Icahn Enterprises LP (IEP) 2014 Q2 法說會逐字稿

Good morning and welcome to the Icahn Enterprises L.P. Q2 2014 earnings call with Jesse Lynn, 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 Lynn, who will read the opening statement. Please go ahead.

Thank you. The Private Securities Litigation Reform Act of 1995 provides us 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 circumstance change, except as otherwise required by law. This presentation also includes certain non-GAAP financial measures.

Now I'll turn it over to Keith Cozza, our Chief Executive Officer.

Thanks, Jesse. Good morning and welcome to the second-quarter 2014 Icahn Enterprises earnings conference 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 will then be available to address your questions.

Icahn Enterprises posted strong results for the second quarter of 2014, driven by the performance of the investment funds. Adjusted net income attributable to Icahn Enterprises for Q2 2014, after adding back the loss on extinguishment of debt, was $520 million, or $4.32 per LP unit, compared to net income of $54 million or $0.48 per LP unit in the prior-year period.

Please note that Q2 of 2013 did not contain any gains or losses for the extinguishment of debt. Adjusted EBITDA attributable to Icahn Enterprises for Q2 2014 was $880 million compared to $275 million in Q2 of 2013.

In our investment segment, the investment fund recorded a total return of 10.7% for the quarter compared to a return of negative 2.8% in the prior-year quarter. The investment funds' performance was driven by significant gains from our investments in Apple, Chesapeake Energy, and Forest Laboratories.

We are very pleased with these returns, given the negative impact that our hedging activities have had on performance. Without giving effect to our hedges, our long-only positions increased by 17% for the quarter.

Q2 2014 sales and operating EBITDA 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, and financial results of the motor parts division improved in North America, which helped to offset some of the weakness in European sales, adding to motor parts portfolio of products, where acquisition of Affinia's chassis business in Q2 as well as the Honeywell Friction acquisition, which closed subsequent to quarter end.

In our energy segment, the refining and fertilizer MLPs had solid operational performance in the second quarter. CVR Refining had record combined crude throughput rates for the quarter and the fertilizer subsidiary, CVR Partners, benefited from sequentially higher average UAN prices per ton. Subsequent to quarter end, CVR Energy announced a special dividend of $2 per share, which was paid on August 4.

Our railcar segment continued have strong tank railcar shipments in Q2 of 2014 and was able to efficiently ramp up production to meet increased demands for Hopper railcars. This segment also continues to build its lease fleet, which consisted of over 37,000 railcars at the end of the quarter.

In our gaming segment, Tropicana's earnings have held steady in spite of weakness in the broader Atlantic City market. Tropicana AC has benefited from the closure of a competitor in Atlantic City as well as from Internet gaming revenues, which commenced in November 2013. Tropicana closed on the acquisition of Lumiere Place Casino and Hotel complex in St. Louis, Missouri, during Q2 2014.

IEP ended the quarter with substantial liquidity, with cash and liquid investments at the holding company totaling approximately $6.2 billion. We are finding no shortage of investment opportunities across all of our segments, which we believe will produce compelling returns over the long term.

With that said, let me turn it over to Sung for a review of the operating segments.

Thanks, Keith. I will begin by briefly reviewing our consolidated results for Q2 2014 and then highlight the performance of our operating segments. In Q2 2014, adjusted net income attributable to Icahn Enterprises, after adding back the loss on extinguishment of debt, was $520 million, driven by strong performance of the investment funds, as Keith mentioned earlier.

As you can see on slide 5, Q2 2014 adjusted EBITDA attributable to IEP was $880 million compared to $275 million in the prior year. Most of the increase was tied to the performance in the investment segment as well as improved performance of Federal-Mogul and the acquisition of ARO in Q4 of 2013. I will now provide more detail regarding the performance of our individual segments.

Our investment segment had income attributable to Icahn Enterprises of $501 million. For Q2 2014, the investment funds that we manage had a gross return of 10.7% compared to a loss of 2.8% in Q2 2013. Long positions had a 16.8% return for the current quarter, while the short positions and other expenses had a negative performance attribution of negative 6.1%.

Year-to-date, the investment segment has generated a 10.2% return compared to 6.7% in the first half of 2013. Since inception in November 2004 through the end of Q2 2014, the investment funds' gross return is 293% or 15.2% annualized.

The investment funds continue to be significantly hedged. At the end of Q2 2014, net long exposure was 39% compared to 13% at the end of 2013. IEP's investment in the funds was $5.1 billion as of June 30, 2014.

And now to our energy segment. For Q2 2014, our energy segment reported net sales of $2.5 billion and consolidated adjusted EBITDA of $215 million. CVR Refining's Coffeyville and Wynnewood refineries achieved another consecutive quarter of record combined crude throughput rates and CVR Partners benefited from sequentially higher average UAN price per ton.

CVR Refining reported Q2 2014 adjusted EBITDA of $193 million compared to $251 million in the prior-year period. The decline is due to lower refining margins adjusted for FIFO, which were $14 per barrel in Q2 2014 compared to $19 per barrel in Q2 2013. Partially offsetting the margin decline was the record crude throughput rate of approximately 212,000 barrels per day for the Coffeyville and Wynnewood refineries.

Subsequent to quarter end, a fire at the Coffeyville refinery caused damage to the plant's control system. Management has estimated that the Coffeyville refinery could be down for approximately four weeks, during which time they will pull forward some of the plant's scheduled maintenance activities.

More importantly, four employees were hospitalized by the fire. CVR management is focused on providing assistance to the injured employees and their families. Despite this tragic accident, we believe that CVR has one of the best safety records in the industry and CVR management remains committed to providing a safe environment for all of CVR's employees.

CVR Partners reported Q2 2014 adjusted EBITDA of $26 million compared to $44 million in Q2 2013. Production levels in Q2 2014 were impacted by planned downtime at the fertilizer plant. Average realized plant gate prices for UAN was $283 per ton compared to $331 per ton in the same period in 2013.

Now turning to our automotive segment. Our automotive segment's Q2 2014 sales were $1.9 billion, which was a year-over-year improvement of 5%. Operational EBITDA was $180 million in Q2 2014, up 11% from Q2 2013.

Federal-Mogul's improved financial results for the quarter were driven by higher sales volume and market share gains in the powertrain division as well as continued improvements in operational performance. On a global basis, powertrain had revenues of over $1.2 billion in Q2 2014 compared to $1.1 billion in the prior-year period.

The powertrain segment is continuing to gain market share in all regions. Revenue in North America was up 12%, while light vehicle production was flat in Q2 2014 and commercial vehicle production grew by 5%. In Europe, Q2 2014 sales were up 4% compared to a slight increase in light vehicle production of 1% and a decline in commercial vehicles of 6%.

Powertrain revenue in all other regions was up 11% on a constant dollar basis, driven by strong sales in China, where sales increased 24% compared to 2013. Powertrain's operational EBITDA continued to improve, as the division reported $117 million in Q2 2014, an increase of $12 million over the same period in 2013.

The motor parts division had revenue of $791 million in Q2 2014. Sales in North America are improving, which helped to offset some softness in European sales in the quarter. Motor parts' operational EBITDA was $63 million in Q2 2014, up $6 million from 2013.

The division continues to make progress strengthening its part product portfolio. The motor parts division closed on its purchase of the Affinia chassis business in May and the acquisition of the Honeywell Friction business subsequent to quarter end.

At the beginning of Q2 2014, Federal-Mogul successfully secured $2.6 billion to refinance maturing debt. The new financing includes a term loan of $700 million due April 2018, a term loan of $1.9 billion due 2021, strengthening the liquidity and financial profile of the Company.

Now turning to our railcar segment. Railcar shipments for Q2 2014 were approximately 2140 railcars, including approximately 1020 railcars to leasing customers as compared to 1310 railcars for the prior-year period, of which approximately 520 railcars were to leasing customers. The industry delivered approximately 16,000 railcars in Q2 according to the Railway Supply Institute, with tank cars accounting for the majority of railcars delivered.

Orders for covered hoppers, however, have been gaining momentum. Covered hoppers now represent 36% 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 an all-time high of nearly 100,000 railcars at the end of Q2 2014 compared to 73,000 railcars at the end of 2013. As of June 30, 2014, ARI had a backlog of approximately 9500 railcars, including 4900 railcars for lease customers.

Total manufacturing revenues before intercompany eliminations for Q2 2014 increased by $90 million over the comparable prior-year period. The increase was primarily due to the increased hopper railcar shipments and strong market conditions for tank railcars.

Gross margin for manufacturing operations before intercompany eliminations for Q2 2014 was $65 million compared to $44 million for the prior-year period. Gross margin for manufacturing operations as a percentage of the manufacturing revenues decreased to 24% for Q2 2014 from 25% in the prior year. The slight decrease in gross margin percentage was primarily due to a shift in the sales mix to a higher mix of hopper railcars, which have lower margins than tank railcars.

Railcar leasing revenues increased for Q2 2014 as compared to the prior year period 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 32,000 railcars at the end of Q2 2013 to approximately 37,100 railcars at the end of Q2 2014.

Lease rates remain strong, driven by strong demand from the energy sector. Adjusted EBITDA attributable to IEP grew to $63 million compared to $21 million in the prior year. As a reminder, we acquired a 75% ownership in ARO in late 2013 and therefore, adjusted EBITDA attributable to IEP for Q2 2013 does not include adjusted EBITDA related to ARO for that period.

Now turning to our gaming segment. Q2 2014 gaming segment revenue and EBITDA improved from the prior year period due to an increase in consolidated gaming volumes. Q2 2014 is the first quarter to include our recent acquisition of Lumiere Place. Even without the addition of Lumiere, however, revenues were higher.

Tropicana's adjusted EBITDA for Q2 2014 was $26 million, which was $2 million higher than Q2 2013. Subsequent to quarter end, we were able to sell the River Palms property in Lawson, Nevada, for $7 million. Tropicana finished the quarter with $160 million in cash and cash equivalents as of June 30.

Now turning to our food packaging segment. Net sales for Q2 2014 were flat at $93 million compared to the prior-year period. An increase in price and product mix and favorable foreign currency translation was offset by lower volumes.

Sales and profits were also impacted by a temporary weather-related disruption at one of this case's extrusion plants. Consolidated adjusted EBITDA of $17 million in Q2 2014 was flat with the prior-year period. This case's cash balance at the end Q2 was $31 million.

And now to our metal segment. Net sales for Q2 2014 decreased by $42 million or 18% compared to the prior-year period. Adjusted EBITDA was a loss of $4 million in Q2 2014 compared to a loss of $6 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 a weak export market, raw material supply constraints, and competition for shredder feedstock continue to impact the operating results of PSC. The Company continues to invest in its operations, with a focus on strengthening our competitive position within our existing markets.

And now to our real estate segment. Q2 2014 real estate revenues were $26 million, which was $5 million above the comparable prior-year period. Most of this increase was due to residential unit sales in our Cape Cod development operations.

The majority of revenues from our real estate segment for both periods continue to be 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 million of adjusted EBITDA in Q2 2014.

And now turning to our home fashion segment. Net sales for Q2 2014 decreased by $4 million or 8% compared to the prior-year period. The decrease was primarily due to reduction in sales volume and certain low-margin programs. Looking forward, we are excited by new brands and believe we have solid placements, which will help topline growth.

Despite the sales decrease, adjusted EBITDA was a positive $2 million in Q2 2014 compared to breakeven in the prior year. Gross margin as a percentage of net sales was 16% for Q2 2014 as compared to 10% in the prior year. The improvement was primarily due to the effects of replacing certain unprofitable programs with higher margin sales.

As of June 30, 2014, West Point had $9 million in unrestricted cash. 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 Q2 2014 with consolidated cash and our investment in the funds totaling approximately $8.4 billion. Our subsidiaries have approximately $2.2 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. Operator, can you please open it up for questions now?

(Operator Instructions) Dan Fannon, Jefferies.

Just wanted to touch base on just the investment opportunities and how you kind of see it today versus other periods. You mentioned you're still pretty positive on the environment, but thinking about your -- the firm capital allocating more to the fund, less to the fund, for the rest this year and how you think. Then ultimately, just comparing maybe just the activist environment as a whole to today in the first half of this year versus maybe a year ago or other periods in time?

Sure. Hey Dan, it's Keith. Obviously, we think the current environment for the activist strategy is fantastic. Some of this is going to sound very familiar, but interest rates are extremely low, organic growth opportunities are somewhat limited.

We been kind of pushing or preaching about an M&A boom, which is somewhat materializing over the last couple of quarters, and we've been able to participate in that with the -- you probably saw the recent public news of Family Dollar as well as Forest Laboratories getting bought out during the first half of the year as well.

So the opportunity set is great. I would characterize -- I would recharacterize one thing you said is we are generally very cautious on the overall economy and very careful where valuations on right now. And so -- but I think that is -- I think that shows up in our low exposures.

We tend to keep things pretty hedged. We're seeing good opportunity sets on certain individual situations, but globally, we're pretty cautious. From a macro point of view, we're pretty cautious.

Okay. And I guess -- should we think about, then, at the segment level, M&A still being something you guys are pushing for in those segments or just thinking about just activity across the various subgroups and where you potentially see more opportunity for that or thinking about the holistic portfolio and don't see much change from here?

Well, I mean -- I think our actions probably are going to speak the loudest. At the subsidiaries, we are seeing a number of different M&A opportunities. We've talked about -- we bought the casino in -- the Lumiere Casino in St. Louis as part of the Tropicana business.

Federal-Mogul just did two bolt-on acquisitions and we're -- there's no shortage of additional opportunities that we are constantly reviewing. And if the valuation makes sense and the strategic rationale makes sense and there is good synergies, we will pull the trigger. So -- but as far as those opportunities -- we see dozens of opportunities every quarter. Which ones materialize is always just price dependent, effectively.

So -- but I think -- I look at IEP in the long term and over a decade, you see different segments being added into our operating businesses and I would expect that to continue over the next decade. I think if we have this conversation two or three years from now, there will probably be a new segment, maybe it will be one less segment. It's always going to be valuation dependent.

Got it. And then lastly, just any update on July with regards to the fund and how that tracks into the third quarter?

Yeah, I am not in a position to -- we haven't disclosed that.

Okay. All right, thanks.

Ken Bann, Jefferies and Company.

I was just wondering could you give us maybe an update on where your cash might be now with the special dividend that you got from CVR?

Well, I mean -- sure, we can do it together. It's -- the special dividend is public information. $2 times 71 million shares, so it's another $140 million on top of our reported balance here. So at Holdco, pro forma, it would be around $1.250 billion.

Okay.

I mean, there's some other regular business type things that are probably in there, but that's the big item.

Okay, right. And then in terms of M&A, are there any thoughts on some of your smaller segments of selling any of those at any point, given stronger valuations in the market?

We're always evaluating -- we like to say we follow our mantra -- we could be buyers or sellers. It's always valuation dependent. There's nothing imminent, but we're always actively reviewing for add-ons or even dispositions, frankly, so -- but there's nothing pending.

Okay. All right, great. Thank you.

(Operator Instructions) Andrew Berg, Post Advisory.

On the metal segment, just curious -- you made a little bit of headway. Obviously, it remains challenging environment. You think that there's any potential to get this to breakeven by fiscal year end or you think it will be a EBITDA loss for the year?

SungHwan Cho

You know, we've made some management changes there. The environment continues to be pretty tough, but we have a lot of operational initiatives in place that we think there's a chance of getting to at least breakeven for the remainder of the year. And the -- I think we've continued to invest in the business and we think that will add to the profitability of the business next year.

Okay. And on the West Point side, again, you've been making slow headway on that one. As that business begins to turn, do you start seeing an increase from anybody who may want to approach you to buy that business, now that you got it back on better footing? Or is it still pretty much a work in progress and you are waiting for the right time to exit?

SungHwan Cho

I think we are most -- we are just focused on improving the operations of it. This year, we are happy with the job management is doing. It's been a long road of turning that around, Andrew, but we are pretty focused on continuing to improve and focused on profitable sales.

So there's again -- hasn't -- that's where our main focus is right now. It's turned into a nice little profitable segment here this year.

Okay. And then just on the hedge fund, I just want to make sure I've got that right. Sung, you said your net long was 39% at the end of 2Q and 13% long at the end of 4Q last year?

SungHwan Cho

Yes, that's right.

What was it at the end of 1Q? Do you have that number?

Off the top my head, I want to say 33%, but it is in the Q in the same section. I'm doing it off memory, but I believe it was 33%.

Okay. I appreciate it. Thanks, guys. Nice quarter.

Thank you and I currently have no more questions in the queue.

Okay, thanks, everyone. We look forward to speaking with you next quarter.

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