Icahn Enterprises LP (IEP) 2017 Q2 法說會逐字稿

Good morning, and welcome to the Icahn Enterprises L.P. Second Quarter 2017 Earnings Conference 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 will now read the opening statements.

Thank you, operator. 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 recent -- most directly comparable GAAP financial measures can be found in the back of this presentation. Now I'll turn it over to Keith Cozza, our Chief Executive Officer.

Thanks, Jesse. Good morning, and welcome to the Second Quarter 2017 Icahn Enterprises' Earnings Conference Call. Joining me on today's call is Sung Hwan Cho, our Chief Financial Officer. I would like to begin by providing some brief highlights. Sung will then provide an in-depth review our financial results and the performance of our business segments. We will then be available to address your questions. For Q2 2017, we had net income attributable to Icahn Enterprises of $1.6 billion or $9.51 per LP unit compared to a net loss of $69 million or $0.50 per LP unit in the prior-year period.

Adjusted EBITDA attributable to Icahn Enterprises for Q2 2017 was $506 million compared to $292 million for Q2 of 2016. Our Investment Funds had a positive return of 4.3% in Q2 of 2017, compared to a loss of 6% in Q2 of 2016. Our second quarter 2017 performance was driven by net gains in both our core long and single main short equity positions offset by losses and various hedge positions. Net sales for our automotive segment in Q2 2017 were $2.5 billion, an increase of 2% from the prior-year period. The increase was primarily due to higher sales volume at Federal-Mogul.

In the Icahn automotive group, we continue to make acquisitions of auto service centers and maintain an active pipeline of additional acquisition opportunities to further expand our national footprint. In our energy segment, our Q2 2017 net sales were $1.4 billion and consolidated adjusted EBITDA was $73 million. CVR Refining posted a strong operational performance during Q2, with a quarterly record for crude oil throughput at its Coffeyville refinery. CVR Partners Coffeyville and East Dubuque facilities also recorded high on-stream rates for the fertilizer operations. The East Dubuque facility posted an on-stream rate of 100% for its ammonia plant, which was also a quarterly record.

RINs expense for our refining operations remain the single largest headwinds for our energy segment. The volatility and extraordinarily high prices of RINs continue to hamper results in the industry and may cause financial distress and risk of closure for smaller independent merchant refiners.

In our Railcar segment, we closed the previously announced initial sales of American Railcar Leasing for a pretax gain of approximately $1.5 billion. We have the option to sell additional railcars upon meeting certain conditions for a value of $559 million as of the end of Q2 2017.

In our Gaming Segment, Tropicana delivered solid results for the quarter, with strong performance improvement at its Atlantic City and St. Louis properties. We closed the quarter with strong liquidity position and are excited about a number of investment opportunities across all of our business segments. With that, let me turn it over to Sung.

Thanks, Keith. I will begin by briefly reviewing our consolidated results, and then highlight the performance of our operating segments and comment on the strength of our balance sheet.

Net income attributable to Icahn Enterprises was $1.6 billion for Q2 2017 compared to a net loss of $69 million in the prior-year period. As you can see on Slide 5, in Q2 2017, IEP had significant income in our Railcar segment, associated with the $1.5 billion pretax gain recorded for the ARL initial sale closing. We also released approximately $500 million of tax asset valuation allowances in our automotive segment during the quarter. The performance of our Investment Funds also improved from the prior-year period with the return of positive 4.3% for Q2 2017 compared to negative 6% for Q2 '16.

Adjusted EBITDA attributable to Icahn Enterprises for Q2 '17 was $506 million compared to $292 million for Q2 '16.

I will now provide more detail regarding the performance of our individual segments. Our Investment segment had a gain attributable to Icahn Enterprises of $97 million for Q2 '17. The Investment Funds had a return of positive 4.3% in Q2 '17 compared to a return of negative 6% for Q2 '16. Long positions had a positive performance attribution of 3.8% for the quarter, while short positions and other expenses had a positive performance attribution of 0.5%.

Since inception in November 4 through the end of Q2 '17, the Investment Funds gross returns is 119% or approximately 6.4% annualized.

The Investment Funds continue to be significantly hedged. At the end of Q2 2017, net short exposure was 44% compared to net exposure -- net short exposure of 128% at the end of 2016. During the quarter, we invested $800 million into the funds from the proceeds of the ARL sale. IEP's investment in the funds was $2.7 billion as of June 30, 2017.

And now turning to our energy segment. For Q2 2017, our energy segment reported revenues of $1.4 billion and consolidated adjusted EBITDA of $73 million compared to revenues of $1.3 billion and consolidated adjusted EBITDA of $113 million for the prior-year period. Both the refining and fertilizer businesses had solid operational performances in the quarter. The Coffeyville refinery achieved a quarterly crude throughput record and the East Dubuque fertilizer facility posted an onstream rate of 100% for plant.

CVR Refining reported Q2 '17 adjusted EBITDA of $43 million compared to $85 million in the prior-year period. Refining margin adjusted for FIFO impact, a non-GAAP financial measure, was $7.48 per barrel in Q2 2017 compared to $9.56 per barrel in the prior-year period. The decrease was primarily driven by higher RINs expense, partially offset by the increase in the Group 3 crack spread.

CVR Partners reported Q2 '17 adjusted EBITDA of $32 million compared to $29 million in Q2 '16. Consolidated average realized gate prices for UAN and ammonia were $174 per ton and $333 per ton respectively in Q2 '17 compared to $199 per ton and $417 per ton respectively for the same period in '16.

Now turning to the automotive segment. Our automotive segments' Q2 '17 net sales were $2.5 billion, up 2% from the prior-year period. The increase is primarily due to volume increases and to a lesser extent, sales volume increases from acquisitions. These sales volume increases were offset in part by the unfavorable effect of foreign currency exchange.

Federal-Mogul on a stand-alone basis reported Q2 net sales of $2 billion compared to $1.9 billion in the comparable prior-year period. Higher OE sales and higher aftermarket sales in North America were partially offset by lower export sales and $28 million of negative impact from currency exchange rate fluctuations.

Operational EBITDA in Q2 '17 was $191 million, down $5 million or 3% compared to Q2 '16. Icahn automotive group, the parent of IEH Auto and Pep Boys had Q2 '17 operating revenue of approximately $697 million compared to $685 million in Q2 '16.

In 2017, we have added 474 locations to our service network. We acquired 134 Just Brakes locations in January of 2017 and added 326 locations with our acquisition of Precision Auto Care in July 2017.

Now turning to our Railcar segment. We closed the initial sale of American Railcar Leasing in Q2 for a pretax gain of approximately $1.5 billion and we have the ability to sell additional railcars upon meeting certain conditions for a value of a $559 million as of June 30, 2017.

We ended Q2 2017 with 16,905 railcars in the lease fleet, down from 45,336 railcars at the end of Q2 2016. Our Railcar segment had railcar shipments in Q2 '17 of 1,076 railcars, including 545 railcars to leasing customers as compared to 1,017 railcars for the prior-year period of which 85 railcars were to leasing customers.

As of June 30, 2017, ARI had a backlog of 2,808 railcars, including 715 railcars for lease customers. According to the Railway Supply Institute, the railcar manufacturing backlog has decreased from a record level of nearly 143,000 railcars at the end of 2014, down to approximately 67,000 railcars at the end of Q2 '17. 87% of the current industry backlog is comprised of tank cars and covered hopper railcars, the 2 primary railcar types manufactured and leased by our Railcar segment. As a result of the initial sale of ARL cars, the segment's railcar leasing revenue declined in the quarter as compared to the prior-year period. Lower weighted average lease rates also contributed to the decline in leasing revenue.

Adjusted EBITDA attributable to IEP for the Railcar segment was $79 million in Q2 '17 compared to $102 million in the prior-year period.

Now turning to our Gaming Segment. Total Gaming Segment operating revenues were $222 million in Q2 '17, which was down $32 million from Q2 '16. The decrease was primarily related to the closing of the Taj Mahal in October of 2016, offset in part by increased gaming revenues at Tropicana Atlantic City and Lumière. Our Gaming Segments' adjusted EBITDA for Q2 2017 was $43 million compared to $33 million in Q2 '16. Improved operational performance at Trop Atlantic City and Lumière in Q2 '17 were coupled with the fact that Q2 '16 included losses from the operations at the Taj Mahal.

Now turning to our Food Packaging segment. Net sales for Q2 '17 increased by $14 million or 16% compared to the prior-year period. The increases were primarily due to the inclusion of recent acquisitions.

Consolidated adjusted EBITDA of $16 million in Q2 2017, which was $1 million above the prior-year period. Gross margin as a percentage of net sales was 26% for both Q2 '17 and Q2 '16.

And now to our Metals segment. Net sales for Q2 '17 increased by $26 million or 34% compared to the prior year. The net sales increase was driven by higher selling prices across all product lines as well as higher volumes for non-ferrous. Higher pricing reflected higher market prices for Q2 '17 as compared to Q2 '16 as well as speculation that changes in current U.S. trade policies will favor domestic producers. Non-ferrous shipment volumes increased primarily due to the capital investment in aluminum processing capabilities at one of our facilities made in late 2016. Adjusted EBITDA was a positive $4 million in Q2 2017 compared to a loss of $1 million in the prior-year period. Gross margin has improved due to the continued focus on disciplined buying, higher prices for non-ferrous auto residue, improved market pricing and by continued efforts to bring processing costs in line with volume and market pricing.

And now to our Real Estate segment. Real Estate revenues were $25 million in Q2 '17, which was slightly above the prior-year period. The increase was primarily due to higher club revenues. Operating revenues from our Real Estate segment were substantially derived from our Club and Rental operations for both Q2 '17 and '16.

Our net lease portfolio continues to drive earnings in this segment with its 15 properties generating strong cash flows. The Real Estate segment generated $10 million of adjusted EBITDA in Q2 '17.

And now to our Mining segment. Our Mining segment has been concentrating on sales in Brazil. During Q2 '17, international Iron ore prices declined with spot prices ending below $60 per tonne in June. Prices have since recovered to the mid-$70 range driven by Chinese demand.

Now turning to our Home Fashion segment. In Q2 '17, net sales for our Home Fashion segment were down 15% as compared to Q2 '16 due to lower sales volumes. Adjusted EBITDA was a loss of $1 million compared to a gain of $1 million in the prior-year period.

Gross margin as a percentage of net sales was 11% for Q2 '17 compared to 13% in Q2 '16.

Now I will discuss our liquidity. We maintained ample liquidity at the holding company and at each of our operating subsidiaries to take advantage of attractive opportunities. We ended Q2 '17 with cash, cash equivalents, our investment in the Investment Funds and revolver availability totaling approximately $6.2 billion. Our subsidiaries have approximately $1.7 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 the call up for questions, please?

(Operator Instructions) And our first question will come from the line of Dan Fannon with Jefferies.

I guess just generally first just on the funds. The hedging has changed pretty dramatically year-to-date. Maybe just give an overall outlook in terms of how you're thinking about investment opportunities there? And then, is the billion that's come into the fund year-to-date -- I'm sorry, $800 million that's come into the fund, is that -- do you think we're going to see -- will you see more going into the fund, or is that kind of where we should -- just the right level?

Hey, Dan, it's Keith. I think it just depends on if there are other significant asset monetizations. We have a healthy amount of cash at the holdco, around $650 million or so. That's a pretty healthy amount to deploy for investment opportunities for the various business segments, but if we were to monetize certain assets and -- that would increase the cash level, a lot of that cash would probably go into the funds. So it's just -- really the answer is it depends, but right now there is no current intention to put more in because we have a kind of a full pipeline of things that we're looking at in the various segments, especially in the Icahn automotive group.

And the overall outlook for just kind of the fund itself just in terms of positive, bearish, the hedging kind of obviously went down on the short side, but ...

Yes. Yes, so the answer on the hedging, yes we reduced some of the macro index hedges. Some of it was to correspond with some long positions that we had sold at decent valuations. The other really related to an outlook we had kind of related to second quarter earnings, particularly in the S&P 500, looking at the year-over-year growth and basically taking some risk off the table with our negative net exposures that the market would perceive those earnings to be quite well. And so we wanted to reduce some of that potential headwind so we took the macro shorts down significantly during the quarter.

Got it. And then just thinking about the energy segment and the sustainability of the dividend with neither of the subsidiaries declaring a dividend this quarter, up to CVR energy. So I guess just thinking about the outlook of that $0.50 cash dividend?

Yes. I mean the Board meets every quarter to evaluate continuing that dividend, so I'm not going to provide forward guidance. But I would point out that CVI, the parent company, has over $200 million of excess cash still. So subject to Board deliberation, they could continue it for another 3 or 4 quarters I would say at least, just based on the shares outstanding. But again, it's a healthy debate each quarter, and we're hopeful that crack spreads can stay elevated here to provide for future distributions.

And the next question will come from the line of A.B. Shapiro with Shapiro Capital.

I noticed that you have indemnified the Board regarding the offer -- regarding the price range. So I was wondering if you guys have reserved anything regarding that? And if you're concerned about potential litigation?

I'm not sure I even understand the question, but no we're not concerned about potential litigation.

Got it. And what's the future plan for the holdings of TPCA?

Future plan, I mean we continue to operate it just like our other 9 segments. We want to provide management with support and -- the support and capital to grow the business and improve profitability over time. And we think the Tropicana management team is doing a good job of that.

Yes they're doing a great job, but do you think they'll eventually IPO it? Will you do an outright sale and do a dividend ...

There is no current plans for any of those things that you just said.

And any thoughts on the balance sheet of TPCA?

No. There's no thoughts.

And guys, the confusion -- just to clarify your confusion before, I was just referencing the fact that you're tendering for a stock at a price that is at a 35% to 40% discount to where you're marketing it. So I would imagine there could be some litigation regarding that and if you had any concerns there?

Nope.

(Operator Instructions) And I have currently no more questions in queue.

Okay. Thanks, everybody. We look forward to talking to you during -- after the third quarter. Thanks.

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