Icahn Enterprises LP (IEP) 2012 Q2 法說會逐字稿

Good morning and welcome to the Icahn Enterprises LP Q2 2012 earnings call with Felicia Buebel. Assistant General Counsel, Daniel A. Ninivaggi, President, and SungHwan Cho, Chief Financial Officer. As a reminder, this conference call is being recorded. I would now like to hand the call over to Felicia Buebel. You may begin.

Good morning and welcome to our quarterly call. I will now read the Safe Harbor statement. 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. I would like to now turn over the call to our President, Dan Ninivaggi.

Thanks, Felicia. Good morning and welcome to the second quarter 2012 Icahn Enterprises earnings conference call. Joining me on today's call are Sung Cho, our CFO, and Peter Reck, our Chief Accounting Officer. Also joining us today are Jack Lapinski and Susan Ball, the CEO and CFO of our newly-acquired subsidiary, CVR Energy. I would like to begin by providing some key highlights for the second quarter. Sung will then provide a more in depth review of our financial results and the performance of our business segments. We will then be available to address your questions.

During the second quarter of 2012 we acquired a majority stake in CVR Energy, and now together with our affiliates own 82% of CVR. In accordance with our transaction agreement with CVR, an investment bank saw buyers for the company, that process ended July 23 with no credible offers having been received. We recently announced our offer to acquire the remaining 18% of CVR shares held by public shareholders at a price of $29 per share. That offer will be considered by the independent directors of CVR.

In terms of IEP's financial results in the second quarter, we had a strong earnings of $2.29 per depository unit. In addition to the contribution of CVR since its acquisition on May 4th, our investments funds were key drivers of earnings in the quarter recording a gross return of 5.2% for the period. Gains were primarily due to our defensive short positions, which benefited from the overall market decline as well as the performance of our long core equity and credit positions.

Our automotive segment had Q2 sales of $1.7 billion, representing approximately 1% growth on a constant dollar basis. OE sales were $1.1 billion, up 3% in constant dollars, driven by growth in the US and in the emerging markets. In Europe, our OE sales were impacted by lower vehicle production and a weaker Euro. Q2 global aftermarket sales were down in the US and Europe, but at solid growth in rest of world.

As previously discussed, Federal-Mogul is pursuing the creation of a separate and independent OE and aftermarket segments. We have hired a new CEO for the aftermarket business, and expect to be operationally separated by the end of the third quarter. We believe this is the optimal direction for the Company as the two units have very different customer bases, business models, and sales and distribution requirements. In Q2, Federal-Mogul announced plans to improve its cost competitiveness for friction and wipers by moving production from the US to low cost countries. In addition, Federal-Mogul announced the acquisition of the BERU spark plug business from BorgWarner, further strengthening the Company's position in the global spark plug market.

In our Railcar segment, quarterly railcar shipments more than doubled to 2,200 from the prior year period. ARI's backlog grew from almost 6,200 in March to 6,800 at the end of the second quarter. Industry backlog remained flat at approximately 59,000 cars at the end of June. Tank cars made up 70% of the industry backlog and hopper cars accounted for an additional 14%. Orders for tank cars remained healthy due primarily to ongoing strong activity in the energy sector. Overall, our other subsidiaries with the exception of PSE Metals, which Sung will talk about later, had solid results in Q2, and are well-positioned for a strong finish to the year.

We are also generally pleased with the operational improvements at each of our companies, which should drive even better results going forward. We will continue to look for growth opportunities within our current operating segments, as well as explore new opportunities to compliment our diverse portfolio of businesses.

In terms of our balance sheet, subsequent to the end of the quarter, we were successful in raising $300 million of new capital at the holding company at an attractive yield through an add-on offering to our 2018 bonds. At quarter end we had cash and cash equivalents at the holding company, as well as investments in the investment funds, of approximately $3.2 billion in the aggregate. With that I will turn it over to Sung for a detailed review of the financial statements, and then we will be available to address your questions.

Thanks, Dan. I will begin by briefly reviewing our consolidated results for the second quarter, and then highlight the performance of our operating segments and comment on our balance sheet. Net income attributable to Icahn Enterprises for Q2 2012 was $240 million, or $2.29 per depository unit. As a reminder, our results for this quarter include the results of CVR from May 5 to June 30.

We ended the quarter with consolidated cash and cash equivalents of approximately $3.2 billion, and our direct investment in the investment funds of $2.1 billion. To date in 2012, we have successfully completed a [rice] offering and three debt offerings, which collectively have raised approximately $1.5 billion in cash, $300 million of which was subsequent to quarter end, as Dan stated earlier. This leaves us with plenty of capital to handle near term maturities, and at the same time invest in our operating segments.

Our Board of Directors approved a quarterly distribution of $0.35 per depository unit payable on August 31st, 2012. This $0.35 distribution will consist of $0.10 payable in cash and $0.25 payable in depository units. I will now provide more detail regarding the performance of our individual segments.

Our investment segment had income attributable to Icahn Enterprises of $116 million in Q2 2012 compared to income of $289 million in the prior year period. The investment funds had a return of 5.2% for the quarter, compared to 10.2% in the second quarter of 2011. As of June 30, 2012, our net equity exposure was a negative 28.7%, down from 0.5% at the end of Q1. Our long equity exposure had a 1.0% return for the quarter. While our short equity exposure had a gain of 2.2%. Our net credit exposure at the end of second quarter was approximately 10.7%, and generated a return of 0.9%. As of June 30, our investment segment had approximately $5.6 billion of assets under management, of which IEP's interest was approximately $2.1 billion. In Q2, we redeemed approximately $1 billion from the investment fund in order to fund the purchase of CVR Energy. Subsequent to quarter end, a subsidiary of IEP invested an additional $300 million into the investment funds.

Now turning to Federal-Mogul. Net sales for Q2 were $1.7 billion, down 5% versus Q2 2011.But up 1% on a constant dollar basis versus Q2 2011. The strengthening of the US dollar primarily against the Euro decreased reported sales by $114 million. Federal-Mogul's global OE sales were $1.1 billion, up 3% in constant dollars versus Q2 2011 driven by a 9% OE sales increase in the US, and 7% OE sales increase in the BRIC countries, offsetting a 4% revenue decline in Europe.

Light vehicle production in Europe during the quarter decreased 9% versus Q2 2011, as regional vehicle makers reacted to macro economic factors driving slower automotive sales. The Company's global aftermarket sales were $566 million, or 3% lower on a constant dollar basis versus Q2 2011. Sales in the US were softer due to mix and a mild winter and in Europe, due to economic conditions resulting in lower market demand and inventory reductions at certain distributors. Aftermarket sales in the rest of the world grew 5% on a constant dollar basis, reflecting stronger customer demand for the Company's leading products in these growth markets. EBITDA in Q2 2012 was $159 million, or 9.3% of sales, compared to $200 million, or 11.1% of sales in Q2 2011. The Q2 2012 EBITDA was negatively impacted by currency exchange, volume and mix factors. The liquidity in our automotive section remains strong at approximately $1.2 billion, which is comprised, $716 million in cash, and $478 million undrawn revolver.

Now to our energy segment. As Dan stated earlier, we acquired a majority stake in CVR during the quarter, and have begun consolidating the results effective the acquisition date of May 4, 2012. Net sales for the period May 5 through June 30, 2012 were $1.4 billion which was primarily comprised of CVS Petroleum business sales of approximately the same amount. For the period May 5 through June 30, 2012, CVR's fertilizer business recognized net sales of $49 million, of which $8 million and $41 million were attributable to ammonia and UAN respectively. Adjusted EBITDA for the period May 5 through June 30, 2012 was approximately $289 million, and was driven by the wide crack spreads, favorable crude differentials, and strong operational performance at both refineries. The fertilizer business contributed approximately 10% of total EBITDA for the period. Liquidity at our energy segment is strong at approximately $1.1 billion, which is comprised of $693 million in consolidated cash, and $372 million in undrawn revolvers. As a reminder, refineries undergo regular maintenance every four to five years. Coffeyville completed its turnaround in Q4 2011 and Q1 2012. The Wynnewood refinery will undergo its turnaround in Q4. The plant will be done approximately 45 days, and the total cost of the turnaround is expected to be around $100 million.

Now turning to our gaming segment. Q2 2012 total net revenue was up $19 million, or 13% from the prior year. $17 million of that increase came from casino revenues, due to an increase in consolidated table game hold percentage from 9.7% in Q2 2011, to 17.6% in Q2 2012, as well as an increase in consolidated slot volumes. Much of the increase in table hold came from Atlantic City where due to fluctuations in our high end table game play, the table hold percentage increased from 6.8% in Q2 2011 to 16.5% in Q2 2012. Consolidated gaming volumes also improved, increasing by 1.3% primarily due to higher slot volumes in Atlantic City, Baton Rouge, and Greenville, offset in part by lower table volumes in Atlantic City. EBITDA of $25 million in Q2 was a 127% increase over the prior year period, and was driven by the improved operating performance of Tropicana Atlantic City.

Now turning to our railcar segment. With the market for certain railcar types remaining very strong, KRI received orders for 2,810 railcars during the quarter. The backlog as of June 30 was approximately 6,800 rail cars, including approximately 1,620 railcars for lease. Manufacturing segment revenues were $219 million for Q2 2012, and more than double the $94 million we had in Q2 2011. The primary reasons for the increase were an increase in railcar shipments driven by strong customer demand, improved pricing, and a shift in the sales mix to more tank cars. Manufacturing segment revenues for Q2 2012 included estimated revenues of $84 million relating to railcars built for the lease fleet compared to zero in 2011. Adjusted EBITDA which excludes stock-based compensation was a quarterly record of $34 million for Q2 2012, more than triple the $11 million for Q2 2011.

Revenues and profit on cars put into the lease fleet are eliminated in consolidation, and the costs associated with those cars are recognized on the balance sheet and PP&E. Our railcar segment's liquidity position is strong with $250 million of cash and cash equivalents as of June 30, 2012. ARI announced that it will redeem $100 million of its 7.5% senior notes on September 4th, at a redemption price of $101.875 of their principal amount. The bond redemption will lower interest expense, and at the same time leave ARI with more than sufficient liquidity to meet operating requirements and fund its leased fleet build.

Now turning to food packaging. Net sales for Q2 2012 decreased by $3 million, or 3% compared to the prior year period. The decrease was primarily due to lower volumes at one plant resulting from a quality issue that has been resolved, as well as unfavorable foreign currency translation offset partially by favorable product mix. Adjusted EBITDA fell by $3 million compared to last year, primarily due to foreign exchange translation impact of $1 million, lower sales, and compressed margins for manufacturing inefficiencies. The shirring plant in the Philippines is complete, and began limited production in May. This plant will be scaled up over several years in accordance with our growth expectations for the Asian market. In addition, this case has some additional capacity coming online later this year, which should help resolve production bottlenecks, and lead to better results in the back half of the year. Cash and cash equivalents for our food packaging segment were $38 million as of June 30, 2012.

And now to our metal segment. Net sales for Q2 2012 increased by $15 million, or 5% as compared to the prior year period. The increase was primarily from acquisitions made subsequent to June 30, 2011, and an increase in brokerage transactions. Adjusted EBITDA declined to a loss of $8 million in Q2 2012, from a positive $8 million in Q2 2011. Material margins were compressed in the quarter with high competition for high obsolete grades of scrap, and low iron-ore prices putting a cap on prices for prime scrap. Also scrap prices fell approximately $150 per ton between May and July, resulting in a lower of cost and market charge of $4 million. Initial indications for August point to a price recovery in excess of $60, due to low inventory at steel mills and tight supplies of scrap.

And now to our real estate segment. Next is our real estate segment. Q2 2012 real estate revenues were $23 million, down slightly from the comparable prior year period. Our net leased portfolio continues to drive earnings in this segment with its 30 properties generating strong cash flows, and our resort operations remain profitable.

Now turning to home fashion. Q2 2012 net sales decreased by $18 million compared to the prior year. The decline in sales reflects the impact of the loss of largely unprofitable programs as the Company focuses on products and customers that match its manufacturing and distribution strengths. Despite the decrease in sales, adjusted EBITDA improved from a loss of $3 million in the prior year to a positive $2 million in Q2 2012. This is the best performance WestPoint has had in quite some time. Gross margins increased from 7.8% to 13.6%, and WestPoint continued to rationalize its expense structure. We are encouraged that WestPoint has achieved positive EBITDA for the quarter, and believe the management team is on the right track by focusing on core customers including Target, Costco, Ralph Lauren, JC Penney's, and Bed Bath & Beyond, as well as institutional customers. WestPoint continued to build cash through Q2 as it works down its working capital. At the end of Q2, WestPoint had $63 million of unrestricted cash compared to $55 million at the end of 2011. WestPoint's credit facility expires in August, and we have decided not to renew or replace it, as we are comfortable funding the business with existing cash on hand.

Now I will highlight our liquidity position. We continue to maintain excellent liquidity as we ended the quarter with cash, cash equivalents, liquid assets, and our investment in the investment fund totaling approximately $5.3 billion. In addition to our strong cash position, our subsidiaries have undrawn credit facilities totaling $858 million as of June 30. Subsequent to June 30, we raised an additional $300 million as a tack-on to our 2018 bonds. 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 it up for questions, please.

We will now take questions as part of our Q&A session. (Operator Instructions). Our first question comes from Ken Bann of Jefferies. Your line is open.

Good morning. I wanted to ask about the food packaging business this case. You indicated that you expect second half results to be better. Do you expect them to be better just in the first half, or better that the second half of last year?

This is Dan. No, we expect them to be better than the second half of last year. We are not giving guidance on it, but we do have additional capacity coming online starting in September, so volumes should be stronger, pricing has held up okay, so we should see an improvement year-over-year.

And then are you seeing any further increases in raw material costs, or is that being covered now by the higher prices that you are getting?

Yes. They have been manageable. We have covered them with price increases this year.

Okay. And then home fashion, it is great to see it back to profitability. Do you expect this trend to continue with the cost cutting that you have done, or are you seeing any slowdown in orders from customers, given the sort of weakness in the economy?

No, we are not seeing a slowdown. I mean basically the new management team we brought in last year cleaned up the cost structure. They created a new, more customer-focused organizational structure. And they have started to rebuild the backlog. The plants are running at near full capacity. We expect them to run at capacity in the back half of the year with reasonably profitable business, so we expect the trend to continue.

And then just on CVR now that the sales process is complete, can you talk about any plans that you might have there to improve profitability at CVR?

Well, the profitability at CVR has been very good, so we can't talk about any specific plans, and I am not sure there are any specific plans to change it. I hope they continue do what they have been doing

Okay, great. Good. Thank you very much.

Thanks a lot, Ken.

Thank you. (Operator Instructions). I am showing no questions in the queue at this time.

Okay. Well, thank you very much for joining for joining our call. We look forward to a strong back half of the year, and we will talk again in a few months. Thanks.

Thanks everyone for joining us and we look forward to chatting with you again when we post our 2012 second quarter results.