Icahn Enterprises LP

NASDAQ:IEP

Earnings Call Transcript 2018-Q4

[Operator]

Good morning, and welcome to the Icahn Enterprises LP Q4 2018 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'll read the opening statement.

[Jesse Lynn, General Counsel]

Thank you. 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 it over to Keith Cozza, our Chief Executive Officer.

[Keith Cozza, President and Chief Executive Officer]

Thanks, Jesse. Good morning and welcome to the fourth quarter 2018 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. Net income attributable to Icahn Enterprises for 2018 was $1.5 billion or $11.46 per LP unit, compared to net income of $2.4 billion or $14.80 per LP unit in 2017.

For Q4, 2018, net income attributable to Icahn Enterprises was $935 million as compared to net income of $298 million in the prior year period. Adjusted EBITDA attributable to Icahn enterprises for 2018 was $561 million compared to $642 million in 2017. Our investment funds earned a positive return of 4.3% in Q4, 2018 bringing our total return for the full year 2018 to positive 7.9%. 2018 performance was driven by significant gains from our short equity index positions. These were partially offset by net losses in our long core equity positions.

We ended 2018 with a net short notional exposure of 24% compared to a net long notional exposure of 14% at the end of 2017. Our Energy segment had a solid year. 2018 net sales were $7.1 billion and consolidated adjusted EBITDA was $825 million. CVR's petroleum segment enjoyed strong crack spreads, low RIN prices and wide crude differentials throughout the year. The results of CVR's fertilizer segment improved in the second half of 2018 to create positive distributable cash flow in the fourth quarter. Net sales and service revenues for our automotive segment were $2.9 billion in 2018.

Our automotive segment is in the process of implementing a multi-year transformational plan, which includes the integration and restructuring of the operations of Pep Boys and Auto plus. The focus will be on improving market positioning, optimizing distribution and inventory management, as well as numerous business process improvement initiatives. During Q4 2018, we closed on our previously announced sales of Federal-Mogul, Tropicana Entertainment and American Railcar Industries and entered into a new deal to sell Ferrous Resources.

As a reminder, we sold Federal-Mogul to Tenneco for approximately $5.4 billion, comprised of $800 million in cash and 29.5 million shares of Tenneco common stock. All of Federal-Mogul's outstanding debt at the time of closing was assumed by Tenneco. We sold Tropicana's Real Estate to Gaming and Leisure Properties Inc and merged Tropicana's Gaming and Hotel operations into Eldorado Resorts, Inc. for aggregate cash consideration of approximately $1.85 billion. The transaction did not include Tropicana's Aruba assets which were acquired by a subsidiary of IEP prior to closing.

In Q4 we merged our majority owned subsidiary American Railcar Industries with a wholly owned subsidiary of ITE Rail Fund LP at a price of $70 per share in cash. IEP's investment in ARI has generated a total return of 423% for a profit of approximately $757.2 million. And finally, during Q4, we announced that 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.

As you can see, IEP had a busy year generating significant earnings for our unit holders. The strong earnings and robust liquidity on our balance sheet led to our Board of Directors, increasing the quarterly cash dividend from $1.75 per unit, to $2 per unit or $7 per unit, to $8 per unit on an annualized basis.

With that, let me turn it over to Sung.

[SungHwan Cho, Chief Financial Officer]

Thanks, Keith. I'll begin by briefly reviewing our consolidated results and then highlight the performance of our operating segments and then comment on the strength of our balance sheet. For Q4 2018, net income attributable to Icahn Enterprises was $935 million as compared to net income of $298 million in the prior year period. Net loss attributable to Icahn Enterprises from continuing ops for Q4 '18 was $434 million compared to net income of $279 million in the prior year period.

Full year net income attributable to Icahn Enterprises for 2018 was $1.5 billion compared to a net income of $2.4 billion in 2017. Net loss attributable to Icahn Enterprises from continuing ops for '18 was $213 million compared to net income of $2.3 billion in the prior year period. The prior period includes a $1 billion gain net of tax from the sale of ARL in June of 2017.

As you can see on slide five, in Q4 2018 IEP had net income of $935 million compared to a net income of $298 million in the prior year period. The sales of ARI, Tropicana and Federal-Mogul which Keith mentioned earlier, resulted in substantial book gains for Q4 '18 which are included in our discontinued operations results. Adjusted EBITDA attributable to Icahn Enterprises for Q4 '18 was a loss of $104 million compared to a loss of $96 million in Q4 '17. Q4 '18 net income was negatively impacted by a goodwill impairment of $87 million in the Auto segment, also a reduction in the value of Tenneco stock, which was received in connection with the sale of Federal-Mogul reduced Q4 holding company net income and adjusted EBITDA by $434 million. Adjusted EBITDA attributable to Icahn Enterprises for the full year 2018 was $561 million compared to $642 million in 2017.

I will now provide more detail regarding the performance of our individual segments. Our Investment segment had a gain attributable to Icahn Enterprises of $207 million in Q4 2018 and a gain of $319 million for the full year. The investment funds had a gain of 4.3% in Q4 '18 compared to a 4.2% loss in Q4 2017. Long positions lost 11.1% for the current quarter, while short positions and other attributes, had a negative positive performance attribution of 15.4%.

For the full year 2018, the Investment segment had a gain of 7.9% compared to a 2.1% gain for 2017. Long positions had 0.8% loss for the full year of 2018, while short positions and other attributes had a net positive performance attribution of 8.7%. Since inception in November 2004 through the end of 2018. The investment funds gross return is 138% or 6.3% annualized. The investment funds continued to be hedged. At the end of 2018, the funds were net short 24% compared to a net long position of 14% at the end of 2017 and net short 26% at the end of Q3, 2018. In Q4, 2018 we invested an additional $1.85 billion into the funds and our investment in the funds was $5.1 billion as of December 31, '18.

And now to our Energy segment. For Q4 2018, our Energy segment reported net sales of $1.7 billion and consolidated adjusted EBITDA of $202 million compared to net sales of $1.6 billion and consolidated adjusted EBITDA of $64 million for the prior year period. CVR Refining had a solid fourth quarter driven by improved cracks, wide crude differentials for Canadian crude and Brant versus TI increased shale oil runs and lower RIN prices. CVR Refining's refining margin was $17.47 per barrel in Q4 '18 compared to $7.46 per barrel in the prior year period. CVR Partners results improved from earlier in the year to generate positive distributable cash flow. These improvements were driven predominantly by improved net back pricing as well as an increase in UAN sales volume of 20%, partially offset by 45% lower ammonia sales volume. The decrease in ammonia sales volume was primarily attributable to weather issues in the Corn Belt. CVR Partners average prices for UAN and ammonia were $180 per ton and $324 per ton respectively in Q4 '18 compared to $132 per ton and $264 per ton respectively for the same period in '17.

For the full year '18, the Energy segment reported net sales of $7.1 billion and consolidated adjusted EBITDA of $825 million, compared to sales of $6 billion and consolidated adjusted EBITDA of $406 million in 2017.

Now turning to our Automotive segment. As Keith mentioned earlier, our Automotive segment is in the process of implementing a multi-year transformation plan, which includes the integration and restructuring of operations of Pep Boys, IEH Auto and the franchise businesses of Precision Tune and American Driveline. The focus will be on strengthening our service footprint by building density in high growth markets and growing our business with flee to national accounts. For the Parts business, we need to focus on core markets where we can grow rapidly by selling parts to commercial customers and leverage efficiencies in our supply chain.

For Q4 2018, our Automotive segment reported net sales and service revenues of $701 million, up 1.4% from the prior year period. Adjusting for the adoption of FASB 606, sales increased 3.6%. Service sales increased 3% on a comp basis. On the Parts side, Auto Plus sales had a 3.7% comp sales increase and Pep Boys parts sales had a negative 0.8% comp sales with commercial growth largely offsetting declines in DIY. 2018 net sales and service revenues were $2.9 billion, up 5% from the prior year period. Adjusting for the adoption of FASB 606, sales increased 7.6%. Service sales increased 4.5% on a comp basis. On the Parts side, Auto Plus sales had 4.1% comp sales increase and Pep Boys parts sales had 2.1% comp sales growth with commercial growth offsetting declines in DIY.

For Q4 2018, adjusted EBITDA attributable to IEP for the Automotive segment was a loss of $56 million compared to a loss of $45 million in the prior year period. Q4 2018 was impacted by accrual adjustments related to vendor rebates. For the full year 2018, adjusted EBITDA attributable to IEP for the Automotive segment was a loss of $48 million in 2018 compared to a gain of $3 million in the prior-year period. In 2018, the Automotive segment invested in delivery and payroll to support the aggressive expansion into the commercial parts business at Pep Boys. Pep Boys' commercial comp sales grew 15% in 2018 and continue to grow heading into 2019. In Q4 2018, we conducted our annual goodwill assessment and impaired all of the goodwill related to the parts business. This resulted in a charge of $87 million.

Now turning to our Food Packaging segment. Q4 2018 net sales decreased by $8 million or 7% and consolidated adjusted EBITDA decreased by $5 million compared to the prior year period. The decrease in sales and EBITDA was largely due to labor disruptions and poor productivity at several of European plants associated with restructuring currently in process. Net sales for 2018 increased by $3 million or 1% compared to the prior year period. Consolidated adjusted EBITDA was $54 million in '18, which was $8 million below the prior year period due to FX and the impact of restructurings in Europe.

And now to our Metals segment. Q4 2018 net sales decreased by $2 million and adjusted EBITDA was roughly flat compared to the prior year period. The decrease in sales and EBITDA was largely lower sales and margin on sales of non-ferrous residue which were impacted by lower demand due to the trade dispute with China. Net sales for 2018 increased by $57 million or 14% compared to the prior year period. Adjusted EBITDA was $24 million in '18 compared to $20 million in the prior year period. Net sales and EBITDA were driven by higher selling prices and higher volumes for ferrous.

Ferrous shipment volumes increased due to the improved demand from domestic steel mills and improved flow of raw materials into the recycling yards driven by increased market pricing. Offsetting the improvement in ferrous operations with lower non-ferrous auto residue pricing and lower non-ferrous volume.

And now to our Real Estate segment. Our Real Estate segment recorded $89 million in gains on sales of triple net lease properties during 2018, compared to $496 million in gains in the prior year period. The prior year gain includes the significant gain from the sale of the Fontainebleau property in Las Vegas. Our Real Estate segment now includes the results of the Aruba Resort property that was acquired from Tropicana in 2018, as well as the idle Plaza Hotel in Atlantic City.

Q4 2018 net operating revenues increased by $5 million or 23% compared to the prior year. Adjusted EBITDA decreased by $8 million, compared to the prior year period. This reflects the changing mix of our portfolio with the sale of several net leased buildings and the addition of the Aruba and Plaza properties. Real estate operating revenues were $106 million in 2018 and generated $48 million of adjusted EBITDA in '18.

Now turning to our Home Fashion segment. Q4 2018 net sales were roughly flat compared to the prior year and adjusted EBITDA increased by $7 million compared to the prior year period. This reflects our focus on core customer channels. Also Q4 2017 EBITDA was impacted by a $2 million inventory write-off. 2018 net sales for our Home Fashion segment were down 7% as compared to 2017 due to lower sales volumes. Adjusted EBITDA was breakeven for '18 compared to a loss of $9 million in the prior year period. Gross margin as a percentage of net sales was 16% for 2018, as compared to 11% for 2017, with the increase primarily due to sales mix.

Now turning 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 of 65% ferrous iron ore, currently sells for around $15 per ton premium compared to the benchmark 62% ferrous iron ore. Q4 2018 net sales increased $13 million compared to prior year and adjusted EBITDA increased by $8 million compared to the prior-year period. At the end of 2017, iron ore with higher levels of silica sold at a significant discount. Those discounts have normalized in 2018, resulting in higher net pricing and margins for ferrous.

In 2018, sales increased $9 million as compared to the prior year period due to volume increases. Consolidated adjusted EBITDA was $20 million in '18, which was $2 million below the prior year period. As Keith mentioned earlier, we announced during Q4 '18 that we entered into a definitive agreement to merge Ferrous Resources with a wholly owned subsidiary of Vale. Total consideration would 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 the operating subsidiaries to take advantage of attractive opportunities. We ended Q4 '18 with cash, cash equivalents, our investment in the funds and revolver availability totaling approximately $8.3 billion. Our subsidiaries have approximately $800 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 our existing operating segments.

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

[Operator]

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

[Dan Fannon, Jefferies]

I guess, Keith, just to think about 2018, as you said was quite active. Your liquidity in your investments in the funds or cash is as high as it's been in some time. So I guess as you think about 2019, the environment, kind of what you're seeing, can you give us a sense of -- do you anticipate being more of a seller or buyer here? I guess where you -- I guess are more constructive whether that's at the fund level in terms of, I don't know, valuations or not, you're just kind of, I guess just a little bit of sense of kind of how you're thinking about the forward in terms of new investments or your current portfolio?

[Keith Cozza, President and Chief Executive Officer]

Sure, sure. Thanks, Dan. I would describe at the Investment segment level where finding probably better opportunities versus buying entire company's just because there's always idiosyncratic opportunities for the activist model to unlock certain value based on the circumstances of certain individual names and you've probably seen some of those that we've been publicly active and in the first quarter, whether it be or even the fourth quarter, whether you saw, you saw like the dull situation you saw our filing on Caesars. So we're finding spots to kind of implement our activist model in the Investment segment. On the -- so, and I think you'll see us continue to do that throughout 2019 while keeping it significantly hedged.

But on the whole company front, as you pointed out, '17 we end -- 2018 have resulted in significant divestitures. It's not a change in strategy, it's just -- look, we've been -- we're getting fair prices for assets that we bought over the years harvested, improved profitability and optimized those operations. And as the cycles turn, we think we're getting adequate multiples where it's time to divest. So when you say net buyer, a net seller, in our world, everything's always for sale. It's a matter of price but we're also on the prowl for adding new segments to IEP it's -- and that's a matter of price as well. I'm slightly less optimistic on adding the new segments in the short term, just given where valuations are in our model of wanting to buy low and buy things cheap, right, and improve. And -- so but if cycles turn and I'm sure we'll have some new segments in there over the next few years.

[Dan Fannon, Jefferies]

And can you give us a little more color on the Auto segment. You gave us a strategy and kind of what the kind of restructuring or kind of reorg is doing. But financially how should we think about what that should look like from either kind of a margin or EBITDA contribution? I guess what are the goals in the time periods you think you're going to get through those changes?

[Keith Cozza, President and Chief Executive Officer]

Yes, sure. I think it's going to be a multiple year endeavor. There's multiple businesses within that Auto segment. As you know, the service side of the business has some nice secular tailwinds, some very good same-store sales growth and is the most and exciting part of the future of that segment. But then we have, as a reminder, we have about 2000 locations between the owned and franchised service centers. But at the same time embedded in that business is also the store side of the business. Remember, there is about 800 stores and the retail environment is tough, we've been trying, we've been investing and growing out the commercial side of the business.

But the commercial side of the business is incredibly expensive and so there is a ton of kind of front-loaded cost in growing the commercial side of the business. That takes time to ultimately then fill the sales volume and to spread out that cost. So, I think in the -- we're not -- we don't look at short term. So, but I get it that you're asking short term, I think it's going to be a grind over the next year to year and a half, two years of optimizing the cost structure and the supply chain and cleaning that up. And we're always looking at various strategies to optimize that. But it's going to take time. I don't have a specific number to tell you contribution or not, but obviously we want to -- obviously we want to grow it into something meaningfully profitable.

[Dan Fannon, Jefferies]

Okay. And then just given, although the transactions that you haven't gone, so is the loan pending one is now the ferrous that's outstanding in terms of what has -- have to close, everything else is kind of...

[Keith Cozza, President and Chief Executive Officer]

Yes, that's correct. All -- coincidentally all three that I referenced closed in the fourth quarter. Tropicana and Federal-Mogul closed October 1st, and American Railcar Industries closed in early December. And so we just have the ferrous will be sometime this year. It's working its way through the Brazilian antitrust process and then licensing process for transfer to Vale.

[Operator]

Thank you. [Operator Instructions]. I currently have no more questions in queue. I would like to turn the call over to Mr. Keith Cozza for closing remarks.

[Keith Cozza, President and Chief Executive Officer]

Okay. Thank you, operator and thank you everyone for joining us. And we'll look forward to catching up with you in late April, early May, regarding our first quarter results.

[Operator]

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