion, or $6.34 per LP unit, compared to net loss of $394 million, or $2.02 per LP unit in the prior year period. The loss was primarily driven by investment losses at both the Investment and Holding Company segment.

Adjusted EBITDA attributable to Icahn Enterprises for Q1 2020 was a loss of $1.3 billion, compared to a loss of $195 million in Q1 of 2019. Our Investment Funds earned a negative return of 17.6% in Q1 of 2020, compared to a negative return of 5.8% for Q1 of 2019.

Performance was negatively impacted by certain large long equity positions, which were disproportionately impacted by the COVID-19 pandemic, offset by significant gains in our short equity and credit index positions.

Net sales for our Energy segment decreased by $356 million for Q1 of 2020 compared to the prior year period. Our Petroleum segment within CVR Energy was negatively impacted by the global crude oil price war, lower throughput volumes due to the planned turnaround at the Coffeyville refinery and unprecedented refined product demand destruction caused by the COVID-19 pandemic.

CVR completed a $1 billion senior unsecured notes offering in January, refinancing $500 million of existing senior unsecured notes and adding $500 million of cash to the balance sheet.

Net sales and service revenues for our Automotive segment were $635 million for Q1 of 2020. The COVID-19 pandemic and the impacts of the actions taken by governments and others have significantly contributed to the decline in revenues, in particular, the automotive services revenue and commercial sales revenue, which until recently, were experiencing growth on an organic basis.

Icahn Automotive Group continues to push forward with a multi-year transformational plan to restructure the operations and improve profitability.

During Q1, IEP issued $850 million of add-on 2024 and 2027 senior notes and paid down $1.35 billion of senior notes due 2022. Total debt outstanding at the holding company now stands at $5.8 billion.

We closed the quarter with a strong liquidity position and are actively pursuing a number of opportunities, resulting from various market and economic dislocations.

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. For Q1 2020, net loss attributable to Icahn Enterprises was $1.38 billion, as compared to net loss of $394 million in the prior year period.

As you can see on Slide 5, in 2020, the performance of our investment funds and holding company investments was a significant driver of our net loss for the quarter. Adjusted EBITDA attributable to Icahn Enterprises for Q1 2020 was a loss of $1.3 billion, compared to a loss of $195 million in the prior year period.

I will now provide more detail regarding the performance of the individual segments. Our Investment segment had a loss attributable to Icahn Enterprises of $926 million for Q1 2020. The Investment Funds had a negative return of 17.6% in Q1 2020, compared to a negative return of 5.8% for Q1 2019. Long positions had a negative performance attribution of 46.7% for the current quarter, while short positions and other attributes had a net positive performance attribution of 29.1%.

Since inception in November 2004 through the end of Q1 2020, the Investment Funds gross return is 66%, or 3.3% annualized. The Investment Funds continued to be hedged. At the end of Q1 2020, the funds were net short 73%, compared to net short 56% at the end of Q4 2019. Our investment in the funds was $4.4 billion as of March 31, 2020. Subsequent to the quarter-end, we redeemed $250 million from the fund.

And now to our Energy segment. For Q1 2020, our Energy segment reported net sales of $1.1 billion and consolidated adjusted EBITDA loss of $38 million, compared to net sales of $1.5 billion and consolidated adjusted EBITDA of $230 million for the prior year period. The combination of lower throughput volumes as a result of the planned Coffeyville turnaround, the dramatic decline in crude oil prices and the cost in product demand due to COVID-19 pandemic, all severely impacted our results for the quarter.

Refining margin per barrel was $1.52 in the first quarter of 2020, compared to $16.55 during the same period in 2019. The refining margin was significantly impacted by dramatic drop in crude oil pricing during the quarter, that led to an inventory valuation impact of $136 million. In addition, domestic crude differentials were tighter due to the start of new pipelines from West Texas to the Gulf Coast.

Excluding the impact of inventory valuation adjustments, refining margin per barrel was $11.06, compared to $14.87 in the prior year. Petroleum EBITDA without the inventory valuation adjustment was $59 million, compared to $177 million in the prior year.

CVR Partners reported Q1 2020 EBITDA of $11 million, compared to $26 million for Q1 2019. CVR Partners experienced 10 days of unplanned downtime. The Q1 decline in EBITDA was primarily due to lower price for ammonia and UAN. Near-term outlook is positive with a strong start to the spring planting season.

CVR Energy successfully raised $1 billion of new debt in January and used $500 million of the proceeds to redeem existing debt. Cash at the end of Q1 stood at $805 million. In light of the volatility and uncertainties facing the U.S. refining industry, CVR has taken several actions. It is running its refineries at minimum rates and will adjust production up and down depending on the environment.

CVR is targeting $50 million of expense reductions for the year. CVR has canceled or deferred capital expenditures and is reevaluating its investments in light of the current environment. CVR Energy also reduced its dividend to $0.40 per unit. Liquidity remains very strong and CVR’s Board will continue to evaluate the appropriate level of dividends going forward.

Now turning to our Automotive segment. Q1 2020 net sales and service revenues for Icahn Automotive Group were $635 million, down $58 million from the prior year period, with $14 million of the decline related to store closures and the remainder related to sales slowdown in March due to COVID-19. Q1 2020 adjusted EBITDA was a loss of $42 million, compared to a loss of $23 million in the prior year.

Icahn Automotive Group continues to push forward with a multi-year transformational plan to restructure the operations and improve profitability. The company has been closing parts stores in select markets in 4Q 2019 and was making progress on the separation of the two businesses.

Due to the COVID-19 pandemic, Icahn Auto has accelerated closures of parts stores that were scheduled for later in the year. In addition, the company has adjusted store hours and staffing to match reduced demand, implemented significant cost savings measures at corporate functions and reduced capital spending to minimum levels.

Now, turning to our Food Packaging segment. Q1 2020 net sales increased by $3 million, or 3%, and consolidated adjusted EBITDA increased by $3 million, compared to the prior year period.

Net sales increased due to volume increases, offset in part by unfavorable effects of foreign exchange and price and product mix. Demand for Viskase casing products remains strong and is seeing increased global demand related to the COVID-19 pandemic.

And now to our Metal segment. Q1 2020 net sales decreased by $7 million and adjusted EBITDA was flat at $2 million compared to the prior year period. Net sales were impacted by lower market selling prices for most grades of metals due to unfavorable market conditions that offset an increase in shipping volumes.

And now to our Real Estate segment. Q1 2020 net operating revenues increased by $1 million, or 5% compared to the prior year. Adjusted EBITDA for the quarter decreased by $1 million compared to the prior year period. Revenue from our real estate operations for both Q1 2020 and Q1 2019 were substantially derived from income from club and rental operations. The Real Estate segment generated $5 million of adjusted EBITDA, compared to $6 million in the prior year period.

Now turning to Home Fashion. Q1 2020 net sales were up 28% compared to the prior year period. WestPoint’s higher sales volume was attributable to the VSS acquisition in Q2 2019, offset in part by lower organic net sales.

As previously disclosed, the VSS acquisition strengthens WestPoint’s focus in the institutional and hospitality business and extends its addressable market to international markets outside of the U.S.

WestPoint achieved break-even EBITDA in Q1, compared to losing $2 million in the prior year. Early in the COVID-19 process, WestPoint started producing and donated non-medical facemask to frontline personnel and continues to see strong demand for this new product line.

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 2020 cash, cash equivalents, our investment in the Investment Funds and revolver availability totaling approximately $7.3 billion. Our subsidiaries have approximately $941 million of cash and $583 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 maintaining ample liquidity to enable us to capitalize on opportunities within and outside of our existing operating segments.

Thank you. Operator, can you please open the call for questions?

[Operator]

[Operator Instructions] Our first question comes from the line of Nathaniel August from Mangrove. Your line is now open.

[Nathaniel August, Mangrove Partners]

Hi, thank you for taking my questions today. I had a couple. The first is, if you could please comment on Investment Fund performance in April, because, obviously, the markets bounced back, but it does seem like you’re running net short. And so it’s hard for me to get a beat on how April might have gone for you?

And then the second question was that, I saw that holding company cash relative to the prior period declined by about $1.5 billion. And it looks like about a third of that decline was attributable to a reduction in debt. But I was hoping you could expand on where the remainder of that decline was, whether you were supporting portfolio companies or adding to the investment portfolio, or sort of where that – where we can account for that? Thank you.

[Keith Cozza, President and Chief Executive Officer]

Yes, sure. Hey, it’s Keith, thanks for the questions. Yes, so I don’t want to get into the exact specific number. But I’ll just say that, April did receive a significant bounce back. And I think the way you can think about April, despite the fact that we are net short is, if you look at our 13F and you look at our investor presentation, you can see what our top five long positions are.

And so in the month of April, some of them bounced back anywhere from 50% to over 100%, when you look at names, like Caesars and names like Occidental Petroleum itself. So April’s performance was quite strong. But again, it’s a very volatile market. So we’ll look forward to updating everybody with final Q2 performance at the end of the quarter, but I would just give the commentary that April had a significant bounce back.

Sung, did you want to take the second question?

[SungHwan Cho, Chief Financial Officer]

Yes. And on the cash, there’s primarily two things going on. One is, we previously disclosed that, at the beginning of the quarter, we invested $1 billion of the cash into the Investment segment. And so $1 billion of cash went into the Investment segment. And then two, the other major thing impacting the cash is the net impact of the debt refinancings. And so, we raised an additional $1.35 billion of debt and then paid off $1.85 billion of debt. So it’s a net reduction of around $500 million.

[Nathaniel August, Mangrove Partners]

That’s really helpful. Thank you very much.

[Operator]

Thank you. Our next question comes from the line of [Lloyd Emery] [ph] from Yellow Street – Yellow Systems. Your line is now open.

[Unidentified Analyst]

Good morning. With the advent of electric vehicles coming soon, what are your thoughts regarding the cost of petroleum going down? My second question is, you pay a very high dividend. Where does the money come from at 16%? Thank you.

[Keith Cozza, President and Chief Executive Officer]

Sure. So I think on the first question, it’s all – it all depends on your view of how quickly electric vehicles are going to gain mass penetration. I think, generally, our firm does not believe that, that is going to – that’s going to take a very long time, probably longer than most forecasts are currently showing.

But I would never be foolish enough to try to predict where the price of oil is going. I mean, you can – you see a lot of production is being shut in. And that should help balance things out from supply and demand, but we’ll have to see. But we’re not overly concerned about electric vehicle penetration in the short-term here.

As far as our dividend, again, we elect – the money obviously comes from the company, but – and out of our ultimate net asset value, but we give shareholders the right to take cash or stock. And so, our largest shareholder over the years has taken stock, which has made the cash portion of the dividend relatively low in prior years. So it’s fairly manageable. So I think to answer your question is, it comes out of our cash balance, which is significant.

[Unidentified Analyst]

Thank you.

[Operator]

Thank you. [Operator Instructions] Our next question comes from the line of Dan Fannon from Jefferies. Your line is now open.

[Dan Fannon, Jefferies & Company, Inc.]

Hey guys, good morning. So I did want to follow-up a bit on the last question just with regards to the the capital coming up from your existing portfolio companies. And I think you mentioned the cutting of the dividend at CVR, which I think $0.40. But just curious across the various segments, what is paying up to IEP from a stated dividend outside of – obviously, I know you have access to all the – some of it’s fungible. But just from a payout ratio, what today is coming up from any of the existing subsidiaries?

[Keith Cozza, President and Chief Executive Officer]

Yes. I think just based on today, it’s the CVI, which you flagged – CVR Energy, which you flagged, which is currently $1.60 a year. And our real estate portfolio tends to kick off a significant amount of cash flow. I don’t know if we have an estimate on that, but it’s really going to be the Real Estate segment and CVR currently.

[Dan Fannon, Jefferies & Company, Inc.]

Okay. And from a liquidity perspective, some of the stats you guys gave just in terms of what you have access to and where you sit is obviously quite large or healthy. And so, I know you’re not going to tell us what you’re going to invest in. But I guess, how aggressive are you thinking about deploying capital in this type of market, given – even though we’ve snapped back, there are certainly still are some dislocations in the markets and opportunities.

So just curious about your guys’ investment outlook in terms of what you – how excited you are about this environment or how cautious you may be? Obviously, we know you’re – you’ve shortened the fund and you have a hedge, but there are obviously a lot of other sectors in the private side and other areas where you could be investing?

[Keith Cozza, President and Chief Executive Officer]

Yes. So I think, Dan, we’re looking at – we’re – I’d say, we’re sort of always cautious, right? And obviously, the economic outlook is a lot worse than we last spoke. But I think we’re still finding pockets of areas to invest and we’re really optimistic on some of our existing positions.

But as you saw in Q1, this is out there in public, obviously. But when the Russia, Saudi price war broke out on oil, we took advantage of some dislocation – what we view as dislocation and ramped up our position in Occidental and then ultimately worked out a deal and got some board seats. And so we’re picking spot.

We’re certainly picking our spots, so to speak, and finding areas that we think are going to really provide really robust long-term returns. But yes, you got to be careful. We’re still net short at the end of the quarter and currently. And we’re always interested in protecting our capital while pushing forward with some of the core names that we think we can be the catalyst to unlock some value. So, short answer is, we’re finding some pockets here and there.

[Dan Fannon, Jefferies & Company, Inc.]

Understood. And just on the net short position, has anything changed with regards to getting more specific on – excuse me, your industries or stocks or is it still more kind of macro market futures and options that you’re using on that short side?

[Keith Cozza, President and Chief Executive Officer]

It’s primarily the way you described it, I’d say, more broad-based index hedges. But primarily, I should say, we’re – we have been shifting portions of it. I wouldn’t call it overly material, maybe 10% to 15%. We’ve been shifting more towards sort of high beta, high-multiple single name stocks that we have directional view on that, we just think maybe valuation has gotten way ahead of itself.

So are starting to find a little bit more than usual. As I think about over the last few years and pivoting a little bit more from index broad-based to single names, but it’s still majority index-based trying to hedge out the macro.

[Dan Fannon, Jefferies & Company, Inc.]

Got it. And then just one more. This is kind of a random question. But Carl has been on TV and some places talking about, over time, that ETF market and fixed income and some of the concerns. I guess, any updates, just given what we’ve gone through in terms of the fixed income market and some of the high-yield or any of the asset classes and how they performed during this last kind of 70 weeks?

[Keith Cozza, President and Chief Executive Officer]

Yes. Look, I mean, I – Carl has done a really good job of outlining in several different interviews. One of the better opportunities he viewed in the marketplace, that has been a trade that he – we formed as a firm a thesis on. I’d say, about two years ago, on some of the commercial real estate and particularly malls, being tremendously overvalued and the security is being dramatically mispriced. And obviously, that thesis is playing out.

But what’s sort of interesting and why the trade has sort of accelerated is that, besides the malls, which obviously have a lot of problems, these indexes that he has been referencing, have a lot of other loans in it unrelated to malls that have now – that have now have a tremendous amount of risk of loss that were never even on the radar of anybody of potentially having – suffering losses in these commercial mortgage-backed securities. They all like office buildings, like hotels, and a lot of those are in play now, too. And the losses are going to be significant. So, that’s been one of the better trades. It’s helped contribute to performance and we think it has a way to go.

[Dan Fannon, Jefferies & Company, Inc.]

Great. I appreciate all the answers. Thank you.

[Keith Cozza, President and Chief Executive Officer]

Yes. Thanks.

[Operator]

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

[Robert Sullivan, MidOcean Partners]

Hi. I was wondering if you could just generally give an update on the Automotive Group, just in terms of store closures, in terms of what level of activity that you’ve seen just with the broad business slowdown? And I was wondering, just generally, where you think we are in terms of kind of getting that back to positive EBITDA?

[Keith Cozza, President and Chief Executive Officer]

Yes. So in terms of the closures, so just to remind you, many of our stores have both parts and service within the same building. And the – what we’re doing right now is, we’re closing just the part side of that business and the service side of that building remains open.

So, I’d say, we’ve closed around – within the Pep Boys chain around roughly 200-ish of the part stores and the service size – the service side remains open. And we’ve been bringing a lot of that inventory back into the DCs and recirculating it throughout the remaining stores that we do keep in the core and denser markets that we have.

In terms of overall kind of market dynamics, I’d say, we’re in line with other players in the automotive kind of aftermarket industry. In most jurisdictions, the auto – the parts distribution and service were considered essential services, so many of our stores did not – most of our stores did not close, but demand goes down significantly. And towards the end of March, demand was down roughly 40%-ish year-over-year.

So, that’s why it was important to adjust staffing and adjust store hours to match that reduced demand. I’d say, since then, demand has significantly recovered, as different geographies around the country lift the stay-at-home orders, but it’s still down from last year.

[Robert Sullivan, MidOcean Partners]

Gotcha. And what’s just your broader outlook in terms of how long it’s going to take to kind of get that segment? I mean, I understand COVID is taking a significant detour on this, but in terms of just a broader revitalization of the segment and turnaround?

[Keith Cozza, President and Chief Executive Officer]

Well, I think, the service side is actually doing – was doing really well before the whole crisis hit. And there, I think, we’re going to see actually maybe some pent-up demand throughout the rest of the year. So, we’re pretty optimistic on the service side and the ability to recover there and show some growth in – when we get out of the pandemic crisis.

And on the parts side, we’re still – with our new footprint, we’ve got to optimize the supply chain and optimize the back-office, in order to be rightsized for the new footprint of the stores that we have. And so that’s going to be through probably early next year in order to get that done.

[Robert Sullivan, MidOcean Partners]

Okay. Thank you very much.

[Operator]

Thank you. I currently have no more questions in queue.

[Keith Cozza, President and Chief Executive Officer]

Okay. Thanks, everybody, for joining us. We appreciate your interest in Icahn Enterprises, and we’ll look forward to talking to you about Q2 results in the summer. Have a good day.

[Operator]

Ladies and gentlemen, this concludes today’s conference call. Thanks for participating. You may now disconnect.