Icahn Enterprises LP (NYSE:IEP) Q3 2018 Earnings Conference Call November 8, 2018 10:00 AM ET
Jesse Lynn - General Counsel
Keith Cozza - President, CEO & Director
SungHwan Cho - CFO
James Steele - Jefferies
Good morning, and welcome to the Icahn Enterprises L.P. Q3 2018 Earnings Call with Jesse Lynn, General Counsel; Keith Cozza, President and CEO; SungHwan Cho, Chief Financial Officer.
I would now like to hand over the call to Jesse Lynn, who'll read the opening statement.
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 measures can be found in the back of this presentation.
I'll now turn it over to Keith Cozza, our Chief Executive Officer.
Thanks, Jesse. Good morning, and welcome to the Third Quarter 2018 Icahn Enterprises Earnings Conference Call. Joining me on today's call is SungHwan Cho, our Chief Financial Officer. I will 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. For Q3 2018, we had net income attributable to Icahn Enterprises of $126 million or $0.68 per LP unit compared to net income of $597 million or $3.53 per LP unit in the prior year period.
Net loss attributable to Icahn Enterprises from continuing operations for Q3 2018 was $29 million or $0.16 per LP unit compared to net income of $577 million or $3.41 per LP unit in the prior year period. Adjusted EBITDA attributable to Icahn Enterprises for Q3 2018 was $26 million compared to $345 million for Q3 of 2017.
Subsequent to quarter-end, we closed on our previously announced sales of both Federal-Mogul and Tropicana Entertainment. We sold Federal-Mogul to Tenneco for $800 million in cash and 29.5 million shares of Tenneco common stock. All of Federal-Mogul's outstanding debt at the time of closing was assumed by Tenneco. We sold Tropicana's real estate to Gaming and Leisure Properties, Inc. and merged Tropicana's gaming and hotel operations into Eldorado Resorts, Inc. for an aggregate consideration of approximately $1.85 billion. The transaction did not include Tropicana's Aruba assets, which were acquired by a subsidiary of IEP prior to closing.
Subsequent to quarter-end, we also entered into a definitive agreement to emerge our majority-owned subsidiary, American Railcar Industries, with a wholly-owned subsidiary of ITE Rail Fund L.P. at a price of $70 per share in cash. IEP's investment in ARI has generated a total return of 423% for a profit of approximately $757.2 million.
Our investment fund had a negative return of 6.3% in Q3 2018 compared to positive 5.1% for the prior year period. Our negative performance in Q3 was driven by net losses in our short equity index positions, offset in part by net gains in our core long equity positions.
Net sales and service revenues for our Automotive segment in Q3 2018, which excludes the operating results of Federal-Mogul, were $735 million compared to $700 million in the prior year period. The increase was primarily due to acquisitions at Icahn Automotive Group as well as organic sales growth in the commercial and service businesses.
In our Energy segment, our Q3 2018 net sales were $1.9 billion and consolidated adjusted EBITDA was $236 million. CVR Refining had a solid third quarter led by strong crack spreads, low RIN prices and wide crude oil differentials.
CVR Partners also had strong operating performance in the third quarter at both its Coffeyville and East Dubuque facilities. Market conditions have continued to improve since the summer and global demand for nitrogen fertilizer is strong.
As you can see, we are having a very busy year. Economic conditions remain strong, which has helped facilitate the sale of several large operating segments, resulting in significant gains for our unitholders and robust liquidity on our balance sheet.
With that, let me turn it over to Sung.
Thanks, Keith. I'll 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. In Q3 2018, net income attributable to Icahn Enterprises was $126 million compared to net income of $597 million in the prior year period.
Net loss attributable to Icahn Enterprises from continuing operations for Q3 2018 was $29 million compared to net income of $577 million in the prior year period. As you can see on Slide 5. In Q3 2018, the performance of the investment funds was the primary driver of our net loss from continuing operations for the quarter. Q3 2017 income benefited from the sale of the Fontainebleau property in Las Vegas. Adjusted EBITDA attributable to Icahn Enterprises for Q3 2018 was $26 million compared to $345 million in Q3 2017. I will now provide more detail regarding the performance of the individual segments. Our Investment segment had a loss attributable to Icahn Enterprises of $206 million for Q3 2018. The investment funds had a negative return of 6.3% in Q3 2018 compared to a positive return of 5.1% for Q3 2017. Long positions had a positive performance attribution of 1.1% for the current quarter, while short positions and other expenses had a negative performance attribution of 7.4%.
Since inception in November 2004 through the end of Q3 2018, the investment funds growth return is 128% or approximately 6.1% annualized. The investment funds continue to be significantly hedged. At the end of Q3 2018, net short exposure was 26% compared to a net long exposure of 14% at the end of 2017 and a net long exposure of 11% at the end of Q2 2018. IEP's investment in the funds was $3 billion as of September 30, 2018. In October, we invested a portion of the Federal-Mogul and Tropicana sale proceeds into the funds, increasing our total fund investment by $1.85 billion.
And now to our Energy segment. For Q3 2018, our Energy segment reported revenues of $1.9 billion and consolidated adjusted EBITDA of $236 million compared to revenue of $1.4 billion and consolidated adjusted EBITDA of $142 million for the prior year period. CVR Refining had a solid third quarter performance led by strong crack spreads, wide crude oil differentials and lower RIN prices. CVR Refining reported Q3 2018 adjusted EBITDA of $221 million compared to $139 million in the prior year period.
Combined crude oil throughput was approximately 209,000 barrels per day for the quarter, which was 2% above the prior year period. Refining margin adjusted for FIFO impact and non-GAAP financial measure was $15.41 per barrel in Q3 2018 compared to $13.05 per barrel in the prior year period.
CVR Refining declared a distribution of $0.90 per unit for the quarter. CVR Partners reported Q3 2018 adjusted EBITDA of $19 million compared to $5 million in Q3 '17. Market conditions have continued to improve since summer and global demand for nitrogen fertilizer is strong. Average prices for UAN and ammonia were $170 per ton and $297 per ton, respectively, in Q3 2018 compared to $138 per ton and $214 per ton, respectively, for the same period in '17. Now to the Automotive segment. Q3 2018 net sales and service revenue for Icahn Automotive Group were $735 million, up 5% from the prior year period. The increase was due to $18 million of organic revenue growth and $29 million of growth from acquisitions, offset in part by $12 million due to the effect of adoption of new revenue recognition standards.
On an organic basis, commercial sales increased $18 million or 8%, driven by increases in both IEH Auto and Pep Boys commercial programs. Service sales increased $8 million or 3% due to growing do-it-for-me and fleet businesses and retail sales decreased $8 million or 5%.
Adjusted EBITDA attributable to IEP for the Automotive segment was $8 million in Q3 2018 compared to $16 million in the prior year period. Profitability was lower due to the expenses related to the transformation and additional costs of the commercial business.
Now turning to the Railcar segment. Our Railcar segment had railcar shipments in Q3 2018 of 654 railcars, including 387 railcars to leasing customers, compared to 893 railcars for the prior year period, of which 275 railcars were to leasing customers.
As of September 30, 2018, ARI had a backlog of 11,215 railcars, including 1,486 railcars for lease customers. According to the Railway Supply Institute, the railcar manufacturing backlog was approximately 74,000 railcars at the end of Q3 '18. 80% 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. Total manufacturing revenues for Q3 '18 decreased by $28 million or 41% compared to the prior year period. The decrease was primarily due to a decrease in shipments to nonleasing customers. The segment's railcar leasing revenue declined in Q3 '18 as compared to the prior year period due to a decrease in leased railcars as a result of selling the remaining railcars previously owned by ARL, a decrease in weighted average lease rates and increased time off-lease for railcar reassignments.
The lease fleet was 13,506 railcars at the end of Q3 2018, down from 17,122 railcars at the end of Q3 '17, due to the further sale closings of the ARL lease fleet. Adjusted EBITDA attributable to IEP for the Railcar segment was $24 million in Q3 '18 compared to $38 million in the prior year period. As Keith mentioned earlier, subsequent to the quarter-end, we entered into an agreement to merge ARI with ITE Rail Fund at a price of $70 per share payable in cash. We expect this transaction to close in Q4 2018.
Now turning to our Food Packaging segment. Net sales for Q3 2018 decreased by $1 million or 1% compared to the prior year period. The decrease was primarily due to the lower price and product mix and lower sales volume, offset in part by favorable effects of foreign exchange. Consolidated adjusted EBITDA was $14 million in Q3 2018, which was $3 million below the prior year period. Gross margin as a percentage of net sales was 21% for Q3 '18 compared to 24% in the prior year period. Profitability in Q3 was impacted by the Brazilian currency devaluation as well as a typhoon in the Philippines. And now to our Metals segment. Net sales for Q3 2018 increased by $10 million or 9% compared to the prior year period. The net sales increase was primarily due to higher shipment volumes of ferrous and higher average selling prices for almost all product lines, offset in part by lower nonferrous volumes. Ferrous shipment volumes increased due to improved demand for domestic steel mills and improved flow of raw materials into the recycling yards, driven by increased market pricing. Nonferrous shipment volumes decreased due to a domestic oversupply of aluminum resulting from the ongoing trade war with China, which has significantly curtailed scrap imports. Adjusted EBITDA was $5 million in Q3 '18, which was consistent with the prior year period.
And now to our Real Estate segment. Real estate operating revenues were $29 million for Q3 '18, which was $8 million above the prior year period. Revenue from our real estate operations for both Q3 '18 and Q3 '17 were substantially derived from income from club and rental operations. The segment recorded a $67 million gain in the period from the sale of one of it's triple-net lease properties. Q3 2017 also included a significant gain from the sale of the Fontainebleau property in Las Vegas. The Real Estate segment generated $14 million of adjusted EBITDA in Q3 '18.
And now to our Mining segment. Our Mining segment has been concentrating on sales in Brazil. In Q3 '18, sales increased $5 million as compared to the prior year period, primarily due to iron ore price and volume increases. Consolidated adjusted EBITDA was $6 million in Q3 '18, which was $2 million above the prior year period.
The company continued its investment to produce higher-quality iron ore, which currently sells for significant premiums. The project is on schedule and expected to fully ramp up in early 2019.
Now turning to our Home Fashion segment. Q3 2018 net sales of our Home Fashion segment were down 17% compared to the prior year. Adjusted EBITDA was a loss of $1 million for the quarter compared to a loss of $2 million in the prior year. Gross margin as a percentage of net sales was 13% for Q3 '18 as compared to 15% in Q3 '17.
Now I will discuss our liquidity. We maintain ample liquidity at the holding company and at each of our operating subsidiaries to take advantage of attractive opportunities. We ended Q3 '18 with cash, cash equivalents, our investment in the funds and revolver availability totaling approximately $4.9 billion. Our subsidiaries have approximately $1.0 billion of cash and $810 million of undrawn credit facilities to enable them to take advantage of attractive opportunities.
Our liquidity has improved significantly with the closing of sales of Federal-Mogul, Tropicana and several real estate assets. Pro forma of those sales, our cash, cash equivalents, investment in the funds and revolver availability increases to $7.7 billion.
Slide 17 shows our indicative net asset value over time. The indicative net asset value has increased by over $1.5 billion or 22% in the last 12 months. We showed September 30, 2018, pro forma for the asset sales and redeployment of capital that incurred after quarter-end. You can see that the increase in the fund investment and our new minority holding in Tenneco. It is worth noting that cash in the fund investments now exceed the value of our holding company debt.
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 operating segments.
With that, operator, can you please open the call for questions?
[Operator Instructions]. Our first question comes from James Steele from Jefferies.
I guess, just sort of generally on the capital position and how we should be thinking about modeling going into 2019. Just curious if maybe we should be -- if most of that's probably earmarked for the hedge fund or if there might be some other uses such as debt pay down or capital return?
Yes, sure. Hi, James, it's Keith. No, I think if you -- and there is a slide in the webcast that shows the pro forma because the Tropicana and Federal-Mogul deals literally closed on October 1 and so that provided an inflow of $2.2 billion to $2.3 billion. If you look at, that's why the pro forma, a significant portion of those funds about, I'd say, $1.8 billion went into the Investment segment and the rest is cash being held at holdco, but there are no current plans to retire any debt. But we're on the lookout for additional operating companies, and we continue to do what we've historically done in our Investment segment.
Okay. And then just sort of on that note, I know that you don't usually give intra-quarter commentary, but just curious if the volatile environment in October and then maybe even more recently in mid-terms resulted in changes to the positioning of the hedge fund?
I don't think the market volatility impacted our investment strategy, but as you can see from the change in exposures at the end of Q2, we were net long a little bit, and if you look at the end of Q3, we kind of went the other way and were a bit net short. That reflected our view of increased risks in the marketplace and wanting to protect the Investment segment from macro risk. So I would just point out that we ended the quarter net short, which is obviously helpful in a month like October.
Okay. And then maybe just one more, just kind of generally on the railcar transaction, still expected to close in 4Q, I take it. Has there been any update on the -- from the regulators? Or just kind of any color on how that transaction is closing?
Well, what I'm comfortable sharing is, it's public that the buyer already received antitrust clearance that's been made public on the FTC's website as well as on the information statement. So antitrust was obviously a significant hurdle, and we expect it to close in Q4.
[Operator Instructions]. I currently have no more questions in queue.
Okay. Thanks, operator. All right, thank you, everybody. We'll look forward to talking to you in February with the year-end results. Have a good day.
Ladies and gentlemen, this is the end of the call, and you may now disconnect. Everyone, have a great day.