Icahn Enterprises' (IEP) CEO Keith Cozza Q1 2017 Results - Earnings Call Transcript

| About: Icahn Enterprises (IEP)

Icahn Enterprises L.P. (NYSE:IEP) Q1 2017 Results Earnings Conference Call May 9, 2017 10:00 AM ET

Executives

Jesse Lynn - General Counsel

Keith Cozza - President and CEO

SungHwan Cho - CFO

Analysts

Anthony Dietz - Dornoch Ventures

Operator

Good morning and welcome to the Icahn Enterprises LP First Quarter 2017 Earnings 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 read the opening statement.

Jesse Lynn

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 directly comparable GAAP financial numbers can be found in the back of this presentation.

I’ll now turn it over to Keith Cozza, our Chief Executive Officer.

Keith Cozza

Thanks, Jesse. Good morning and welcome to the first quarter 2017 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 segment. We will then be available to address your questions.

For Q1 2017, we had a net loss attributable to Icahn Enterprises of $18 million or $.012 per LP unit compared to a net loss of $837 million or $6.21 per LP unit in the prior year period.

Adjusted EBITDA attributable to Icahn Enterprises for Q1 2017 was $412 million compared to a loss of $70 million for Q1 of 2016. Our investment fund had a return of negative 2.7% in Q1 of 2017, driven by losses from our short equity exposure, offset in part by gains in our long equity positions, primarily in a few of our largest core holdings.

Net sales for our automotive segment in Q1 of 2017 were $2.5 billion compared to $2.3 billion in the prior year period. This 7% net sales increase was primarily due to the February 2016 acquisition of Pep Boys as well as higher sales volumes at Federal Mogul.

In January of 2017, Icahn Enterprises purchased the 18% of Federal Mogul that it did not already own for total consideration of $305 million. Federal Mogul is now 100% owned by IEP.

In our energy segment, our Q1 2017 net sales were $1.5 billion and consolidated adjusted EBITDA was $133 million. CVR Refining posted strong operational performance during Q1 with a quarterly record for combined crude oil throughput of 214,000 barrels per day.

CVR Partners Coffeyville and East Dubuque Facilities also recorded on stream rates of just under 100% for the fertilizer operations.

In our railcar segment, investments in our rail car services and rail car leasing businesses continue to compliment our manufacturing operations. The segments lease fleet was over 46,000 rail cars at the end of Q1 2017. We expect to close the previously announced initial sale of American Railcar leasing in Q2 of this year. The initial sale of approximately 29,000 railcars is expected to generate $1.1 billion of net proceeds.

We have the ability to sell an additional 4,800 rail cars upon meeting certain conditions for three years following the initial closing date at predetermined prices.

In our gaming segment, Tropicana delivered excellent results for the quarter, led by strong performances at Atlantic City, Indiana, and St. Louis properties. Separately, at the end of Q1, we consummated the sale of the Taj Mahal in Atlantic City.

During Q1, IEP issued approximately $1.2 billion of new unsecured notes to refinance the 2017 notes that were maturing in the first quarter. We also completed a rights offering to raise proceeds of approximately $600 million to support IEP’s credit ratings and to bolster the holding company's liquidity position.

With that, let me turn it over to Sung.

SungHwan Cho

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

In Q1 2017, the net loss attributable to Icahn Enterprises was $18 million compared to a net loss of $837 million in the prior period.

As you can see on slide five, in Q1 2017, IEP had a decrease in our net loss from prior year .Q1 2016 had higher losses in the investment funds and we also incurred significant goodwill impairment in our energy segment.

Adjusted EBITDA attributable to Icahn Enterprises for Q1 2017 was $412 million compared to a loss of $70 million in the Q1 2016.

I’ll now provide more detail regarding the performance of our individual segments. Our investment segment had a loss attributable to Icahn Enterprises of $23 million for Q1 2017. The Investment Fund had a return of negative 2.7% in Q1 2017 compared to a return of negative 12.8% for Q1 2016.

Long positions had a positive performance attribution of 10.2% for the current quarter, while short positions and other expenses had a negative performance attribution of 12.9%. Since inception in November 2004 through the end of Q1 2017, the Investment Funds growth return is 110% or approximately 6.2% percent annualized.

The Investment Funds continue to be significantly hedged. At the end of Q1 2017, net short exposure was 110% compared to a net short exposure of 128% at the end of 2016.

During the quarter, we redeemed $300 million from the Fund to fund the purchase of the minority interest in Federal Mogul and then subsequently replenished our investment with $500 million of proceeds from the completed rights offering. IEP’s investment in the Funds was $1.8 billion as of March, 31 2017.

And now to the energy sector. For Q1 2017, our energy segment reported revenues of $1.5 billion and consolidated adjusted EBITDA of $133 million compared to revenues of $0.9 billion and consolidated adjusted EBITDA of $61 billion for the prior year period. Both the refining and fertilizer businesses had solid operational performance in the quarter.

CVRR had a quarterly record for combined crude oil throughput of 240,000 barrels per day and CVR Partners Coffeyville and East Dubuque Facilities also recorded high on stream rates for the fertilizer operations.

CVR Refining reported Q1 2017 adjusted EBITDA of $115 million compared to $35 million in the prior period. Refining margin adjusted for FIFO impact for crude oil barrel, a non-GAAP financial measure, was $11.54 in Q1 2017 compared to $7.19 in the prior period.

CVR Partners reported Q1 2017 adjusted EBITDA of $21 million compared to $28 million in Q1 2016. CVR Partners results for Q1 2017 include the results of East Dubuque Fertilizer Facility, which was acquired in April of 2016.

Spring planting is underway and CVR Partners expect demand to remain firm as farmers are forecasted to plant 90 million acres of corn this year.

Now, turning to the automotive segment. Our automotive segments Q1 2017 net sales were $2.5 billion, up 7% from the prior year period. The increase was primarily due to the February 2016 acquisition of Pep Boys as well as higher sales volumes at Federal Mogul. Federal Mogul on a standalone basis reported Q1 net sales of $2.0 billion compared to $1.9 billion in the comparable prior year period.

Higher OE sales were offset by lower aftermarket sales in North America and $35 million of negative impact from currency exchange rate fluctuations. Operational EBITDA in Q1 2017 was $217 million, up $24 million or 12% compared to Q1 2016.

As Keith mentioned earlier, IEP acquired the remaining non-controlling interest of Federal Mogul during Q1 2017 for a total consideration of $305 million. Icahn Enterprises Automotive Group, the parents of IEH auto and Pep Boys, had Q1 2017 operating revenue of approximately $637 million. Also in January of 2017, we completed an acquisition of 134 location auto service chain and maintain an active pipeline of additional acquisition opportunities.

Now, turning to our railcar segment. Our railcar segment had railcar shipments in Q1 2017 of 1,151 railcars including 602 railcars to leasing customers as compared to 1,330 railcars for the prior period, of which 200 were to leasing customers.

As of March 31, 2017, ARI had a backlog of 3,286 railcars including 1,199 railcars to 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 60,000 railcars at the end of Q1 2017.

85% of the current industry backlog is comprised of tank cars and covered hopper railcars, the two primary railcar types manufactured and leased by our railcar segment.

Adjusted EBITDA attributable to IEP for the railcar segment was $88 million in Q1 2017 compared to $97 million in the prior year period. The leasing businesses within the railcar segment continue to perform well.

In Q1 2017, we grew the combined leased car portfolios to roughly 46,340 from approximately 45,270 at the end of Q1 2016. Average lease rates in Q1 2017 declined slightly from the prior year period.

We are expecting to close the initial sale of American railcar leasing in Q2 of this year. The initial sale of approximately 29,000 railcars is expected to generate $1.1 billion of net proceeds.

Now, turning toward gaming segment. Total gaming segment operating revenues were $217 million in Q1 2017, which was down slightly from Q1 2016. The decrease was primarily due to the closing of the Taj Mahal in October of 2016, offset in part by increased gaming revenues at Tropicana, Atlantic City.

Our gaming segments consolidated adjusted EBITDA for Q1 2017 was $32 million. While EBITDA increased by $9 million at Tropicana, overall EBITDA for the segment was lower by $2 million in Q1 2016 due to losses at Trump Entertainment.

At the end of Q1 2017, Icahn Enterprises sold the [Indiscernible] Taj Mahal property in Atlantic City.

Now, turning to the food packaging segment. During Q1 2017, this case purchased a fibers and plastic casing manufacturing in Germany in a continuing effort to broaden this case’s product offering and provide significant operational synergies.

Net sales for Q1 2017 increased by $13 million or 17% compared to the prior year period. This increase was primarily due to the inclusion of the recent acquisitions. Consolidated adjusted EBITDA was $12 million in Q1 2017, which was $2 million above the prior year period.

Gross margin as a percentage of net sales was 24% in Q1 2017 compared to 21% in Q1 2016.

And now to our metals segment. Net sales for Q1 2017 increased by $45 million or 78% compared to the prior period. The net sales increase was driven by higher selling prices and higher shipping volumes across almost all product lines.

Ferrous shipment volumes increase due to the improved demand for domestic steel mills and improved flow of raw material into the recycling yards, driven by increased market pricing.

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 swung to a positive $7 million in Q1 2017 compared to a loss of $6 million in the prior year period.

Gross margin has improved due to a continued effort on discipline buying and to higher pricing for non-ferrous auto residue and by continued efforts to bring processing cost in line with volume and market pricing.

Q1 2017 also includes the benefit of insurance proceeds related to issues in our Pennsylvania yard in 2016.

And now to our real estate segment. Real estate revenues were $18 million in Q1 2017, which was slightly below the prior year period. The decrease, primarily, was due to the lower development sales.

Operating revenues from our real estate segment were substantially derived from our resort and rental operations for both Q1 2017 and 2016. Our net lease portfolio continues to drive earnings in this segment with its 15 properties generating strong cash flows. The real estate segment generated $9 million of adjusted EBITDA in Q1 2017.

Now, turning to our mining segment. Our mining segment has been concentrating on sales, domestically in Brazil. During Q1 2017, international iron ore prices improved with spot prices as high as $90 per ton in March. Prices have since dropped back down to the $60 range. However, with the improved prices, the business has returned to EBITDA positive for the past two quarters.

Now, turning to the home fashion segment. Q1 2017 net sales for our home fashion segment were down 6% percent as compared to Q1 2016 due to lower sales volumes. Adjusted EBITDA was near breakeven in Q1 2017 compared to a gain of $2 million in the prior year period.

Gross margin as a percentage of net sales was 15% for Q1 2017 compared to 16% in Q1 2016.

Now, I will discuss the liquidity position. We maintain liquidity at the holding company and at each of the operating subsidiaries to take advantage of attractive opportunities. We ended Q1 2017 with cash, cash equivalents, our investment in the Investment Funds, and revolver availability totaling approximately $4.9 billion.

In Q1 2017, we successfully refinanced our holding company debt maturity and raised the additional $600 million via a rights offering. Our subsidiaries have approximately $1.7 billion of cash and $1.1 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 our existing operating segments.

Thank you. Operator, can you please open the call to questions please?

Question-and-Answer Session

Operator

Thank you. [Operator Instructions]

Our first question comes from the line of Anthony Dietz with Dornoch Ventures. Your line is open.

Anthony Dietz

Good morning. I was wondering what the view is with respect to the Fannie Mae common shares in terms of -- is there a concern that there might be a complete liquidation receivership whereby the comment would be completely wiped out?

I've been following this very closely for many months, administration, well, it seems to be moving very carefully with respect to what was signaled in November by Mr. [Indiscernible] himself, I'm just curious what the view is from Icahn as to the risk of the commons being wiped out?

Keith Cozza

Yes, we have no view. I mean it's not one of our operating segments. It's not something we're focused on. So, we don't have a public view on that.

Anthony Dietz

Okay. I thought maybe that that was part of the investment portfolio, so, I apologize that it doesn't affect what you're talking about today, I thought that might be part of your investment portfolio?

Keith Cozza

No.

Anthony Dietz

Okay, thank you.

Operator

Thank you. [Operator Instructions]

Our next question comes from the line of [Indiscernible] with Baird. Your line is open.

Unidentified Analyst

Hi. I noticed that your mark on Tropicana is $55 a share versus the public market at $35. I was wondering what you guys are going to do to close that valuation gap

Keith Cozza

Yes, I'm not going to do anything to close the valuation gap. We're going to keep empowering the management team to executing their operating plan and stock prices take care of themselves. We don't take actions to managed controlled subsidiaries stock price.

Unidentified Analyst

Sounds great. Thank you.

Keith Cozza

You're welcome.

Operator

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

Keith Cozza

Okay. Thanks everybody. We'll look forward to talking to you for the second quarter.

Operator

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

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