Icahn Enterprises LP (IEP) 2014 Q1 法說會逐字稿

Good morning and welcome to the Icahn Enterprises L.P. Q1 2014 Earnings Call with Jesse Lyn, Assistant General Counsel; Keith Cozza, President and CEO; and SungHwan Cho, Chief Financial Officer. I would now like to hand the call over to Jesse Lyn, who will read the opening statements.

Good morning. 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.

Good morning. Welcome to the first quarter 2014 Icahn Enterprises Earnings Call. Joining me on today's call is SungHwan Cho, our Chief Financial Officer. I would like to 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'll then be available to address your questions.

Adjusted net income attributable to Icahn Enterprises for Q1, 2014, after adding back the loss on extinguishment of debt, was $92 million or $0.77 per LP unit, compared to adjusted net income of $274 million or $2.49 per LP unit in the prior year period. Adjusted EBITDA attributable to Icahn Enterprises for Q1 2014 was $356 million, compared to $618 million in Q1 of 2013.

While the first quarter produced somewhat modest results compared to the standards we hold ourselves -- out for ourselves, we believe that the second quarter is off to a great start with preliminary net income attributable to Icahn Enterprises of over $200 million for the month of April. Our investment segment was essentially flat for the quarter in a volatile market, but year-to-date, the investment funds are now approximately 4% through the end of April 2014.

Q1 2014 results for Federal-Mogul improved from the prior-year period, driven by strong conversion on higher sales, and improved operating performance, particularly in their powertrain division. Powertrain continued to gain market share in all regions in the quarter and financial results of the aftermarket business, VCS, have stabilized.

Management is aggressively investing in Federal-Mogul's VCS product portfolio, improving distribution infrastructure and pursuing growth initiatives, including Federal-Mogul's most recent acquisitions for the Honeywell friction and Affinia chassis businesses.

In our Energy segment, the refining and fertilizer MLPs had excellent operational performance in the first quarter. CVR Refining had record combined crude throughput rates for the quarter and the fertilizer subsidiary, CVR Partners, posted solid results.

Our Railcar segment had strong tank car -- tank railcar shipments in Q1 2014, driving manufacturing margins to 26%, a 6% improvement over prior year. The segment also continues to build its lease fleet, which was nearly 36,000 railcars at the end of the quarter.

In our Food Packaging segment, Viskase is enjoying solid earnings, largely from the expected benefits from recent investments in capacity expansion.

In our Gaming segment, Tropicana's earnings have held steady in spite of market data showing Atlantic City market experienced year-over-year decline in Casino win of 7.5%. Trop AC has benefited from the closure of a competitor in Atlantic City, as well from Internet gaming revenues, which commenced operations in November of 2013. Subsequent to the quarter end, Tropicana closed on its acquisition of Lumiere Place Casino and Hotel Complex in St. Louis, Missouri.

We issued $5 billion of new notes in January of 2014, which refinanced $3.5 billion of existing senior notes and added $1.3 billion of additional liquidity to the balance sheet. The lower coupons on our new debt will result in substantial interest savings over the next several years. We are well positioned to seek out investment opportunities, both organic and external that should result in superior long-term returns for all of our unitholders.

With that let me turn it over to Sung.

Thanks Keith. I'll begin by briefly reviewing our consolidated results for Q1 2014 and then highlight the performance of our operating segments and comment on the strength of our balance sheet.

In Q1 2014, net income attributable to Icahn Enterprises was a loss of $29 million. This was impacted by losses on debt extinguishment related to the refinancings completed in the quarter. Adjusted for the losses on debt extinguishments, our adjusted net income attributable to Icahn Enterprises was $92 million, compared to adjusted net income of $274 million in the prior year period.

As you can see on slide 5, Q1 2014 adjusted EBITDA attributable to IEP was $356 million, compared to $618 million in the prior year. Most of the decrease was tied to the decrease in the performance in the Investment segment, and lower refining margins in the Energy segment. All the other operating segments showed improvement year-over-year. I will now provide more detail regarding the performance of our individual segments.

Our Investment segment had income attributable to Icahn Enterprises of $5 million. For Q1 2014, the investment funds had a gross return of negative 0.4%, compared to positive 9.7% for Q1 2013. Long positions had a 10.5% return for the current quarter, while short positions and other expenses had a negative performance attribution of negative 10.9%. In April, the investment funds generated a return of 4.1%, bringing year-to-date performance up to 3.7%, compared to 2.6% for the S&P 500. Since inception in November 2004 through the end of Q1 2014, the investment fund's gross return is 255% or 14.4% annualized.

We continue to maintain relatively low net exposures. At the end of Q1 2014, net equity exposure was 34%, compared to 13% at the end of Q1 2013. During the quarter, we contributed an additional $1 billion into the funds bringing IEP's investment in the funds up to $4.7 billion as of March 31, 2014.

And now to our Energy segment. For Q1 2014, our Energy segment reported net sales of $2.4 billion and consolidated adjusted EBITDA of $224 million. Q1 performance was driven by strong operational performance at both the refinery and fertilizer businesses. CVR Refining reported Q1 2014 adjusted EBITDA of $194 million, compared to $310 million in the prior year period. The decline is due to lower refining margins adjusted for FIFO, which were $16 per barrel in Q1 2014, compared to $26 per barrel in Q1 2013, due primarily to the decline in the NYMEX 211 crack spread and the negative product basis.

Offsetting this was the exceptional operational performance at both of the refineries. Coffeyville and Wynnewood refineries combined to produce record crude throughput rate of approximately [200 to 1,000] barrels per day.

CVR Partners reported Q1 2014 adjusted EBITDA of $30 million, compared to $44 million in Q1 2013. Realized fertilizer prices and plant operations were generally in line with expectations. Q1 2014 average realized plant gate prices for UAN and ammonia were $253 per ton and $479 per ton respectively, compared to $295 per ton and $663 per ton respectively for the same period in 2013.

Now turning to the Automotive segment. Our Automotive segment's Q1 2014 sales were $1.8 billion, up from $1.7 billion in the prior year period. Operational EBITDA was $166 million in Q1 2014, up from -- up 20% from Q1 2013. Federal-Mogul's improved financial results for the quarter were driven by higher sales volume in the Powertrain division, as well as continued improvements in operational performance. On a global basis, Powertrain had a revenue of $1.1 billion in Q1 2014, compared to $1 billion in the prior year.

We believe the Powertrain segment is continuing to gain market share around the world, as our revenue is growing faster than the light and commercial vehicle production in each market. Powertrain's operational EBITDA continued to improve as the division recorded $116 million in Q1 2014, an increase of $29 million over the same period in 2013.

The Vehicle Component Segment or VCS had revenue of $720 million in Q1 2014. Sales in North America are improving, which helped to offset some softness in European sales in the quarter. The segment continued to make progress, strengthening its part of product portfolio. The VCS segment closed on its purchase of the Affinia chassis business in May and the acquisition of the Honeywell friction business is still pending.

Subsequent to quarter end, Federal-Mogul successfully secured $2.6 billion to refinance maturing debt. The new financing includes a term loan of $700 million due April 2018 and a term loan of $1.9 billion due April of 2021, strengthening the liquidity and financial profile of the Company.

Now turning to Railcar. Railcar shipments for Q1 2014 were approximately 1,610 railcars, including approximately 700 railcars to leasing customers, as compared to 1,900 railcars for the prior year, of which approximately 1,030 railcars were to leasing customers. The industry delivered approximately 14,000 railcars in Q1 according to the Railways Supply Institute with tank railcars accounting for the majority of railcars delivered.

Orders for covered hoppers however have been gaining momentum. Covered hoppers now represent 28% of the industry backlog, up from 16% at the end of 2013, driven by strong demand for frac sand and plastic pellet cars. According to the Railway Supply Institute, the railcar manufacturing backlog increased to 82,000 railcars at the end of Q1 2014, compared to 73,000 cars at the end of 2013. As of March 31, 2014, ARI had a backlog of approximately 8,600 railcars, including 4,400 railcars for lease customers.

Total manufacturing revenues for Q1 2014 decreased by $10 million over the comparable prior year period, before elimination of railcar sales to our railcar segment's leasing operations. The decrease was primarily due to lower hopper car shipments, partially offset by the higher mix of tank cars, which generally sell at higher prices than hopper cars.

Gross margin from manufacturing operations before intercompany eliminations for Q1 2014 was $56 million, compared to $46 million for the comparable prior year period. Gross margin for manufacturing operations as a percentage of revenues increased to 26% for Q1 2014, from 20% in the prior year period. The increase in gross margin percentage was primarily due to a shift in sales mix to higher mix tanks -- a higher mix of tank railcars.

Railcar leasing revenues increased for Q1 2014 compared to the prior year, due to an increase in the number of railcars leased to customers and an increase in the average lease rate. The lease fleet grew from approximately 31,100 railcars at the end of Q1 2013 to approximately 35,600 railcars at the end of Q1 2014. Lease rates remained strong, driven by strong demand from the Energy sector.

Adjusted EBITDA attributable to IEP grew to $59 million, compared to $15 million in the prior year. As a reminder, we acquired a 75% ownership in ARL in late 2013. And therefore, adjusted EBITDA attributable to IEP for Q1 2013 does not include EBITDA related to ARL for that period.

Now turning to our Gaming segment. Casino revenues for Q1 2014 improved from the prior year period, due to an increase in the consolidated gaming volumes and an increased gaming hold percentage, primarily due to higher gaming volumes in Atlantic City, offset in part by lower casino revenues at the Baton Rouge property.

Tropicana's consolidated gaming hold percentage was 10.3% in Q1 2014, compared to 9.6% for Q1 2013. As Keith mentioned earlier, Tropicana Atlantic City has benefited from the closure of a competitor in Atlantic City, as well as from Internet gaming revenues, which commenced in November 2013.

Tropicana's consolidated adjusted EBITDA for Q1 2014 was $18 million, which was consistent with the prior year period. Tropicana finished the quarter with $394 million in cash and cash equivalents. Subsequent to quarter end, Tropicana closed on the purchase of the Lumiere Place Casino in St. Louis, Missouri for $260 million in cash subject to adjustments.

Now turning to the Food Packaging segment. Net sales for Q1 2014 were flat at $88 million, as compared to the prior year period. An increase in price and product mix was offset by unfavorable foreign currency translation and lower volumes. Consolidated adjusted EBITDA of $16 million in Q1 2014 was $700,000 improvement over the prior year period. In January 2014, Viskase completed a $275 million term loan facility. A portion of the proceeds from the term loan were used to pay off existing debt. Viskase's cash balance at the end of Q1 was $41 million.

And now to our Metals segment. Net sales for Q1 2014 decreased by $75 million or 28% compared to the prior year. Adjusted EBITDA was a loss of $3 million in Q1 2014, compared to a loss of $5 million in the prior year. The decrease in sales was driven by lower volumes, as PSC focuses on more profitable volumes. The market environment remains challenging as softer demand from steel mills and weak export markets continue to impact the operating results of PSC.

And now to our Real Estate segment. Q1 2014 Real Estate revenues were $24 million, which was slightly above the comparable prior year. Revenues from the real estate operations for both periods were substantially derived from our rental and resort operations. Our net lease portfolio continues to drive earnings in this segment with its 29 properties generating strong cash flows. The Real Estate segment generated $12 billion of adjusted EBITDA in 2014. We have begun to see more interest in our development properties as well and have restarted sales activities in New Seabury and Vero Beach.

Now turning to Home Fashion. Net sales for Q1 2014 decreased by $4 million or 9% compared to the prior year. The decrease was primarily due to reduction in sales volume in certain low margin programs. Looking forward, we are excited by new brands and believe we will have solid placements in 2014, which will help topline growth. Despite the sales decrease, adjusted EBITDA was a positive $1 million in Q1 2014, compared to a loss of $1 million in the prior year. Gross margin as a percentage of net sales was 12% for Q1 2014, as compared to 11% in the prior year. The improvement was primarily due to the effects of exiting certain unprofitable programs and customers. As of March 31, 2014, WestPoint had $15 million of unrestricted cash on the balance sheet.

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 2014 with consolidated cash and our investments in the funds totaling approximately $8 billion. Our subsidiaries have approximately $2.3 billion of cash and $1 billion 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.

With that, operator, can you please open it up for questions?

(Operator Instructions) Daniel Fannon, Jefferies.

Good morning, guys. So I just wanted to touch base on the -- [the highest level] in terms of the activist strategy. In the past we've kind of spoken about how it can be successfully applied in, in the environment. But, with the current market volatility since the last quarter and kind of growth going out of favor, somewhat to -- more towards value-oriented, how does that strategy change? I mean, do you start targeting different types of companies or is it just kind of universal, you're always kind of looking for a certain playbook?

Hey, Dan, it's Keith. I think there is no one set of -- one specific strategy in any particular environment. I think you're seeing a lot of -- we're finding opportunities across the gamut. We're actually looking at some distressed opportunities and you saw in the first quarter alone, we were very active with eBay and Apple. So I don't think there is one specific type of company or specific strategy when it comes to activism, there's different things work in different environments. It's always going to be case-specific, but we're finding no shortage of opportunities in deploying capital.

Okay that's helpful. Perhaps touching a little bit on the Energy segment, we talked about -- he has mentioned record throughputs in first quarter, but there were some challenges around the refining margin. Can you talk a little bit about your outlook for crack spreads and then maybe your hedging strategy, how variable is that in terms of how much you guys hedge as a percentage on a forward basis your production?

Yeah. So I'll take the second part first. This year I think we have somewhere in the range -- just north of 30% hedged out for 2014, it'll be a little bit higher than 30%. And we have our -- our goal is always going to be, and I think we've said this historically, to hedge anywhere between 30% and 40% of production, lock in kind of a base rate of EBITDA. And then we're going to kind of roll along with the market on the remaining balance.

So for 2014 that's pretty much all locked down. For 2015, we're still implementing our hedging strategy. We obviously have certain targets on both the heating oil crack side and the gasoline cracks. So when they get to certain levels that's when we [lay demand]. So as a base, if you're modeling it out, you can use 30% of the base kind of hedge of our production.

And then, Dan, as to the first part of the question, our view on spreads, the regional spreads will vary depending on the balance of crude production and the demand in each of the regions, and we continue to be bullish on the prospects of crude production in the US, especially crude making its way to the Mid-Continent, which is where CVR operates. So we continue to be optimistic on that front.

Okay. So if I was to just to maybe follow-on on that, given that you guys are at the lower end of the amount that's hedged, it would appear that you guys would be bullish on spreads basically. I guess (technical difficulty)?

I think long-term our thesis has not changed, in that we've consistently said that 900,000 plus barrels, incremental barrels of production are coming on every day year-over-year in the US and it's got to go somewhere, and a lot of that's going to get -- a lot of that supply is going to get trapped where our refiners are positioned. And so, we should have long-term advantage to favorable purchases of WTI at a discount.

As far as hedging 30% to 40%, we have two refineries. Refineries, you always are reading about refineries going down for maintenance or whatever it may be. So you don't want a -- 40% maybe a little bit higher. That's going to be the absolute top just from a risk management point of view. I'm not even saying it's necessarily a bullish view on spreads, although we're long-term bullish on our positioning in the marketplace. If you've hedged 80% and one of your refineries go down, I'm going to be making short.

Okay that makes sense. And then maybe one final question on kind of the Railcar segment. We're seeing a lot of demand there. It seems we're in the early stages or mid-stages of a bull cycle there, especially given kind of the outlook for US energy production. I guess one of the questions I have there is, how far do you think we're into that cycle? It just seems demand is very strong and it will remain strong.

The demand is strong. I think you are continuing to see big orders being placed, especially in the covered hopper car side recently. On the tank car side, there is some guidance that I think the whole industry is waiting for in terms of the safety standards and any required retrofits on car designs. And so, we think there's been a slowdown of orders until all of that gets cleared up. But it's all going to be driven by end demand, and for the tank car side especially, driven a lot by crude by rail. But backlogs continue to be at the highest levels in many, many years. And so, we think there is still another wave of orders to come when the regulations get finalized.

And I would add to that Dan, to what Sung said and just tying into the statement I made earlier about back to the incremental US oil production and the various bottlenecks kind of also reconciles and to -- as that supply continues to grow, there is only so much pipeline capacity. And so, we used to -- moving oil by rail will continue to grow with it. So to Sung's point, we do think tied into that piece is we have a ways to go here.

Okay. Thanks guys. That's it from my part. Very helpful.

Thanks, Dan.

(Operator Instruction) And I see no further questions in the queue at this time.

Okay. Thanks everyone. We look forward to talking to you during the second -- after the second quarter result.

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may now disconnect. Everyone have a good day.