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

Q2 2014 Earnings Call

August 05, 2014 10:00 am ET

Executives

Jesse Lynn -

Keith Cozza - Chief Executive Officer of Icahn Enterprises G.P. Inc., President of Icahn Enterprises G.P. Inc. and Director of Icahn Enterprises G.P. Inc.

SungHwan Cho - Chief Financial Officer of Icahn Enterprises G.P. Inc. and Director of Icahn Enterprises G.P. Inc.

Analysts

Daniel Thomas Fannon - Jefferies LLC, Research Division

Kenneth P. Bann - Jefferies LLC, Research Division

Andrew Berg - Post Advisory Group, LLC

Operator

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.

Jesse Lynn

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 statements should circumstances 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.

Keith Cozza

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 Motorparts division improved in North America, which helped to offset some of the weakness in European sales. Adding to Motorparts portfolio of products were the 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 to have strong tank railcar shipments in Q2 of 2014 and was able to efficiently ramp up production to meet increased demand 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 of 2013. Tropicana closed on the acquisition of Lumière Place Casino & Hotel complex in St. Louis, Missouri, during Q2 of 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.

SungHwan Cho

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 is tied to the performance in the Investment segment, as well as improved performance of Federal-Mogul and the acquisition of ARL 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 managed 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 record combined crude throughput rates, and CVR Partners benefited from a 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 for $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 4 weeks, during which time they will pull forward some of the planned schedule maintenance activities. More importantly, four employees were hospitalized by the fire. CVR's 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% in 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 recorded $117 million in Q2 2014, an increase of $12 million over the same period in '13.

The Motorparts 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. Motorparts operational EBITDA was $63 million in Q2 2014, up $6 million from 2013. The division continues to make progress strengthening its product portfolio.

The Motorparts 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 2,140 railcars, including approximately 1,020 railcars to leasing customers as compared to 1,310 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, has 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 9,500 railcars, including 4,900 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 from 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 ARL in late 2013, and therefore, adjusted EBITDA attributable to IEP for Q2 2013 does not include adjusted EBITDA related to ARL for that period.

Now turning over 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 Lumière Place. Even without the addition of Lumière, 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 Laughlin, 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 temporary weather-related disruption at one of Viskase's extrusion plants.

Consolidated adjusted EBITDA of $17 million in Q2 2014 was flat from the prior year period.

Viskase's cash balance at the end of Q2 was $31 million.

And now to our Metals 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 the 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 top line 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, WestPoint had $9 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, could 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?

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from Dan Fannon from Jefferies.

Daniel Thomas Fannon - Jefferies LLC, Research Division

Just wanted to touch base on just the investment opportunities and how you kind of see it today versus other periods. You mentioned there are still pretty -- opportunities -- you're still pretty positive on the environment. But just thinking about your -- the firm capital allocating more to the Fund, less to the Fund, kind of for the rest of this year and how you think about that. Then ultimately just kind of 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.

Keith Cozza

Sure. 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've 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 just 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 one -- I would recharacterize one thing you said, we're generally very cautious on the overall economy and very careful where valuations are right now. And so -- but 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.

Daniel Thomas Fannon - Jefferies LLC, Research Division

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

Keith Cozza

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 it. We bought the casino in -- the Lumière 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're constantly reviewing. And if the valuation makes sense and the strategic rationale makes sense and there's good synergies, we'll pull the trigger. But as far as those opportunities -- we see dozens of opportunities every quarter. Which ones materialize is always just price dependent, effectively. 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 had this conversation 2, 3 years from now, there'll probably be a new segment, maybe it'll be one less segment. It's always going to be valuation dependent.

Daniel Thomas Fannon - Jefferies LLC, Research Division

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

Keith Cozza

Yes. I'm not in the position to -- we haven't disclosed that.

Operator

And our next question comes from Ken Bann from Jefferies and Company.

Kenneth P. Bann - Jefferies LLC, Research Division

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

Keith Cozza

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 would be around $1.250 billion. I mean, there are some other thing -- regular business-type things that are probably in there, but that's the big item.

Kenneth P. Bann - Jefferies LLC, Research Division

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

Keith Cozza

We're always evaluating. I mean, we kind of -- 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. But there's nothing pending.

Operator

[Operator Instructions] And we do have a question from Andrew Berg from Post Advisory.

Andrew Berg - Post Advisory Group, LLC

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

SungHwan Cho

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 I think we continue to invest in the business and we think that'll add to the profitability of the business next year.

Andrew Berg - Post Advisory Group, LLC

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

Keith Cozza

I think we're most -- we're just focused on improving the operations of it this year. We're happy with what the job management is doing. It's been a long road of turning that around, Andrew, but we're pretty focused on continuing to improve and focus on profitable sales. So there's again -- that's where our main focus is right now, to turn it into a nice little profitable segment here this year.

Andrew Berg - Post Advisory Group, LLC

Okay, and then, just on the hedge fund, I just want to make sure I got it 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.

Andrew Berg - Post Advisory Group, LLC

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

SungHwan Cho

Off the top of 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%.

Operator

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

Keith Cozza

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

Operator

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.

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