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Icahn Enterprises, L.P. (NASDAQ:IEP)

Q2 2013 Earnings Call

August 07, 2013 10:00 am ET


Felicia Buebel

Daniel A. Ninivaggi - Chief Executive Officer of Icahn Enterprises GP, President of Icahn Enterprises GP and Director of Icahn Enterprises GP

SungHwan Cho - Chief Financial Officer of Icahn Enterprises GP and Director of Icahn Enterprises GP


Daniel Thomas Fannon - Jefferies LLC, Research Division

Andrew Berg - Post Advisory Group, LLC


Good morning, and welcome to the Icahn Enterprises, L.P. Q2 2013 Earnings Call, with Felicia Buebel, Assistant General Counsel; Dan Ninivaggi, President; and SungHwan Cho, Chief Financial Officer.

I would like to hand the call over to Felicia Buebel, who will read the opening statements.

Felicia Buebel

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 include certain non-GAAP financial measures.

And now, I'd like to turn the program over to our President and Chief Financial -- Chief Executive Officer, Dan Ninivaggi.

Daniel A. Ninivaggi

Thanks, Felicia. Good morning and welcome to the Second Quarter 2013 Icahn Enterprises Earnings Conference Call. Joining me today are SungHwan Cho, our Chief Financial Officer; and Keith Cozza, our Executive Vice President.

I'd like to begin by providing some brief highlights for the quarter. 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.

Icahn Enterprises' net income for the second quarter was $54 million or $0.48 per depositary unit, compared to net income of $257 million or $2.37 per unit in the prior year period. For the first 6 months of 2013, the company had net income of $331 million or nearly $3 per depositary unit versus net income of $306 million or $2.93 per depositary unit in the first 6 months of 2012. Our indicative net asset value per unit has increased from $57 at the beginning of the year to $71 per unit at July 31.

Our investment funds had a return of 6.7% year-to-date through June 30. Subsequent to the end of Q2, the funds returned 6.2% in July with year-to-date return to 13.3%. Our investment segment return has been driven by several of our large core equity positions including Herbalife, Netflix and Chesapeake.

In our energy segment, performance was solid at both CVR Refining and CVR partners. Although CVR Refining has now seen the impact of narrowing crack spreads and higher cause of renewable identification numbers or RINs, the Coffeyville and Wynnewood refineries had strong operational performance with record throughput at Wynnewood for the quarter. In addition, RIN prices have recently declined significantly from peak levels several weeks ago.

Federal-Mogul had a solid quarter, considering the continued weak environment in Europe and lower commercial vehicle production globally. In the second quarter, the Powertrain segment showed improving results, with revenues up 5% and EBITDA up $4 million from the prior year period. The VCS or aftermarket segment also had a solid second quarter with both revenue and EBITDA up from the prior year.

Federal-Mogul recently completed a 500 million equity rights offering to facilitate a refinancing of its debt. IEP purchased 434 million of additional shares -- $434 million of additional shares at $9.78 per share, bringing our total ownership position to 80.7%.

In the Railcar segment, ARI's profitability and outlook remained favorable due to strong tank car demand and an improving outlook for hopper cars. The company is also continuing to build its lease fleet.

In our Food Packaging segment, this case is achieving the expected benefits from recent investments and capacity expansion. In our Gaming segment, Tropicana has had solid operating performance and is actively working on its online gaming platform in New Jersey, having recently completed a joint venture with Gamesys, a prominent European online gaming operator.

In March and June of this year, IEP raised over $300 million in additional equity through secondary offerings. In Q2, we also adopted a $5 annual dividend policy, providing a 6.7% yield to our unitholders based on yesterday's closing price.

Providing additional liquidity in IEP units, and our new dividend policy, are part of our strategy to broaden and strengthen our shareholder base. We also believe that creating more liquidity in IEP units will provide us more financial flexibility in the future to pursue our strategy and make it even more effective.

With that, I'll turn it over to Sung to review the operating segments and then, as I mentioned, we'll answer your questions.

SungHwan Cho

Thanks, Dan. I will begin on Slide 4, briefly reviewing our consolidated results for Q2 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 2013 was $54 million compared to income of $257 million in the prior year period. Year-to-date, net income attributable to Icahn Enterprises increased from $306 million to $331 million.

As you can see on Slide 5, the change in Q2 net income from prior year was primarily due to the performance of the investment funds, and the fact that Q2 2012 benefited from a release of a tax valuation allowance.

Comparing year-to-date net income, the primary drivers were the inclusion of CVR Energy for the full period and the release of a tax valuation allowance in 2012. We ended Q2 with consolidated cash and cash equivalents of approximately $3.3 billion and our direct investment and the investment funds was $2.5 billion.

I will now provide more detail regarding the performance of our individual segments. Our investment segment had a loss attributable to Icahn Enterprises of $72 million for Q2 2013 due to negative performance of our direct investment in the investment funds during the quarter. The investment funds had a negative growth return of 2.8% for Q2 2013 compared to a positive 5.2% for the prior year period.

During Q2 2013, the fund's net equity exposure was 36% compared to 13% at the end of 2012. The fund's long equity exposure had a 1% return for the second quarter, while the fund's short equity exposure had a negative return of 4%. The fund's net credit exposure at the end of Q2 2013 was approximately 8% and generated a return of under 1%.

As of June 30, 2013, our investment segment had approximately $6.4 billion of assets under management, including IEP's $2.5 billion investment in the funds. Performance had recovered in July, which had a preliminary return of 6.2%, bringing the year-to-date return up to 13.3% and inception to date annual compounded returns up to 13.8%.

And now to our Energy segment. Q2 was yet another busy quarter for CVR Energy. The company completed secondary offerings for both its refining and fertilizer MLPs and paid a special dividend of $6.50 per share. This brings total distributions for 2013 up to $12 per share. IEP have received over $900 million so far this year from CVR Energy. The refining business reported Q2 2013 adjusted EBITDA of $251 million compared to adjusted EBITDA of $381 million in the prior year period. Refining margin adjusted for FIFO impacts per barrel was $19 in Q2 2013 compared to $27 during the same period in 2012, due to the higher costs of renewable identification numbers or RINs, and lower group 3 211 crack spreads.

Operationally, both the Coffeyville and Wynnewood refineries had strong operational performance with record level throughput rates at Wynnewood for the quarter. The fertilizer MLP reported Q2 adjusted EBITDA of $44 million on net sales of $89 million compared to adjusted EBITDA of $44 million on net sales of $81 million for Q2 2012.

For Q2 2013, average realized plant gate prices for ammonia and UAN were $688 per ton and $331 per ton, respectively, compared to $568 per ton and $329 per ton respectively, for the same period in 2012. The fertilizer business produced 91,300 tons of ammonia during Q2 2013, of which 2,200 net tons were available for sale, while the rest were upgraded to a record 225,000 tons of UAN.

As a reminder, we began consolidating CVR in May of 2012 but our discussion above relating to the refining and fertilizer MLPs includes a prior year comparison for the full period's standalone results.

Now, turning to Federal-Mogul. Federal-Mogul's Q2 2013 sales were $1.8 billion, up from $1.7 billion recorded in Q2 2012. Adjusted EBITDA was also up almost 4% from the prior year. The Powertrain segment showed improving results with Q2 2013 revenues up 7%, and EBITDA up $4 million from the prior year. Operating results have been negatively impacted by European light vehicle and heavy-duty production declines, but the company has adjusted its capacity and cost structure to match the market environment. Powertrain margins have recovered after dropping the back half of 2012 due to the severe drop in European production.

The VCS segment reported Q2 2013 revenue up 5% and EBITDA up $2 million from the prior year. Improvements were based upon stable U.S. sales and improvement in Europe.

We are pleased to have hired Kevin Freeland as the CEO of the VCS segment. Kevin has a long history in merchandising and was most recently the Chief Operating Officer at Advance Auto Parts. We're working very closely with Kevin and the SMO team to improve their manufacturing footprint, leverage their brands and more aggressively penetrate emerging markets where the carpark is growing substantially.

As Dan mentioned earlier, Federal-Mogul recently completed a $500 million rights offering to facilitate a refinancing of its debt. IEP purchased $434 million of additional shares, bringing our ownership to 80.7%. The company is continuing to monitor the debt markets and will refinance its debt when market conditions warrant.

Now, turning to our Railcar segment. Our Railcar segment is primarily comprised of our controlling interest in American Railcar Industries or ARI, in addition to a growing railcar lease fleet at AEP Leasing, a wholly-owned sub of IEP. AEP Leasing's lease fleet at the end of Q2 consisted of approximately 1,150 cars purchased from ARI and ACF, an affiliated company. The total lease fleet including both ARI and AEP leasing cars was approximately 4,640 cars as of June 30, 2013.

Railcar shipments for Q2 2013 were approximately 1,300 Railcars including approximately 520 railcars to leasing customers, as compared to 2,200 railcars for the comparable period last year, which included approximately 910 Railcars to leasing customers.

As of June 30, 2013, ARI had a backlog of approximately 6,940 Railcars, including approximately 4,510 Railcars to lease customers, including IEP's lease fleet.

Manufacturing revenues were $178 million for Q2 2013, a decrease of 19% from the prior year period. The primary reason for the decrease was lower hopper car shipments, partially offset by an increase in tank railcar shipments and improved general market conditions for tank railcars.

Growth margin from manufacturing operations were 25% in Q2, compared to 19% in the prior year. Revenues and profit on cars put into the lease fleet are eliminated in consolidation and the cost associated with those cars are recognized on the balance sheet and PP&E. $62 million of revenue and $80 million of profit were eliminated in consolidation in Q2 2013 compared to $84 million of revenue and $14 million of profit in Q2 2012.

ARI's adjusted EBITDA was $43 million for Q2 2013, compared to $34 million in Q2 2012. The increase was driven primarily by strong margins on tank railcar sales, partially offset by losses incurred at ARI's joint ventures.

Our Railcar segment's liquidity position is strong with $97 million of cash and cash equivalents as of June 30, 2013.

Now, turning to our Gaming segment. Total Gaming segment revenues were $149 million in Q2 2013 compared to $158 million in Q2 2012, primarily due to a drop in casino revenues. The decrease in casino revenues is primarily due to a 10.4% decrease in consolidated Gaming volumes, primarily due to lower Gaming volumes at Atlantic City and Baton Rouge properties.

Tropicana's gaming hold percentage was 10.2% for both periods. Tropicana's consolidated adjusted EBITDA for Q2 2013 was $28 million compared to $25 million in the prior year. The increase in EBITDA was primarily due to lower property operating costs. Tropicana had a solid balance sheet with approximately $244 million of cash and cash equivalents as of June 30, 2013.

Now, turning to our Food Packaging segment. Net sales for Q2 2013 increased by $7 million or 8% compared to the prior year period. The increase was due to higher volume and favorable product mix, offset in part by unfavorable foreign currency translation. Consolidated adjusted EBITDA of $17 million in Q2 2013 was a $3 million improvement over the prior year period. We are seeing the benefits year-over-year of the capital spending we made in 2011 and 2012. Q2 2013 net income was impacted by a $23 million payment of a tax settlement in Brazil related to the import of goods into Brazil prior to 2005. Cash and cash equivalents for our Food Packaging segment were $16 million as of June 30, 2013.

Now, to our Gaming -- now to our Metal segment. Net sales for Q2 2013 decreased by $73 million or 24% compared to the comparable prior year period. The decrease was primarily driven by lower ferrous and nonferrous volumes and selling prices. The decrease in volumes and average pricing ferrous scrap was largely driven by soft demand from steel producers along with weak exports. Weak market conditions were also responsible for the drop in nonferrous shipment volumes and pricing.

Adjusted EBITDA improved to a loss of $6 million in Q2 2013 from a loss of $8 million in Q2 2012. Material margins continue to be compressed as a weak selling environment and competitions for feedstock continues to negatively impact margin percentages.

PSE has taken measures to align our costs to the environment including idling several yards and shredders running below capacity.

Now, to our Real Estate segment. Q2 2013 real estate revenues were $21 million, which was slightly below the comparable period last year. Revenues from our Real Estate operations for both periods were substantially derived from our rental and resort properties. Our net lease portfolio continues to drive earnings in this segment with its 29 properties generating strong cash flows.

Now, turning to Home Fashion. Q2 2013 net sales decreased by $14 million compared to the prior year period. The decline in sales reflects the impact of the loss of largely unprofitable programs as the company focuses on products and customers that matched its manufacturing and distribution strengths. The challenge now is to grow the top line and we are optimistic in our prospects as we have been successful singing up some up-and-coming brands. EBITDA was close to breakeven in the second quarter of 2013 despite the sales decrease. Gross margins were 10% in Q2 2013 compared to 14% in the prior year period, primarily due to manufacturing process changes which entail higher labor charges. As of June 30, WestPoint had $10 million of 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 2013 with cash, cash equivalents, liquid assets and our investment in the investment funds totaling approximately $5.9 billion. We recently completed a $500 million debt offering, which in effect, replaces the convertible notes we defeased earlier in the year. Pro forma for the debt raise and our participation in the Federal-Mogul rights offering, our holding company cash position would've been almost $1.5 billion on June 30, 2013. Our subsidiaries also have almost $2 billion of cash and $0.9 billion of undrawn credit facilities to enable them to take advantage of attractive opportunities. In addition, as Dan discussed earlier, the holding company has established recurring sources of cash flow from operating subsidiaries. So far in 2013, we have received over $1 billion of cash distributions from our operating subs.

On Slide 17, we have provided an indicative net asset value over the last year. You can see that the asset value net of debt has increased steadily every period and provides a substantial cushion to debt investors. In July, are indicative NAV increased to approximately $71, primarily due to the 6.2% return in the investment funds, and the increased value of our ownership in Federal-Mogul.

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. Now, operator, can you please open it up for questions?

Question-and-Answer Session


[Operator Instructions] Our first question comes from the line of Daniel Fannon from Jefferies.

Daniel Thomas Fannon - Jefferies LLC, Research Division

I'd like to start to talk a little bit about just the overall M&A environment. Just kind of putting aside your current pursuits. Relative to Q1, are you guys seeing more active engagement? Or has kind of like the volatility that we saw in June, tempered things a little bit at this point?

Daniel A. Ninivaggi

I think we're seeing sort of steady progress on that front. I think the volatility hurts, but I think people are more confident that -- with the tail risk, so we're seeing steady improvement in the overall M&A environment and expect that it will accelerate as the economy improves.

Daniel Thomas Fannon - Jefferies LLC, Research Division

Okay. And perhaps related to that, how much actually debt capacity do you have and the ability to go after some of the larger targets and stuff?

Daniel A. Ninivaggi

We don't really want to disclose the amount of tech capacity we really have. Obviously, there a lot of sources. Are you talking about both within IEP and then within the hedge funds, right?

Daniel Thomas Fannon - Jefferies LLC, Research Division

That is correct, yes.

Daniel A. Ninivaggi

Right. So I would just say that we have ample capacity to pursue larger targets and I don't want to put a number on it.

Daniel Thomas Fannon - Jefferies LLC, Research Division

Okay. No, good, that's fine. So maybe related to the kind of the M&A stuff. Can you maybe talk a little bit about the exit side of things? Like you've got a pretty solid portfolio going in and it looks like operating fundamentals, at least for a large part portion of your portfolio, things are on the upswing. Now, is there a certain window that's ideal for exiting and stuff? Or as if rates were to rise or suddenly start rising that presents more of a difficulty in maybe moving some of these properties and things? And then maybe related to that, how do you see the portfolio looking out maybe 12 months from now? Any changes there?

Daniel A. Ninivaggi

Yes, so look, we see ample synergistic M&A activity in most of our operating segments. So we have our return thresholds, if we believe that we can participate by being a consolidator and pursuing M&A on our own and it hits our return threshold, we'll do it. And right now, we see a lot of opportunities for that within the existing operating segments. Of course we'll balance the risk and the return over time and at the appropriate time, we'll get out. But right now, I'd say that we see more opportunity to build the segments than to sell any of our existing operating subs.

Daniel Thomas Fannon - Jefferies LLC, Research Division

Okay, I appreciate that. And then maybe hoping for a little bit more color on the kind of the current environment and the activist strategy. I mean, you guys have been doing really, really well with that. But as the market continues to trend higher, are you seeing more resistance from companies who are simply kind of benefiting from this rising market that maybe you guys are a little less effective in the current environment? Or at least face more challenges or obstacles?

Daniel A. Ninivaggi

Yes, I think Carlos has talked publicly a lot over the last 6 months that in an environment where capital is relatively cheap, where organic growth is relatively limited, there should be a lot more synergistic M&A activity than there has been. Capital markets are wide open, debt markets have been somewhat volatile recently but are still very, very strong. So we're seeing -- I think, Carl would say he's seeing more opportunities now than he ever has. And that's in part why we're so active. We're seeing it on our existing operating segments as well. So we don't see that declining anytime soon. We think this is a multiyear kind of thing. And so, we're very active.

Daniel Thomas Fannon - Jefferies LLC, Research Division

That sounds good. I mean, we've definitely been hearing a lot about you guys in the news. So maybe turning to the Energy segment, I guess the stock has come in a little bit, with the crack spreads and kind of the bank WTI differential narrowing, kind of what is your outlook there? Are we kind of now back at more normalized operating environments or level? Or do you kind of see that kind of some of the pullback in the spreads were just more of a short-term thing?

Daniel A. Ninivaggi

Yes. So look, stepping back from it, we think it's fundamentally. The increased crude production in North America will benefit CVR and other mid-continent refiners. There will continue to be bottlenecks of crude in the mid-continent, but it's going to fluctuate quarter-to-quarter. I mean, there's going to be some volatility in it. Right now that's -- the reason that the Brent TI differentials have narrowed is really a result of pipeline -- pipelines coming in. So outflow capacity out of Cushing has outpaced inflow of pipelines into Cushing. And so you're seeing a narrowing of cracks out of differentials. If you look at the futures, the Brent TI futures, you see the crack spread or the differential widening over the next 12 months. So we think it's -- now it's bottoming out here, in the back half of the year and that differentials will increase going into 2014. That ultimately, the differential will gravitate towards the transportation cost of crude of the marginal transportation cost of crude out of the mid-continent, which is basically Railcar. And so we think that, that differential, longer-term, will be in the $7, $8 to $10, $12 range. But there will be fluctuations quarter-to-quarter, or even year-to-year. But we think the underlying fundamentals are very strong for the long term. And keep in mind too that we were very impacted by this RINs issues in the first half of the year. And that is -- who knows when and if there'll be a regulatory or legislative fix to that, but that's been a drag on earnings and we think longer term that'll be resolved as well.

Daniel Thomas Fannon - Jefferies LLC, Research Division

Okay. And in just one other part of the refining business, kind of it seems like your throughput is around roughly 200k barrels per day, now that seems -- that's a little bit above your official rated capacity and I assume part of that is kind of a mix that's going through, but are those levels kind of sustainable or should they be coming in a little bit?

Daniel A. Ninivaggi

Again, we -- last year, we just got through a couple of big turnarounds, right? So both our refineries went through turnaround, so the throughput will be a little bit better right after turnaround then it'll be over 4-year cycle. But we think the operating -- I mean, CVR has tremendous operating performance. If you compare it to most other refiners, our operating costs per barrel, very, very strong, your operational performance has been great. They've invested hundreds of millions of dollars into the refineries over the last several years. We've got a very good synergies at Wynnewood since the acquisition. And so I think you're going to see their throughput always outperformed their peers. But it'll be up and down. I mean, refineries go down for reasons. We've had a couple of outages from time to time. We get back on our feet very quickly. But over time, you'll see it gravitate more towards the nameplate capacity, which is 150,000 -- 185,000 barrels. So that's probably what you'll see over the long term, but their operating performance has been good for a long period of time.


[Operator Instructions] Our next question comes from the line of Andrew Berg from Post Advisory Group.

Andrew Berg - Post Advisory Group, LLC

A couple of quick questions. One is housekeeping. Did you guys ever disclose what the sales price was from River Palms?

Daniel A. Ninivaggi

No. But you're familiar with that property. It's a $5 million range, $5 million to $6 million range.

Andrew Berg - Post Advisory Group, LLC

Okay. And then with respect to WestPoint, can you just go a little bit more detail, you said you've got -- you're optimistic because you're going to be adding some brands, can you just flush that out a little bit more, what are you adding and help me understand the optimism a little bit better?

Daniel A. Ninivaggi

Okay. So earlier in the year or last year, we talked about kind of continuing to rationalize the business. For the past 3 years, that really meant rationalizing the manufacturing footprint and the cost structure. And over the last 6 months or so, it's been more about rationalizing the customer base and the product portfolio, focusing in on higher margin customers and higher margin products. And so part of that has been, we've gotten some licensing deals on brands like Southern Tide or under the Canopy and a few other brands. Using our own house brands a little bit more effectively and focusing in on customers where there's better alignment, strategic alignment. So that would be sort of deemphasizing commodity products and very high volume, low margin customers and focusing higher on the value chain. And so far, that's worked pretty well, although we've been disappointed on the sales. The sales backlog hasn't been a strong as we'd like. We think, given that the housing market is somewhat coming back somewhat, that should be a bit of a tailwind. And these things do take some time to get traction. You just don't rollout a brand and then in 6 months later, you see it in sales. It takes time. We're very happy with the management team there. I think they're doing a great job. And we're confident in it longer term. But again, we're keeping an eye on that sales backlog to make sure the strategy stays on track.


We currently have no further questions in the queue.

Daniel A. Ninivaggi

All right. Well, thank you very much. And it's been a solid first half of the year and we look forward to even better second half. Take care.


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.

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