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Edited Transcript of IEP earnings conference call or presentation 2-Aug-18 2:00pm GMT

Q2 2018 Icahn Enterprises LP Earnings Call

New York Aug 6, 2018 (Thomson StreetEvents) -- Edited Transcript of Icahn Enterprises LP earnings conference call or presentation Thursday, August 2, 2018 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jesse A. Lynn

Icahn Enterprises L.P. - General Counsel

* Keith Cozza

Icahn Enterprises L.P. - President, CEO & Director of Icahn Enterprises GP Inc

* SungHwan Cho

Icahn Enterprises L.P. - CFO & Director of Icahn Enterprises GP Inc

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Conference Call Participants

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* Dan Fannon

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Presentation

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Operator [1]

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Good day, and welcome to Icahn Enterprises L.P. Q2 2018 Earnings Conference Call with Jesse Lynn, General Counsel; Keith Cozza, President and CEO; and SungHwan Cho, Chief Financial Officer. I would now turn the call over to Jesse Lynn who will read the opening statements.

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Jesse A. Lynn, Icahn Enterprises L.P. - General Counsel [2]

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Thank you, and good morning. The Private Securities and 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.

Now I'll turn it over to Keith Cozza, our Chief Executive Officer.

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Keith Cozza, Icahn Enterprises L.P. - President, CEO & Director of Icahn Enterprises GP Inc [3]

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Thanks, Jesse. Good morning, and welcome to the Second Quarter 2018 Icahn Enterprises Earnings Conference Call. Joining me on today's call is SungHwan Cho, our Chief Financial Officer. I'll 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 Q2 2018, we had net income attributable to Icahn Enterprises of $309 million or $1.70 per LP unit compared to net income of $1.6 billion or $9.51 per LP unit in the prior-year period. Net income attributable to Icahn Enterprises from continuing operations for Q2 2018 was $164 million or $0.90 per LP unit compared to net income of $1.5 billion or $9.20 per LP unit in the prior-year period.

The prior-year period included a $1 billion gain net of tax from the sale of ARL. Adjusted EBITDA attributable to Icahn Enterprises for Q2 2018 was $356 million compared to $288 million for Q2 of 2017. We previously announced in April of 2018 separate definitive agreements to sell both Federal-Mogul and Tropicana Entertainment. We are reporting their respective results and discontinued operations and we have reclassified the assets and liabilities of each group to held for sale on our balance sheet.

We agreed to sell Federal-Mogul to Tenneco Inc for approximately $5.4 billion comprised of $800 million in cash and 29.5 million shares of Tenneco common stock. All the Federal-Mogul's outstanding debt at the time of closing will be assumed by Tenneco. We expect the sale to close in the early part of the fourth quarter. We agreed to sell Tropicana's real estate to Gaming and Leisure Properties Inc and to merge Tropicana's gaming and hotel operations into Eldorado Resorts, Inc for aggregate consideration of approximately $1.85 billion.

The transaction does not include Tropicana's Aruba assets which will be disposed of prior to closing with the consideration received being added to the $1.85 billion. We expect this sale to close in the beginning of the fourth quarter.

Our investment funds earned a return of 4.9% in Q2 of 2018 compared to 4.3% for the prior-year period. Our positive performance in Q2 2018 was driven by net gains in our core long equity position, offset in part by net losses in our short equity index position. We moderately decreased our net long exposure to 11% as of the end of Q2 compared to 18% at the end of Q1 2018.

Net sales and service revenues for our automotive segment in Q2 2018 which now excludes the operating results of Federal-Mogul were $737 million compared to $694 million in the prior-year period. The increase was due to acquisitions at Icahn Automotive Group as well as strong organic sales growth in the commercial and service businesses. In our energy segment, our Q2 2018 net sales were $1.9 billion and consolidated adjusted EBITDA was $175 million.

CVR Refining had a solid second quarter led by strong group three crack spreads, low RIN prices and wide crude oil differentials, while CVR Partners' results were hampered by both planned and unplanned downtime at the Coffeyville and East Dubuque fertilizer facilities. As you can see, we had a very busy quarter and are quite pleased with our results thus far in 2018.

With that let me turn it over to Sung.

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SungHwan Cho, Icahn Enterprises L.P. - CFO & Director of Icahn Enterprises GP Inc [4]

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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.

In Q2 2018 net income attributable to Icahn Enterprises was $309 million compared to net income of $1.6 billion in the prior-year period. Net income attributable to Icahn Enterprises from continuing operations in Q2 '18 was $164 million compared to net income of $1.5 billion in the prior-year period.

On Slide 5. In Q2 of 2018 the performance of our investment funds was the primary driver of net income in the quarter. In 2017 you can see we had significant one-time gains related to the sale of ARL railcars flowing through both the railcar segment and the holding company. Adjusted EBITDA attributable to Icahn Enterprises for Q2 2018 was $356 million compared to $288 million in Q2 2017.

I will now provide more detail regarding the performance of the individual segments. Our investment segment had a gain attributable to Icahn Enterprises of $157 million for Q2 2018. The investment funds had a positive return of 4.9% in Q2 '18 compared to a positive return of 4.3% for Q2 '17. Long positions had a positive performance attribution of 6.5% for the current quarter while short positions and other expenses had a negative performance attribution of 1.6%.

Since inception in November 2004 through the end of Q2 2018 the investment fund's growth return is 144% or approximately 6.7% annualized. The investment funds continue to be significantly hedged. At the end of Q2 2018 net long exposure was 11% compared to a net long exposure of 14% at the end of '17 and a net long exposure of 18% at the end of Q1 2018. IEP's investment in the funds was $3.3 billion as of June 30, 2018.

And now to our energy segment. For Q2 2018 our energy segment reported revenues of $1.9 billion and consolidated adjusted EBITDA of $170 million compared to revenues of $1.4 billion and consolidated adjusted EBITDA of $73 million for the prior-year period.

CVR Refining had solid second quarter performance led by strong crack spreads, wide crude oil differentials and lower RIN prices. CVR Refining reported Q2 2018 adjusted EBITDA of $147 million compared to $43 million in the prior-year period. Combined crude oil throughput was approximately 206,000 barrels per day for the quarter which was 4% below the prior-year period. Refining margin adjusted for FIFO impact, a non-GAAP financial measure, was $12.61 per barrel in Q2 2018 compared to $7.21 per barrel in the prior year. CVRR declared a distribution of $0.66 per unit for the quarter.

CVR Partners reported Q2 2018 adjusted EBITDA of $26 million compared to $32 million for Q2 2017. CVR Partners' results were hampered by both planned and unplanned downtime at the Coffeyville and East Dubuque fertilizer facilities. Average prices for UAN and ammonia were $191 per ton and $348 per ton respectively in Q2 2018 compared to $174 per ton and $333 per ton respectively for the same period in '17.

Management believes that the U.S. nitrogen fertilizer market has finally adjusted to the new production capacity that has come onstream during the past 3 years.

Now turning to our automotive segment. With the pending sale Federal-Mogul is now accounted for in discontinued operations and our automotive segment now represents only the operations of Icahn Automotive which includes Pep Boys, Auto Plus and the franchisor businesses of Precision Tune and AAMCO. Q2 2018 net sales and service revenues were $737 million, up 6% from the prior-year period. 2018 sales reflect new revenue recognition rules which account for drop-ship sales on a net basis. This accounting change accounted for $18 million of sales decline in the commercial business from 2Q '17 to 2Q '18.

Adjusting for the new revenue recognition rules, sales increased by $61 million or 9%. $34 million of the increase was related to acquisitions, and the remaining $28 million was due to organic growth. The commercial parts business organic growth was 7%, driven by growing Pep Boys commercial sales and strong Auto Plus sales. The service business had organic growth of 4%, driven by growth in DIFM and Fleet businesses.

Adjusted EBITDA attributable to IEP for the automotive segment was $10 million in Q2 2018 compared to $28 million in the prior-year period.

Now turning to our railcar segment. Our railcar segment had railcar shipments in Q2 2018 of 933 railcars, including 19 railcars to leasing customers compared to 1,076 railcars for the prior-year period of which 545 railcars were to leasing customers.

As of June 30, 2018, ARI had a backlog 3,387 railcars including 1,141 railcars for lease customers. According to the Railway Supply Institute, the railcar manufacturing backlog was approximately 65,000 railcars at the end of Q2. 82% 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.

Total manufacturing revenue for Q2 2018 increased by $35 million or 64% as compared to the prior-year period. The increase was primarily due to an increase in shipments to nonleasing customers. The segment's railcar leasing revenue declined in Q2 2018 as compared to the prior year due to the closing of the initial sale of ARL railcars on June 1, 2017, as well as to a decrease in weighted average lease rates. The lease fleet was 13,128 railcars at the end of Q2 2018, down from 16,905 railcars at the end of Q2 2017 due to the further sale closings of the ARL lease fleet.

Adjusted EBITDA attributable to IEP for the railcar segment was $23 million in Q2 '18 compared to $79 million in the prior-year period.

Subsequent to quarter end ARI announced a multiyear agreement to sell 7,650 railcars to GATX through 2023. GATX will also have the option to purchase an additional 4,400 railcars subject to certain restrictions.

Now turning to our food packaging segment. Net sales for Q2 2018 increased by $5 million or 5% compared to the prior-year period. The increase was primarily due to higher sales volume and the favorable effects of foreign exchange offset in part by unfavorable price and product mix. Consolidated adjusted EBITDA was $17 million in Q2 2018, which was $1 million above the prior-year period. Gross margin as a percentage of net sales was 23% for Q2 2018 which was slightly below the prior-year period.

And now to our metals segment. Net sales for Q2 '18 increased by $30 million or 29% compared to the prior-year period. The net sales increase was primarily due to higher shipment volumes of ferrous and nonferrous materials and higher average selling prices for almost all product lines. Ferrous shipment volumes increased due to the improved demand from domestic steel mills and improved flow of raw materials into the recycling yards, driven by increased market pricing.

Adjusted EBITDA was $8 million for Q2 '18 compared to $4 million in the prior-year period. Gross margin has improved due to continued focus on disciplined buying, higher pricing for nonferrous auto residue, improved market pricing and by continued efforts to bring processing costs in line with the volume and market pricing.

And now to our real estate segment. Real estate operating revenues were $24 million in Q2 '18, which was slightly down from the prior-year period. Revenue from our real estate operations for both Q2 '18 and Q2 '17 were substantially derived from income from club and rental operations. The real estate segment generated $13 million of adjusted EBITDA in Q2 '18.

Now turning to mining. Our Mining segment has been concentrating on sales in Brazil. In Q2 '18 sales increased $4 million as compared to the prior-year period primarily due to iron ore price and volume increases. Consolidated adjusted EBITDA was $5 million for Q2 '18 which was consistent with the prior-year period.

The company continues to invest in upgrading its ability to process iron ore and produce the higher quality product, which currently sells for significant premiums. The project is on schedule and is expected to fully ramp up in early 2019.

Now turning to our Home Fashion segment. Q2 2018 net sales for Home Fashion segment were flat compared to the prior-year period. Adjusted EBITDA was breakeven for the quarter compared to a loss of $1 million in the prior-year period. Gross margin as a percentage of net sales was 13% for Q2 '18 as compared to 11% for Q2 '17.

Now I will discuss our liquidity. We maintain ample liquidity at the holding company and at each of our operating subs to take advantage of attractive opportunities. We ended Q2 2018 with cash, cash equivalents, our investment in the funds and revolver availability totaling approximately $5 billion. holdco cash will be replenished with the close of Federal-Mogul and Tropicana transactions.

Our subsidiaries have approximately $800 million of cash and $770 million 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 for questions?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question come from Dan Fannon of Jefferies.

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Dan Fannon, [2]

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I guess just first on the -- you talked about the holdco cash getting replenished after these deals. Should we just think about the funds, kind of the $3.3 billion kind of investment in the fund going up in the short term as you think about deploying that cash or should -- you're looking at paying down any more debt or any kind of use of those proceeds?

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Keith Cozza, Icahn Enterprises L.P. - President, CEO & Director of Icahn Enterprises GP Inc [3]

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Yes, sure. Hi, Dan, it's Keith. I think the way we look at it is a significant portion of the pro forma proceeds from dispositions would go into the investment segment. All things being equal with some portion of it also replenishing cash at the holdco level. But we're -- I'm not sure that it makes a ton of economic sense at this juncture to pay down any of our bonds. They have significant call protection. That would probably not make a ton of economic sense.

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Dan Fannon, [4]

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Got it. Then I guess could you just kind of give us a sense broadly of, we have your positions on the kind of net long in the fund, but I guess kind of your view at an investment level of kind of where we are in the cycle and kind of evaluations or any kind of more context around how you're thinking about new investments and kind of the overall kind of I guess attractiveness of the markets today?

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Keith Cozza, Icahn Enterprises L.P. - President, CEO & Director of Icahn Enterprises GP Inc [5]

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Yes, sure. Broadly speaking, obviously it does feel like we're at the tail end of the cycle, but we have no way of knowing whether it lasts another year or 2 years or 2 months. So we're always kind of trying to manage risk accordingly with -- of the unknown macro situation. And the multiple do seem high and it's harder to find what we like to refer to as cheaper value value-oriented situations. We are finding a handful of stuff. You've seen our public filings. We've been quite active this year on a number of fronts. So we are finding pockets of opportunity, but in general representative -- it's represented by our net long exposure trying to stay pretty cautious and hedge out some of the macro risk.

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Operator [6]

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Our next question comes from [Justin Schafferdehill].

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Unidentified Analyst, [7]

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I was wondering if you can give us an update on the sale process of the Aruba casino hotel as a part of the Tropicana sale.

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Keith Cozza, Icahn Enterprises L.P. - President, CEO & Director of Icahn Enterprises GP Inc [8]

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I mean the only update I would say is that we're currently, we ran a process, there were a number of bids received and we're in the later rounds of that process. And hopefully we'll have the transaction to announce in the next I'd say 2 months, but that's really the only update -- yes, that's really the only update I can give on that.

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Unidentified Analyst, [9]

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Okay, great. And can you given an update on expected proceeds, roughly speaking?

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Keith Cozza, Icahn Enterprises L.P. - President, CEO & Director of Icahn Enterprises GP Inc [10]

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I can't at this juncture.

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Unidentified Analyst, [11]

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Understood. And when do you expect that transaction to close, the entire transaction, entire sale of Tropicana?

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Keith Cozza, Icahn Enterprises L.P. - President, CEO & Director of Icahn Enterprises GP Inc [12]

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I referenced in -- I referenced in my prepared remarks, early fourth quarter.

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Operator [13]

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Thank you. I currently have no more questions in queue. I like to turn the conference back over to Keith Cozza for any closing remarks.

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Keith Cozza, Icahn Enterprises L.P. - President, CEO & Director of Icahn Enterprises GP Inc [14]

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Thank you, operator. Thank you very much for joining us today everyone and we look forward to talking to you about the third quarter results. Have a good day.

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Operator [15]

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Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you for your participation and have a wonderful day. You may all disconnect.