Icahn Enterprises LP

NASDAQ:IEP

Earnings Call Analysis

Overview of Financial Performance

In the third quarter of 2024, Icahn Enterprises LP reported a decrease in its net asset value (NAV) by $423 million, largely due to declines in CVR Energy and poor performance in the automotive services segment. However, the investment fund showed a positive return of approximately 8%, driven by gains in healthcare investments and refining hedges, despite incurring losses from broad market hedges. This performance highlighted both resilience and vulnerability in the company’s operations.

Challenges in the Energy Segment

The Energy segment experienced significant setback with EBITDA dropping to negative $38 million from $347 million year-over-year. A drastic reduction in refining margin from $31.05 to $2.53 per barrel, amid external power outages and declining crack spreads negatively impacted earnings. Despite these adversities, average realized prices for UAN and ammonia increased by 3% and 9% respectively, indicating potential for future recovery.

Automotive Services Division Struggles

The automotive services division faced a revenue decline of $70 million from last year, largely attributed to management challenges, including insufficient tire inventory and consumer spending cuts. A restructuring initiative has been launched, replacing several top executives and signaling a transition towards better performance. The company's CEO anticipates that EBITDA margins could eventually reach high single digits to double digits compared to the current low single-digit figures.

Strategic Moves with CVR Energy

Icahn Enterprises is pursuing a tender offer to acquire additional shares of CVR, reflecting confidence in the long-term cash generation potential despite recent dividend cuts from $1 to $0.50 per depositary unit. The company has received over $3 billion in dividends since its investment in CVR in 2012, reinforcing the belief that the refining cycle will rebound and provide future revenue streams.

Liquudity and Financial Flexibility

By the end of the quarter, Icahn Enterprises reported a solid liquidity position with $1.6 billion in cash and equivalents at the holding company and an additional $800 million in the funds. This robust liquidity enables the company to capitalize on investment opportunities, indicating a strategic approach to managing financial resources while maintaining flexibility in operations.

Future Outlook and Capital Plans

With several segments including real estate and food packaging underperforming, Icahn Enterprises is contemplating capital investments to modernize infrastructure and improve efficiencies. The real estate segment is eyeing a potential sale of a 45-acre site in Nashville, expected to fetch a price significantly above its book value. Meanwhile, improvements are anticipated in the food packaging segment once a capital plan is implemented, although specific investment figures are yet to be disclosed.

Final Thoughts

The company's management remains optimistic about its ability to unlock value through management changes, strategic investments, and ongoing operations adjustments. Despite current challenges, the proactive measures being taken position Icahn Enterprises well for potential future recovery and growth, underscoring the importance of patience and strategic foresight for investors.

Earnings Call Transcript 2024-Q3

[Operator]

Good morning, and welcome to Icahn Enterprise LP Third Quarter 2024 Earnings Call with Andrew Tino, President and CEO and Ted Papapostolou, Chief Financial Officer; and Robert Flint, Chief Accounting Officer. I would now like to hand the call over to Robert Flint, who will read the opening statement.

[Robert Flint, executive]

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 LP 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. 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, including adjusted EBITDA. A -- 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. We also present indicative net asset value. Indicative net asset value includes, among other things, changes in the fair value of certain subsidiaries, which are not included in our GAAP earnings. All net income and EBITDA amounts we will discuss are attributable to Icahn Enterprises unless otherwise specified. I'll now turn it over to Andrew Tino, our Chief Executive Officer.

[Andrew Teno, executive]

Thank you, Rob, and good morning, everyone. NAV decreased $423 million from the second quarter of 2024. The -- Positive returns in the investment fund were more than offset by declines in CVR Energy, disappointing performance from auto service and the impact of the quarter's distribution to unitholders. So first, the good news.

The investment funds were up approximately 8% for the quarter. We generated positive returns from our single name lungs, led by our health care investments and our refining hedges and generated significant interest income. Our losses were predominantly caused by our broad market hedges, and we avoided any big single name losses.

Moving on to the not so good. Our CVR investment was down during the quarter as cracks returned to levels that are either mid-cycle to below mid-cycle levels, further compounded by uncontrollable external power outages. In regards to our Automotive Services division, it has unfortunately continued to struggle. The quarter suffered from lower-than-expected revenue driven by staffing and inventory management decisions. We have already replaced several top members of management at Pep Boys and can already see a return to better performance.

Though we see green shoots, it will be a while until our Auto Service division will hit its potential. I continue to believe that over a multiyear time period, there is no reason that EBITDA margins shouldn't be in the high single digits, if not double digits versus the low single digits today.

We ended the quarter with $1.6 billion of cash and cash equivalents at the holding company and an additional $800 million of cash at the funds. So as Carl likes to say, we have a significant war chest to take advantage of opportunities as they arise.

As many people on this call likely know, subsequent to the quarter end, the refining market continued to soften, which led CVR deposits dividend. Since the inception of our CVR investment in 2012 and -- IEP has received dividends totaling over $3 billion. We believe that sooner or later, and unfortunately, we don't know when, the cycle will swing again and CVR will return to generating significant cash flow. It is this belief that has led us to announce the proposed tender offer to buy additional CVR shares.

Given the recently launched tender for CVR, additional investment opportunities both in our portfolio and in the market and a desire to maintain our cash war chest, the Board has reduced the quarterly distribution from $1 per depositary unit to $0.50. We know that some unitholders may be disappointed by the decision, but as Carl mentioned in our press release, we hope and believe that the actions we take today and in the near term will lead to increased capital returns to our unitholders in the future.

Now turning to our Investment segment. In terms of our top 5 disclosed names, we see considerable value creation potential. At [ SWX], we see a gas utility that is closing its ROE gap to peers and separating the utility services business with significant growth opportunity. We see upside in both the gas utility and the service business. At AEP, we see new management closing its ROE gap, improving regulatory outcomes and benefiting from tremendous growth in electricity -- electricity demand due to AI-driven data center demand.

IFF is a high-quality ingredients company that should see improving organic revenue growth and increasing margins from new management. IFF trades at a significant discount to its peers on EBITDA. At Caesars, Carl has significant respect for Tom Reeg and what he has accomplished so far at Caesars. We believe we are buying a great business with tremendous asset value and a great management team that is actively buying back shares and with a growing digital business at a free cash flow yield greater than 15%.

I -- at Bausch, we see considerable value both at BHC and BLCO. The fund ended the quarter approximately 2% net short. Adjusting for our refining hedges, the fund was 24% net long. And now I will pass it on to Ted to cover our controlled businesses.

[Ted Papapostolou, executive]

Thank you, Andrew. I will begin with our Energy segment. Energy segment EBITDA was negative $38 million for Q3 '24 and -- compared to $347 million in Q3 '23. The quarter's performance was impacted by unplanned downtime caused by external power outages, resulting in lower volumes and margins. Q3 '24 Refining margin per throughput barrel was $2.53 compared to $31.05 in the prior year quarter. This decrease was primarily driven by a decrease in crack spreads, unfavorable impact of the mark-to-market on the outstanding RFS obligation and unfavorable inventory valuation impact.

Q3 '24 average realized gate prices for UAN increased by 3% and -- to $229 per ton and ammonia increased by 9% to $399 per ton when compared to the prior year quarter.

Now turning to our Auto segment. Q3 '24 net sales and other revenues decreased by $70 million compared to the prior year quarter. Automotive services revenues decreased by $51 million due to operational challenges such as insufficient tire inventory and staffing levels at certain locations and reduced consumer spending on automotive repairs and maintenance. We have swiftly taken actions to address the operational challenges including a change in management, and we have already seen signs of improvement. Aftermarket parts revenues decreased by $20 million due to the winding down of the business, which is expected to be complete by the end of this year.

Now turning to our other segments. Real Estate's Q3 '24 adjusted EBITDA decreased by $10 million compared to the prior year quarter, driven by the sale of an investment property during Q3 '23, which accounted for $6 million. The remaining decrease is mainly due to reduced sales on single-family homes. The segment owns a desirable 45-acre site in Nashville, Tennessee, which is located close to the planned NFL stadium in the emerging East River district. We are exploring the sale of this land and if successful, we believe to have proceeds which far exceed the current book value.

Food Packaging adjusted EBITDA decreased by $6 million for Q3 '24 as compared to the prior year quarter. Volumes have increased, however, a shift in product mix and lower pricing led to a reduction in net sales. While there are opportunities to improve efficiency at the plants, we do not expect a meaningful impact until we execute a capital plan to modernize equipment and reduce the overall cost structure.

Home Fashions adjusted EBITDA decreased by $1 million as compared to the prior year quarter, mainly driven by lower demand from our international business and our e-com business, offset in part by a strong U.S. hospitality market.

Pharma segment's adjusted EBITDA for Q3 '24 improved by $2 million as compared to the prior year quarter, mainly due to higher prescription growth. Recently, one of our developmental therapies cleared a significant milestone and we're working with the management team to assess the next phase, which has the potential for meaningful returns.

Now to our liquidity. We maintain liquidity at the holding company and at each of our operating subsidiaries to take advantage of attractive opportunities. As of quarter end, the holding company had cash and investment in the funds of $4.3 billion and our subsidiaries had cash and revolver availability of $1.1 billion.

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

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

[Operator]

[Operator Instructions]. And our first question will come from Dan Fannon with Jefferies.

[Daniel Fannon, analyst]

Just to want to talk about the dividend liquidity and obviously, the CVR discussion. So just how at the IP level, are you looking to manage the overall liquidity to kind of come up with the dividend level versus maintaining the flexibilities you talked about for new investments as well as obviously running the business. So just what is the kind of optimal level of liquidity you're looking to run with and/or leverage as you think about it at the company. .

[Andrew Teno, executive]

Dan. So first off, I'd just say we have a significant war chest of liquidity. If you look at IEP, we have, call it, $1.5 billion to $1.6 billion of cash at the holding company. We have $800 million of cash or so at the hedge funds. And so we retain significant liquidity whether we want to make -- wherever we want to make investments.

Now when we think about the CVI tender decision, look, we think it's just an attractive investment. We've we -- generated significant cash over time, something like $3 billion in dividends. And we think at some point, the crack cycle will swing and then we'll go back to making significant cash. Unfortunately, we can't really promise you when that will happen, but we think the decisions we made today will actually help cash flow in the future.

I'd also point out, we have -- not only do we have the $1.6 billion of cash at the holding company, the $800 million of the funds, but we're always looking at our assets. And so Ted mentioned a little bit in his comments, and he said, we have, call it, some acres that's in Nashville. So a while back, we owned a segment called PSC Metals, we sold the business. We retained the land. It was a very good decision. And you have an asset on our books today for, call it, something like $25 million. And there have been press reports out there that said we're exploring a sale and some people think it could be -- it could go for north of 10x that, right?

So between the cash, between the undervalued assets that we have in our portfolio and look at our job to prove that out, that we think we'll have plenty of liquidity to come.

[Daniel Fannon, analyst]

Good. And then just on the auto business, you mentioned kind of another round of restructuring. So did that actually happen in the third quarter, is that subsequent to the fourth quarter, where you talked about some of the management changes and seeing improvements? Or is that something that -- and also just how quickly do you think we can see some of those changes actually come through? .

[Andrew Teno, executive]

Yes. So a lot of the changes happened right around quarter end. -- and the individual who's now running the organization, we've seen significant changes already. So the trends in the quarter, as you went through the quarter, it got worse and worse. And as soon as we made a change, we've seen kind of the trends improve now.

Look, it's not -- we're not seeing what we should be, right? What we should be seeing eventually is same-store sales growth. We should see -- be seeing margin improvement. We're not seeing that, but we are seeing quite a significant reversal, right? So I think there were times we were seeing revenue minus 20% year-over-year, and that's declined. Now we're seeing some high single digits.

So we're already seeing an improvement. And I'd say, look, some of the -- obviously, the business didn't do well in the quarter, but there were good ideas that were -- some of the initiatives that are being worked on were good ideas. They were just poorly executed, right? So it is a good idea to run an RFP to purchase tires cheaper so we can make more money when we sell them to our customers. It's a bad idea to run out of inventory so that when your customers show up, there's nothing to sell them when we say, "Hey, it's going to be a week when they can just go across the street and it's going to take them a day. So good ideas, bad execution, and now it's up to us to execute and turn it around.

[Daniel Fannon, analyst]

Understood. And then just a question on the investment fund given the change in the White House and as you look at the portfolio today and its construct as well as both the long positions you highlighted as well as the kind of hedges. Any changes to how you're thinking about the mix or the overall net exposure given what has transpired this past week.

[Andrew Teno, executive]

I'd say not too many changes in terms of the hedge book, but it is nice to be able to rely and use the M&A tool a bit more, right? So things that were off the table maybe won't be off the table. I think there was an article not too long ago, and I think it was the journal, right, where they were highlighting that activists were replacing CEOs as the primary tool to improve the business and moving away from M&A. And I think this change in administration, hopefully, will give us more options to push for more ways to make money.

It's also nice to have, I think, a bunch of our businesses or at least if you look at CVI, and I think the Trump administration will be much more favorable towards refining than the prior.

[Daniel Fannon, analyst]

Got it. And then just last one, just on the dividend and the outlook. As you think about the change today with also the proposals around CVI and others and knowing you can't predict when the dividend at CVR is coming back? Like is that content -- like what is contemplating as we think about the go forward in terms of sustainability of the current dividend here versus what's coming off of the business and the liquidity overall?

[Andrew Teno, executive]

Yes. Look, I think it comes back to the same thing we've been discussing, which is we evaluate it every quarter. Clearly, it's been an important part of our story in the past, but it's something we evaluate all the time. I think if we are right and that our -- the assets that we own are attractive, they're undervalued, and we can do important things to unlock that, then we can probably continue to stick to our knitting.

[Operator]

And our next question comes from Andrew Berg with Post Advisory Group.

[Andrew Berg, analyst]

If we go back to Automotive real quickly. Was it just a change in the CEO spot? Or were there other management changes? And if so, which changes were done?

[Andrew Teno, executive]

Yes. I think there were a few changes that were made. The CEO and the CFO have changed. There were some others as well. I would just say that the changes -- the other changes that were made were for people to do, I'd say, rather than having mid-level management or senior level management is more to have more people doing the actual work, getting back to basics to improve the core business.

[Andrew Berg, analyst]

Okay. When you're looking at Food, you had mentioned the need for CapEx there to modernize the facility. How much CapEx do you think needs to be invested there to get it to a level that you guys would be happy with?

[Ted Papapostolou, executive]

It's too early to spit out a number. So management is working on a capital plan, but it is apparent that we need to bring cost out of the P&L to increase the bottom line. So they've been working on that for the past 2 quarters. I am expecting to have an update on the next call to see how much of an outlay, the time frame and get more into the nitty gritty of the details.

[Andrew Teno, executive]

We look at it as a variety of options kind of stages. And from the IEP level, it's an immaterial amount.

[Andrew Berg, analyst]

Okay. And given that last comment, it sounds like any needs they would have would be something then that could just be financed and handle at that subsidiary level wouldn't require any downstreaming of cash or equity investment from you guys? It was, it wouldn't be notable.

[Andrew Teno, executive]

I think this case is a certain size, we're a certain size. And so we just evaluate each capital structure and figure out the best decision for each business.

[Ted Papapostolou, executive]

Yes. And I think timing would have a big impact on that, whether we can stretch it out or speed it up. So I think getting the plan would be -- we'd be able to answer the question appropriately, but it's not going to be a big outlay for IEP.

[Andrew Berg, analyst]

Okay. Just wanted to confirm that. And then can you help me reconcile the holdings in the investment funds you noted that the performance was up and up nicely ex the hedge you had on. But the value that's shown on Slide 11 is down a little bit, which suggests there was distributions that came out of that. I think the number was probably around $500 million. But I just want to make sure I'm understanding the math and the movements there.

[Andrew Teno, executive]

Yes. So there was a distribution during the quarter. And so you see a movement from the investment funds into the IP holding company cash. And then we'd use that cash for -- it goes into a big bucket, and we use it as we did in the quarter. So you'd see some bond repurchases that were there, that'd probably be 1 of the bigger uses of cash during the quarter.

[Andrew Berg, analyst]

Okay. And the repurchases that -- I'm just trying to recall, was that for a maturity? Or were you buying bonds in the open market?

[Andrew Teno, executive]

There were some repurchases in the open market. So if you look on that bottom, Row, where you look at the unsecured debt balance, you could see that it ticked down.

[Andrew Berg, analyst]

Okay. Great. And then lastly, with respect to the dividend, I think that Carl had elected to take some in cash in the recent past, but historically, you've been taking more of it in stock, given the reduction and given the desire to use the company's capital to help fund the CVR investment, is he going to switch back to taking it predominantly or entirely in stock versus cash going forward?

[Andrew Teno, executive]

Yes. So that's a decision for Carl. He has the same decision that all the other shareholders have.

[Andrew Berg, analyst]

Okay. And he hasn't communicated things either way on that. or doesn't want to say?

[Andrew Teno, executive]

That's not.

[Operator]

And our next question comes from Bruce Monrad with Northeast Investors Trust.

[Bruce Monrad, analyst]

Question on food packaging, if I could. So in May, at the annual meeting of this case, you guys said or the management said that budget for 2024 was for EBITDA profitability to be higher than that in '23. And so my question is what changed so suddenly here? What did you -- what didn't you know then that you learned subsequent. Can you help me on that? And I have a follow-up.

[Ted Papapostolou, executive]

Yes. Just to give more context what happened this quarter is, as I mentioned, volume was up compared to the prior year period. But the mix of product we're selling was at a lower margin and then there's price, which let me touch on price.

As I mentioned in previous call, the supply chain has stabilized. And what that's done for the industry is it brought back the price competitiveness to what I call pre-pandemic levels when things were more normalized. So that layer in the higher waste that we have as compared to historical periods, and that all affects the bottom line. And there is some upside in tackling the waste and management has initiatives to do so.

But like I mentioned in the previous question, the biggest impact we see to improve 2025 and beyond would be a capital plan to take further costs out of the P&L.

[Bruce Monrad, analyst]

Well, so correct. I mean so Viscofan sort of patting itself on the back and saying that the destocking is done, but demand has normalized. [indiscernible] , I'm a little surprised that the -- that hasn't been straightened out by now. It's sort of sprung out of nowhere 24 to 36 months ago, I remember talking 24 months ago with Dave Willis on this call. and he said they would be 2 to 3 quarters. Why is that this proving so intractable? What's going on there? Why -- and why is this a surprise? Why I know why do we need to default to a capital plan? Is it something that should be able to be fixed in-house? Or Dave, what's changed here? .

[Ted Papapostolou, executive]

The waste has many elements to it, but one of them is the old machinery. So a lot of -- we're doing a lot of the planned maintenance, but as these things age out, we're seeing that we probably have to adjust the planned maintenance, and it's costing more and more to maintain them. And even with so, they go down unexpectedly, which is causing waste. So part of this capital plan would be to modernize the equipment and that would alleviate that aspect of it. But there's many elements to the waste that management has been firefighting.

[Bruce Monrad, analyst]

And with regard to waste with regard to this, what -- again, what was the epiphany that occurred in the summer that you didn't -- that we didn't know about, management didn't know about in May when they were guided higher?

[Ted Papapostolou, executive]

It's really just the pricing competitiveness, I would say, and the mix of business. They were budgeting for a better mix and that didn't come to fruition.

[Bruce Monrad, analyst]

Okay. And is the mix issue? Is that mostly U.S.? Or is that Europe, would you say? The change in that .

[Ted Papapostolou, executive]

It's throughout every region, mostly in Europe. .

[Bruce Monrad, analyst]

Okay. So if the mix Dean if I look at -- if I went back to your 10-K for greater '23 the region that was suffering for profitability was really the U.S., if I've got it right. So what is the structural issue there that's not getting resolved? Are your competitors? I'm thinking [indiscernible] North America having I mean they don't have new shiny plants? Are they -- I mean are they suffering.

[Ted Papapostolou, executive]

Sorry to cut you off, we could set up a call to go through more detail on this case at a future time.

[Bruce Monrad, analyst]

Okay. Can I just ask 1 more, which is just to say, do you think the industry would benefit from consolidation? And that I'll let you go.

[Ted Papapostolou, executive]

Yes, throughout our portfolio, we look at opportunities and put in hurt, but there's nothing that we see right now that makes sense.

[Operator]

I show no further questions at this time. I would now like to turn the call back to Andrew Tino for closing remarks.

[Daniel Fannon, analyst]

Thank you, everyone, for joining this morning's call. Just leave you with some final comments, which is we think it's an active and attractive environment for activism in today's markets. We think we have an underappreciated portfolio. It's our job to kind of prove out that value to you. and we have a war chest of cash and liquidity to go ahead and take advantage of it. So we'll speak soon. Thank you. Bye.

[Operator]

This concludes today's conference call. Thank you for participating. You may now disconnect.