Icahn Enterprises LP

NASDAQ:IEP

Earnings Call Transcript 2019-Q2

[Operator]

Good morning, and warm welcome to the Icahn Enterprises L.P. Q2 2019 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 statement.

[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. 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 now turn the call over to Keith Cozza, our Chief Executive Officer.

[Keith Cozza, President, CEO & Director]

Thanks, Jesse. Good morning, everyone, and welcome to the Second 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 Q2 2019, we had a net loss attributable to Icahn Enterprises of $498 million or $2.49 per LP unit compared to net income of $302 million or $1.66 per LP unit in the prior year period. The quarterly loss was primarily driven by a decline in market value of the Tenneco common stock received in connection with the sale of Federal-Mogul. Adjusted EBITDA attributable to Icahn Enterprises for Q2 2019 was a loss of $258 million compared to a gain of $335 million for Q2 of 2018.

Our Investment segments had a negative return of 3.1% in Q2 2019 compared to a positive 4.9% for the prior-year period. Our negative performance in Q2 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 continued to be defensively positioned, finishing the quarter with a net short exposure of 37%. In our energy segment, our Q2 2019 net sales were $1.7 billion and consolidated adjusted EBITDA was $273 million. CVR Energy had strong second quarter led by higher crack spreads, lower RIN prices, and increased fertilizer sales volumes and pricing.

Net sales and service revenues for our Automotive segment in Q2 2019 were $744 million compared to $737 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. Icahn Automotive Group continues to push forward with the multi-year transformational plan to restructure the operations and improve profitability.

During Q2, IEP issued $1.25 billion of new senior notes due in 2026 at a coupon of 6.25%. Subsequent to quarter-end, we paid down $1.7 billion of IEP senior notes due in 2020 with cash on hand. Total debt outstanding at the holding company now stands at $5.1 billion. Also subsequent to quarter-end, we closed on our previously announced agreement to merge Ferrous Resources with a wholly owned subsidiary of Vale. IEP received proceeds of approximately $450 million for our equity and debt interests in Ferrous Resources subject to future closing adjustments.

We closed the quarter with a strong balance sheet and continue to look for investment opportunities that align with our activist philosophy.

With that, let me turn it over to Sung.

[SungHwan Chondrodysplasia]

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 Q2 2019, net loss attributable to Icahn Enterprises was $498 million compared to net income of $302 million in the prior year period. As you can see on Slide 5, in Q2 2019, the performance of our investment funds was a significant driver of our loss for the quarter. In addition, a decrease from the value of the Tenneco stock, received as part of the Federal-Mogul transaction in 2018, drove losses at the holding company level.

Adjusted EBITDA attributable to Icahn Enterprises for Q2 '19 was a loss of $258 million compared to a gain of $335 million in Q2 2018. I will now provide more detail regarding the performance of the segments. Our Investment segment had a loss attributable to Icahn Enterprises of $148 million for Q2 '19. The Investment Funds had a negative return of 3.1% in Q2 2019 compared to a positive return of 4.9% in Q2 '18. Long positions had a positive performance attribution of 0.5% for the current quarter, while short positions and other expenses had a negative performance attribution of 3.6%.

Since inception in November 2004 through the end of Q2 '19, the Investment Funds gross return is 117% or approximately 5.4% annualized. The investment funds continue to be significantly hedged. At the end of Q2 '19, net short exposure was 37% compared to a net short exposure of 43% at the end of Q1 2019. IEP's investment in the funds is $4.6 million as of June 30, 2019. And now to our Energy segment. For Q2 '19, our Energy segment reported net sales of $1.7 billion and consolidated adjusted EBITDA of $273 million. Net sales were down 12% from the prior year period while adjusted EBITDA improved by $94 million.

CVR Refining had a solid second quarter performance led by higher crack spreads and lower RIN prices. CVR Refining reported Q2 '19 adjusted EBITDA of $216 million compared to $164 million in the prior year period. Combined, total throughput was approximately 216,000 barrels per day for the quarter, which was slightly below the prior year period. Refining margin per total throughput barrel was $15.66 in Q2 '19 compared to $14.13 per barrel in the prior year period. CVR Partners reported Q2 2019 adjusted EBITDA of $60 million compared to $26 million for Q2 '18. Increased profitability was driven by increased fertilizer sales volumes and pricing. CVR Partners created a strong distributable cash flow in Q2 '19 and declared a distribution of $0.14 per unit.

Now, turning to our Automotive segment. Q2 '19 net sales and service revenues for Icahn Automotive Group were $744 million, up 1% from the prior year period. The increase was attributable to higher automotive service revenues, partially offset by a decrease in aftermarket part sales. Higher service revenues were due to growing do-it-for-me and fleet businesses. Adjusted EBITDA attributable to IEP for the Automotive segment was a loss of $4 million in Q2 '19 compared to a gain of $10 million in the prior year period.

Profitability was impacted by margin rate contraction for services and parts businesses due to the reduction in vendor support funds and other unfavorable margin adjustments. The Auto segment is implementing a plan to separate the parts business from the service business. We have appointed CEOs for each of the parts and service businesses and established a central shared service group to support both sides. Now turning to our Food Packaging segment. Net sales for Q2 '19 decreased by $7 million or 7% compared to the prior year period. The decrease was primarily due to lower sales volume and the unfavorable effects of foreign exchange.

Consolidated adjusted EBITDA was $16 million in Q2 '19, which was down $1 million from the prior year period. Gross margin as a percentage of net sales was 23% for Q2 '19, which was flat with the prior year period. And now to the Metals segment. Net sales for Q2 '19 decreased by $37 million or 28% 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. Nonferrous shipment volumes continued to be significantly impacted by the ongoing trade dispute with China. Adjusted EBITDA was $1 million in Q2 '19, which was $7 million below the prior year period.

And now to the Real Estate segment. Real Estate operating revenues were $27 million in Q2 '19, which was $1 million below the prior year period. Revenue from our real estate operations for both Q2 '19 and Q2 '18 were substantially derived from income from club and rental operations. The Real Estate segment generated $5 million of adjusted EBITDA in Q2 of '19. Now turning to our Home Fashion segment. Q2 '19 net sales for Home Fashion were down 2% compared to the prior year period. The adjusted EBITDA was a loss of $1 million for the quarter compared to a breakeven for the prior year period. Gross margin as a percentage of net sales was 11% for Q2 '19 compared to 13% for Q2 '18. In June 2019, WestPoint acquired Vision Support Services or VSS. VSS strengthens WestPoint's hospitality and commercial focus and opens up new markets in Europe and the Middle East, and provides a global sourcing network.

Now turning to our Mining segment. In Q2 2019, sales increased $40 million as compared to the prior year period primarily due to iron ore price and volume increases. Consolidated adjusted EBITDA was $40 million for Q2 '19, which was $35 million above the prior year period. As Keith said earlier, subsequent to quarter-end, we closed our previously announced transaction to merge Ferrous Resources with Vale. IEP received proceeds of approximately $450 million for equity and debt interest in Ferrous Resources subject to future closing adjustments.

Now I will discuss our liquidity position. We maintain ample liquidity at the holding company and at each of the operating subsidiaries to take advantage of attractive opportunities. We ended Q2 '19 with cash, cash equivalents, our investment in the funds and revolver availability totaling approximately $9.2 billion. Our subsidiaries have approximately $700 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 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]. And our first question comes from the line of Dan Fannon with Jefferies.

[James Steele, Jefferies]

This is actually James Steele filling in for Dan. So my question is on the proceeds from the Ferrous sale. Are those earmarked for some investment or what was that used in the debt paydown subsequent to the quarter that you mentioned or are there any other intentions with that capital?

[Keith Cozza, President, CEO & Director]

No. I think you saw as of last quarter, and we had significant cash balances of holding company. Subsequent to quarter-end, we paid down the $1.7 billion of 2020 notes and then got another $450 million in. So, it'll basically just go into the holding company cash level, and it's not earmarked for anything in particular, but it will be opportunity set driven.

[James Steele, Jefferies]

And then on the Tenneco shares, obviously sort of has masked some of the other progress made in the business throughout the year. This morning helps with their results a bit, just curious if there's any kind of opportunity to get that off the books or if there is a longer-term strategy in place there.

[Keith Cozza, President, CEO & Director]

Yes. So, I don't think when you say opportunity to get it off the books, I don't think there's a desire to get it off our books. We think the stock is extraordinarily cheap. We believe in the original merits of the merger with Federal-Mogul and ultimately harvesting the synergies and creating two pure play businesses of powertrain technology business and an aftermarket business. So we still think that the strategic logic is there and a lot left to do with the global economy and executing on those synergies. But -- we've -- we're fairly positive on it longer term and they need to execute, but it has been a disappointment year-to-date, but definitely no desire to get it off our balance sheet.

[Operator]

[Operator Instructions]. And at this time, I currently have no more questions in queue.

[Keith Cozza, President, CEO & Director]

Okay. Thanks, everybody. We appreciate your interest in Icahn Enterprises, and we'll talk to you after the third quarter completion. Thank you.

[Operator]

Ladies and gentlemen, thank you for participating in today's conference call. This does conclude today's conference. You may all disconnect. Everyone, have a great day.