Icahn Enterprises LP (IEP) 2015 Q2 法說會逐字稿

Good morning and welcome to the Icahn Enterprises LP Q2 2015 Earnings Call, with Andrew Langham, General Counsel; Keith Cozza, President and CEO; and SungHwan Cho, Chief Financial Officer.

I would now like to hand over the call to Andrew Langham, who will read the opening statements.

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 statement, should circumstances change, except as otherwise required by law. This presentation also includes certain non-GAAP financial measures.

And I'd like to hand it over to Keith Cozza, President and CEO.

Thanks, Andrew. Good morning and welcome to the Second Quarter 2015 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.

Net income attributable to Icahn Enterprises for the second quarter of 2015 was $212 million or $1.68 per LP unit, compared to an adjusted net income after adding back the loss on extinguishment of debt of $520 million or $4.32 per LP unit in the prior-year period.

Adjusted EBITDA attributable to Icahn Enterprises for the second quarter of 2015 was $619 million compared to $883 million in the prior-year period. Our investment funds earned a return of 3.9% in the second quarter of 2015, compared to 10.7% in the prior-year period.

Second quarter performance was driven by gains in our core long equity positions as well as positive performance from various hedging activities. Year-to-date, through June 30, 2015, the bonds have earned a return of 8.4%.

Federal-Mogul had record sales of $2 billion for the second quarter of 2015, an increase of 16% in constant dollars compared to the prior-year period. Federal-Mogul's Powertrain division maintained strong performance in the quarter, with revenue increasing 12% on a constant dollar basis, compared to the prior-year period. Powertrain's revenue reflects the inclusion of TRW's engine valve business, which closed in February of this year as well as organic growth.

Subsequent to quarter end, the Powertrain division closed on Phase II of the acquisition of TRW's engine valve business, which included the purchase of engine component plants located in Tennessee and Thailand.

Federal-Mogul's Motorparts divisions reported sales growth driven by acquisitions as well as organic growth. The Motorparts division continues to make progress on a number of strategic initiatives designed to accelerate growth and increase value.

During the quarter, IEH Auto Holdings, a wholly-owned subsidiary of IEP, acquired substantially all of the US auto parts assets of Uni-Select, USA, now known as Auto-Plus, for a purchase price of approximately $330 million. The acquisition included 39 distribution centers and satellite locations, and 240 own jobbers stores in the United States and supports a network of more than 2,000 independent wholesalers.

This business is reported as part of our automotive segment and will be operated independently of Federal-Mogul. We are excited about the opportunity this presents and would like to welcome all the members of the Auto-Plus team to the IEP family.

In our Energy segment, CVR's petroleum and fertilizers subsidiaries performed well during the second quarter.

The petroleum business benefited from favorable product margins, that combined refinery crude throughput of over 210,000 barrels per day. The fertilizer business also had a strong quarter with on-stream rates ranging from 97% to 100% for all facility operating units.

Our Railcar segment had strong quarterly railcar shipments in the second quarter and continues to build its lease fleet with over 43,000 railcars at quarter-end.

In our Gaming segment, Tropicana had strong operational quarter with improved performance at a majority of the properties. Trop AC experienced higher gaming volumes as it has benefited from the closure of several competitors and the recent completion of an extensive room renovation project in the North Tower, as well as growth from its online gaming operations.

Finally, during the quarter, IEP obtained a controlling interest in Ferrous Resources Limited, a Brazilian iron ore mining operation, through a tender offer for a majority of the outstanding shares. Ferrous Resources owns rights to certain iron ore mineral resources in Brazil and related infrastructure to produce and sell iron ore products to the global steel industry.

With that, let me turn it over to Sung.

Thanks, Keith. I'll begin by briefly reviewing our consolidated results for the second quarter of 2015 and then highlight the performance of our operating segments and comment on the strength of our balance sheet. Net income attributable to Icahn Enterprises for Q2 2015 was $212 million or $1.68 per LP unit compared to adjusted net income after adding back the loss on extinguishment of debt of $520 million or $4.32 per LP unit in the prior-year period.

Adjusted EBITDA attributable to Icahn Enterprises for Q2 2015 was $619 million compared to $883 million in Q2 2014. As you can see on slide 5, most of the decrease from the prior year is tied to the performance in the Investment segment in their respective periods. I will now provide more detail regarding the performance of our individual segments.

Our Investment segment had a gain attributable to Icahn Enterprises of $176 million for Q2 2015. The Investment Funds had a return of 3.9% in Q2 2015 compared to a return of 10.7% for Q2 2014. Long positions had a positive 5.5% return for the current quarter, while short positions and other expenses had a negative performance attribution of 1.6%.

Since inception in November 2004 through the end of Q2 2015, the Investment Funds gross return is 258% or 13% annualized. The Investment Funds continue to be significantly hedged. At the end of Q2 2015, net long exposure was 3% compared to 14% at the end of 2014. IEP's investment in the funds was $4.6 billion as of June 30, 2015.

And now, to our Energy segment. For Q2 2015, our Energy segment reported net sales of $1.6 billion and consolidated adjusted EBITDA of $230 million compared to net sales of $2.5 billion and consolidated adjusted EBITDA of $215 million for the prior-year period. Q2 results reflect a solid financial and operational performance of our fertilizer and petroleum subsidiaries.

CVR Refining reported Q2 2015 adjusted EBITDA of $194 million compared to $193 million in the prior-year period. CVR Refining posted solid results operationally and financially for Q2 2015. The Coffeyville and Wynnewood refineries ran well during the quarter, posting a combined crude throughput of approximately 211,000 barrels per day. The refineries also benefited from favorable product margins during the quarter.

CVR Partners reported Q2 2015 adjusted EBITDA of $36 million compared to $26 million in Q2 2014.

The fertilizer facility performed well in the quarter with on-screen rates ranging from nearly 97% to 100% for all facility operating units. For Q2 2015, average realized gate prices for UAN and ammonia were $269 per ton and $546 per ton, respectively, compared to $283 per ton and $521 per ton, respectively, for the same period in 2014.

Now, turning to our automotive segment. As Keith discussed earlier, on June 1, 2015, a wholly-owned subsidiary of IEP, IEH Auto Holdings, acquired substantially all of the US Auto Parts assets of Uni-Select USA, for a purchase price of approximately $330 million. This business will operate independently at Federal-Mogul and all transactions between the two entities have been eliminated in consolidation.

In Q2 2015, net sales for our consolidated automotive segment, which includes both Federal-Mogul and IEH Auto, increased by $144 million from the prior-year period and adjusted EBITDA was $181 million for Q2 2015, compared to $184 million in Q2 2014.

Federal-Mogul, on a standalone basis, reported sales of $2 billion, up 5% from prior year and up 16% in constant dollars. This reflects organic growth, both in Powertrain and Motorparts division, as well as Powertrain's acquisition of the TRW engine valve business and Motorparts' acquisition of the Honeywell brake component business.

Operational EBITDA was $180 million compared to $184 million in the prior year due to a $28 million negative impact from currency changes. Subsequent to quarter end, Federal-Mogul's Powertrain division closed on Phase II of the acquisition of TRW's engine valve business.

IEH Auto is included in Q2 2015 results for only one month. On a stand-alone basis, net sales were approximately $65 million and there was minimal contribution to segment-adjusted EBITDA.

Now, turning to our Railcar segment, our Railcar segment had strong railcar shipments in Q2 2015 of approximately 2,400 railcars, including approximately 1,760 railcars to leasing customers as compared to 2,140 railcars for the prior-year period, of which 1,020 railcars were to leasing customers.

As of June 30, 2015, ARI had a backlog of approximately [8,450] railcars, including 2,060 railcars for lease customers.

According to the Railway Supply Institute, the railcar manufacturing backlog has dropped from a record of nearly 143,000 railcars at the end of 2014 down to approximately to 136,000 at the end of Q2 2015. Tank cars are now only 34% of the industry backlog, down from a peak of 85% in Q1 2013.

Total manufacturing revenues for Q2 2015 were $268 million, which is in line with the prior year before elimination of railcar sales to our railcar segment's leasing operations.

Gross margin from manufacturing operations before intercompany eliminations for Q2 2015 was $72 million compared to $65 million for the prior-year period. Gross margin from manufacturing operations as a percentage of manufacturing revenues increased to 27% for Q2 2015 as compared to 24% in the prior-year period. The increase in gross margin percent is primarily due to stronger efficiencies and favorable pricing.

The leasing businesses within the railcar segment continue to perform well. In Q2, we grew the combined leased car portfolios to roughly 43,500 railcars from approximately 39,700 railcars at the end of 2014.

Consolidated adjusted EBITDA attributable to IEP grew to $127 million in Q2 2015 from $102 million in the prior-year period. The increase was primarily driven by higher railcar manufacturing margins and higher leasing revenues.

Our railcar segment's liquidity position is strong with $432 million of cash at the end of Q2 2015. ARI recently announced that its Board has authorized a share repurchase program pursuant to which ARI may repurchase up to $250 million of its shares from time to time.

Now, turning to our gaming segment, our gaming segment posted solid Q2 2015 results with consolidated adjusted EBITDA of $33 million compared to $26 million in the prior year. The majority of the properties experienced year-over-year improvement in operating performance. Tropicana Atlantic City's gross casino win increased 1.8% in Q2 2015 as compared to the prior-year period as a result of increased customer volumes. In addition, promotional gaming credits redeemed at Trop AC were reduced by 16% during that time period.

Internet gaming revenues also increased during Q2 2015 as compared to the prior-year period.

Based on market data, the Atlantic City market experienced year-over-year declines in gross casino win of 10.9% for Q2, 2015. Results have also improved significantly at Lumiere Place as promotional spending intended to re-launch the casino under new ownership in 2014 has been reduced.

Tropicana has a solid balance sheet with $185 million in cash and cash equivalents as of June 30, 2015. Tropicana recently announced that its Board has authorized a share repurchase program pursuant to which Tropicana may repurchase up to $50 million of its shares from time to time.

Now, turning to our Food Packaging segment. Net sales for Q2 2015 decreased by $2 million or 2% compared to the prior year. The decrease was primarily due to unfavorable foreign currency translation and unfavorable price and product mix offset in part by higher sales volumes.

Consolidated adjusted EBITDA was $18 million in Q2 2015, which was a $1 million increase from the prior-year period. Gross margin as a percentage of net sales was 26% in Q2 2015, which was consistent with the prior year. Viskase's cash balance at the end of Q2 2015 was $37 million.

And now, to our Metals segment. Net sales for Q2 2015 decreased by $85 million or 45% compared to the prior year.

The decrease was primarily due to lower shipment volumes and lower prices of ferrous and non-ferrous scrap. Ferrous scrap volumes decreased approximately 28% and the average ferrous selling price per ton decreased approximately 35% from $377 to $246. Adjusted EBITDA was a loss of $3 million in Q2 2015 compared to a loss of $4 million in the prior year.

Gross margin as a percentage of net sales was a loss of 7% in Q2 2015 compared to a loss of 2% in Q2 2014. The market environment remains challenging with reduced demand from domestic steel mills, a weak export market, declining iron ore prices and competition for a shredder feedstock.

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 Real Estate revenues were $23 million compared to $26 million in the prior-year period. Revenues were higher in the prior year, primarily due to residential development sales. Revenues from our rental and resort operations were consistent with prior-year period.

Our net lease portfolio continues to drive earnings in this segment, with its 27 properties generating strong cash flows. The Real Estate segment generated $12 million of adjusted EBITDA in Q2 2015. So far, in 2015, we have sold two rental properties in the Oak Harbor operations for $41 million which was over double the book carrying value.

Subsequent to this quarter end, we have also completed a transaction to sell a portfolio of 11 net lease properties for $25 million, generating a gain of approximately $17 million.

Now, turning to our mining segment. IEP obtained control of Ferrous Resources Limited during the second quarter of 2015 through a tender offer for outstanding shares. Prior to the tender offer, IEP owned 14% of the company's common stock; and as of the end of Q2, we own 77%.

Ferrous Resources owns rights to certain iron ore mineral resources in Brazil and develops mining operations and the related infrastructure to produce and sell iron ore products to the global steel industry. Of the six properties acquired, three are already extracting and producing iron ore while the other assets are at an early stage of exploration.

Now, turning to Home Fashion. Q2 2015 net sales increased by $6 million compared to the prior year due to higher sales volumes. We are continuing to concentrate on higher-margin lines and believe we will have solid placements for the remainder of 2015. Adjusted EBITDA was $1 million in Q2 2015, compared to $2 million in the prior year.

Gross margin as a percentage of sales was 14% for Q2 2015 compared to 16% in the prior year. The decrease was primarily due to a sell-off and write-down of aging inventory. As of June 30, 2015, WestPoint had $7 million of unrestricted cash.

Now, I will discuss our liquidity position. We maintained ample liquidity at the holding company and at each of our operating subsidiaries to take advantage of attractive opportunities. We ended Q2 with cash, cash equivalents, liquid assets and our investment in the investment funds totaling approximately $6.8 billion. Our subsidiaries have approximately $1.9 billion of cash and $0.8 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 our existing operating segments.

Thank you. Operator, can you please open it up for questions, please?

Thank you. We'll now take questions as part of our Q&A session. (Operator Instructions) Daniel Fannon, Jefferies.

Hi, good morning, guys. I'd actually like to start, touch base first just on the liquidity. I noticed that the cash at the holding company level is down to about $230 million or so, that's the lowest level it's been in some time. How are you guys thinking about that in terms of going forward? What is the right level and maybe are we looking at, maybe raising some more capital, if you continue to see some interesting opportunities out there?

Yes. Hi, Dan, it's Keith. Yes. So I think, we had, as we discussed, two very big acquisitions that obviously took down the holding company cash and we acquired the Auto Plus assets or the formerly known as Uni-Select assets. And then, we acquired this Ferrous Resources, so that was the reason for it.

Just to answer your question, I don't think we have plans to -- if you're asking about like equity issuances or anything like that, we certainly don't see that as being necessary and so that will always be price dependent. But we think we'll see that cash balance go back up over the next quarter or so from the typical dividend upstreams. I think you're pretty familiar with them, but we have a number of cash flows that are upstream.

Yes.

From CVI and American Railcar Industries and then we're also going to -- we paid for the Auto-Plus assets fully in cash. That's a business that is highly concentrated on inventory and accounts receivable. So it's frankly ripe for probably some debt at that level of the capital structure for our Auto-Plus business and that could also result in some cash flow up top as well.

So we see it rebuilding over the next couple of quarters, what's the right level. We've always talked historically of the $500 million level as kind of a base level in more, if we're not finding lots of opportunities, it's gone up, as you know, in history over $1 billion. But we're generally seeing a lot of good opportunities in the marketplace.

That's helpful. And then, so I guess maybe on the topic of opportunities, it seems like the market for M&A actually seems to be picking up a little bit. Would you agree with that and in the past, in our previous conversations, we've talked about that maybe M&A activity has been a little bit light, so do you think we're potentially entering a cycle where we may see some more activity in opportunity?

100%. From an IEP's perspective, obviously, we agree. I mean, we bought two companies this quarter alone; we have a bunch of stuff that we're looking at in the pipeline at our subsidiary levels of tack-on acquisitions. So we see the M&A activity very robust from an overall global perspective or at least the US perspective.

We were recently looking at data and this year, M&A activity is on pace to exceed $2 trillion, double what it was five years ago. So there is a lot of M&A going on. We're picking our spots where it makes sense, where we either have industry expertise or where we already having a company or a segment where we could expand that segment.

So is that maybe one of the things, is it the investment fund continues to take a relatively cautious outlook. So is maybe the M&A actually a sign of we're maybe nearing the market top at this point or are there certain segments of the market that you guys are seeing that are maybe much more interesting than perhaps other segments that may be overvalued?

I would say, I have to break the question into two components from the nine operating segments that we have, we have I would say more of a balanced approach because if we already have a company and we're doing a tack-on acquisition, we may be paying a multiple that is higher than we would normally pay, but their pro forma of synergies and things of that nature, it may still make a lot of sense for us and that gives us a lot of cushion on the downside and more comfort level on what we're paying.

At the investment fund level, I think we're finding opportunities in certain segments. Obviously, there are certain segments that are beaten down pretty substantially. And so, we've been pretty aggressive in building positions in a couple of opportunities that will be disclosed over the next quarter or so. So we are finding segments that are beaten down, but obviously we're very cautious on overall market levels and hence the Sung's reference earlier to net equity exposures in the single digits, very, very cautious on -- and our Chairman has been very vocal about that over the last quarter in seeing various aspects of the market in bubble state.

Fair enough. That's helpful. And then, maybe kind of just a final question here. Just any thoughts on maybe how the market environment might change as we potentially enter a rising rate environment here or will it simply be business as usual for you guys? Do you see anything, maybe like change in strategy or anything like that going forward?

You will not see a change in the strategy of IEP. How the market reacts to higher interest rates? Again, our Chairman has been very vocal on -- we'd be very, very cautious, especially in the high-yield debt space as to how that reaction will be absorbed by the market in a rising rate environment. Again, we've been pretty vocal about credit spreads for low-quality corporate companies and there could be a problem there, but I don't think it will change our approach and I think we've positioned ourselves from an IEP perspective to -- we hope to be able to make money in a rising-rate environment or lower-rate environment. So we're cautiously optimistic, but very, very cautious on -- the answer is, we don't know what the reaction will be, but we have worries.

Fair enough. And then, maybe just a quick tack on, is there anything that would make you less cautious, like I guess, maybe you would get a little more bullish or optimistic about what's out there or a change in stance?

For us, it always comes down to risk-adjusted returns, risk-reward to say it simply. I suppose, if we -- we see a lot of risks, I'm not going to name of every one of them, but they are the popular risks that everybody talks about, China, in the high-yield market, rate environment. We see a lot of risks and so simply put, paying 20 times PE ratios when weighing those risks is not in our opinion a great risk-reward return. So, if we see those risks subside or valuations come in to reflect a better risk-return ratio, then we would probably adjust accordingly. But it's hard to say what would cause us to adjust. I think the single-digit equity exposure speaks for itself on our view of the market.

Okay. Excellent. Again, thanks for your help.

Yes. Thanks, Dan.

Thank you and I'm currently showing no more questions in queue.

Okay. Thanks, everybody; will look forward to talking to you in November for the third quarter results. Have a good day.