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Edited Transcript of IEP earnings conference call or presentation 2-May-19 2:00pm GMT

Q1 2019 Icahn Enterprises LP Earnings Call

New York May 28, 2019 (Thomson StreetEvents) -- Edited Transcript of Icahn Enterprises LP earnings conference call or presentation Thursday, May 2, 2019 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

* SungHwan Cho

Icahn Enterprises L.P. - CFO & Director

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Conference Call Participants

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* Daniel Thomas Fannon

Jefferies LLC, Research Division - Senior Equity Research Analyst

* Robert Sullivan

MidOcean Partners LP - Analyst

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Presentation

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Operator [1]

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Good morning, and welcome to the Icahn Enterprises L.P. Q1 2019 Earnings Call with Jesse Lynn, General Counsel; Keith Cozza, President and CEO; and SungHwan Cho, Chief Financial Officer. As a reminder, this conference call is being recorded. I would now like to hand the call over to Jesse Lynn, who will read the opening statement.

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

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Thank you, operator. 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 on 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.

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

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Thanks, Jesse. Good morning, and welcome to the first quarter 2019 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 Q1 2019, we had a net loss attributable to Icahn Enterprises of $394 million or $2.02 per LP unit compared to net income of $132 million or $0.74 per LP unit in the prior year period. Adjusted EBITDA attributable to Icahn Enterprises for Q1 2019 was a loss of $194 million compared to a gain of $325 million for Q1 of 2018.

Our Investment segment had a negative return of 5.8% in Q1 2019 compared to a positive 5.3% for the prior year period. Our negative performance in Q1 2019 was driven by net losses in our short equity index position, offset in part by net gains in our core long equity positions. The investment funds are well positioned to withstand the market correction, finishing the quarter with a net short exposure of 43%.

In our Energy segment, our Q1 2019 net sales were $1.5 billion, and consolidated adjusted EBITDA was $230 million. CVR Refining had a solid first quarter led by wide Brent-WTI differentials, rising crude oil prices, hedging gains and lagging crude oil differentials. In Q1, CVR Energy purchased the remaining common units of CVR Refining, not already owned by CVR Energy, simplifying its capital structure. CVR Partners' performance was impacted by weather conditions, which delayed the start of the spring fertilizer application.

Net sales and service revenues for our Automotive segment in Q1 2019 were $693 million compared to $686 million in the prior year period. The increase was primarily due to higher automotive service revenues offset in part by a decrease in aftermarket part sales. As a reminder, Icahn Automotive Group is in the process of implementing a multiyear transformational plan to restructure the operations and improve profitability.

This morning, we announced our intention to enter into an open-market sales agreement to which IEP may sell depository units from time to time up to $400 million in the aggregate sales proceeds. The proceeds from these transactions, if any, will be used to fund potential acquisitions and general limited partnership purposes. We also believe any potential sales will strengthen our credit profile, expand our unitholder base and improve daily trading liquidity. We closed the quarter with a strong balance sheet and are actively seeking new investment opportunities.

With that, let me turn it over to Sung.

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SungHwan Cho, Icahn Enterprises L.P. - CFO & Director [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 Q1 2019, net loss attributable to Icahn Enterprises was $394 million compared to net income of $132 million in the prior year period. $34 million of net income from Q1 '18 was from discontinued operations.

As you can see on Slide 5, in Q1 2019, the performance of our investment funds was the primary driver of our net loss for the quarter. In addition, a decrease in the value of Tenneco stock received as a part of the Federal-Mogul transaction in 2018 drove losses at our holding company level. Adjusted EBITDA attributable to Icahn Enterprises for Q1 2019 was a loss of $194 million compared to a gain of $325 million in Q1 2018. I will now provide more detail regarding the performance of the individual segments.

Our Investment segment had a loss attributable to Icahn Enterprises of $295 million in Q1 2019. The investment funds had a negative return of 5.8% in Q1 '19 compared to a positive return of 5.3% for Q1 '18. Long positions had a positive performance attribution of 7% for the current quarter while short positions and other expenses had a negative performance attribution of 12.8%. Since inception in November 2004 through the end of Q1 '19, the investment funds' gross return is 124% or approximately 5.8% annualized.

The investment funds continue to be significantly hedged. At the end of Q1 2019, net short exposure was 43% compared to a net short exposure of 24% at the end of the 2018. IEP's investment in the funds was $4.8 billion as of March 31, '19.

And now to our Energy segment. For Q1 2019, our Energy segment reported revenues of $1.5 billion and consolidated adjusted EBITDA of $230 million. Revenues were flat with the prior year while adjusted EBITDA improved by $25 million. CVR Refining had a solid first quarter performance led by wide Brent-WTI differentials, rising crude oil prices, hedging gains and lagging crude oil differentials.

The Wynnewood Refinery also completed its planned maintenance turnaround safely and on-time and under-budget. CVR Refining reported Q1 2019 adjusted EBITDA of $209 million compared to $192 million in the prior year period. Combined total throughput was approximately 213,000 barrels per day for the quarter, which was 12% higher than the prior year period.

Refining margin per total throughput barrel was $16.55 in Q1 '19 compared to $17.58 per barrel in the prior year period. CVR Partners reported Q1 2019 adjusted EBITDA of $26 million compared to $13 million in Q1 '18. Increased profitability was driven by improved pricing with UAN pricing up 45% and ammonia pricing up 14% from Q1 '18.

Sales volume was impacted by weather conditions, which delayed the start of the spring fertilizer application. Demand, however, has picked up recently with the start of the spring application season.

Now turning for the Automotive segment. Q1 2019 net sales and service revenues for Icahn Automotive Group were $693 million, up 1% from the prior year. The increase was attributable to higher automotive service revenues due to do-it-for-me and fleet businesses. Overall, part sales were flat with a positive 6% commercial same-store sales comp, offset by weakness in DIY retail sales.

Adjusted EBITDA attributable to IEP for the Automotive segment was a loss of $22 million in Q1 2019 compared to a loss of $10 million in the prior year period. Profitability was lower due to expenses related to the transformation of the business and additional costs related to the investment in the commercial business.

Now turning to our Food Packaging segment. Net sales for Q1 2019 decreased by $2 million or 2% compared to the prior year period. The decrease was primarily due to lower sales volume and an unfavorable -- effects of foreign exchange. Consolidated adjusted EBITDA was $11 million in Q1 '19, which was consistent with the prior year period. Gross margin as a percent of sales was 21% for Q1 '19, which was also flat with the prior year.

And now to our Metals segment. Net sales for Q1 '19 decreased by $25 million or 21% compared to the prior year period. The net sales decrease was primarily due to lower volumes and lower average pricing for almost all product lines. Nonferrous shipment volumes continue to be impacted by the ongoing trade dispute with China. Adjusted EBITDA was $2 million in Q1 '19, which was $6 million below the prior year period.

And now to our Real Estate segment. Real estate operating revenues were $21 million in Q1 '19, which was $1 million below the prior year period. Revenue from our real estate operations for both Q1 '19 and Q1 '18 were substantially derived from income from club and rental operations. The Real Estate segment generated $6 million of adjusted EBITDA in Q1 '19.

Now turning to Home Fashion. Q1 '19 net sales for our Home Fashion segment were down 7% compared to the prior year. Adjusted EBITDA was a loss of $2 million for the quarter compared to a loss of $1 million in the prior year period. Gross margin as a percent of net sales was 15% for Q1 '19 as compared to 14% in Q1 '18.

Now to our Mining segment. Our Mining segment has been concentrating on sales in Brazil. The company has largely completed its investment to produce higher-quality iron ore. The new production currently sells for significant premiums compared to the benchmark 62% ferrous iron ore. In Q1 2019, sales increased $15 million compared to the prior year period primarily due to iron ore price and volume increases. Consolidated adjusted EBITDA was $11 million for Q1 '19, which was $10 million higher than the prior year period.

As we announced in 2018, we entered into a definitive agreement to merge Ferrous Resources with a wholly owned subsidiary of Vale. Total consideration will be approximately $550 million, including indebtedness that will be repaid at closing. We expect this transaction to close during 2019.

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 Q1 2019 with cash, cash equivalents, our investment in the funds and revolver availability totaling approximately $8.1 billion. Our subsidiaries have approximately $600 million of cash and $600 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 maintain 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 for questions?

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Questions and Answers

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Operator [1]

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(Operator Instructions) First question from the line of Dan Fannon from Jefferies.

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Daniel Thomas Fannon, Jefferies LLC, Research Division - Senior Equity Research Analyst [2]

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So I just wanted to talk about the environment. I mean you talked about being over 40% net short in the fund but also on the market for new investment opportunities. So just want to get -- I mean, is valuation where you're concerned just with the overall market or are there certain sectors that you're a little more bearish on? And have -- historically you've -- your shorts have been in high yield or other areas or certain asset classes. So just kind of want to get a broader sense of kind of your outlook.

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

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Sure. Dan, it's Keith. I would describe it as we're pretty cautious on overall market multiples. Again, a lot of our hedging activities are through broad-based market indices like the S&P 500. So from that perspective, we obviously have a cautious outlook on the market overall, but at the same time picking and trying to find our spots where we think there is undervalued situations.

I mean, you saw in the first quarter, this is all publicly disclosed, but we deployed over $1.5 billion into the [previous] investment. It's a situation where we think an activist can play a role and stock trading at a significant undervaluation versus the comps. And so we're -- that's just an example.

But we're not afraid to deploy capital in certain situations. But overall, just from a market perspective, we're positioning the portfolio fairly conservatively. It's been a very long bull market run here, approaching 10, 11 years, and these things typically don't last forever.

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Daniel Thomas Fannon, Jefferies LLC, Research Division - Senior Equity Research Analyst [4]

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Yes. That makes sense. And I guess just in terms of the process in how you guys have gone through and cycled through investments previously from the fund to kind of separate category, separate segments. Is there any different -- is there any change in strategy? So anything, if we think about the evolution of the segments and adding of a new one potentially, should it all still manifest originally in the fund and then potentially become a wholly owned separate subsidiary?

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

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Yes. I think the way to look at it is that simplistically put, in noncontrolling positions, which in our mind are typically less than 50% ownership or lower, are going to originate in the fund. But to the extent where we obtain control or buy the full company, that's when it basically gets moved out of the fund and becomes its own operating segment.

I think of it more of like the Investment segment is the 10% positions of the world. And once we kind of buy majority control of the company, which is 51% to 100%, it shifts more to a private equity model where we're running the whole company, and that's when it gets its own segment.

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Operator [6]

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Our next question comes from the line of Robert Sullivan from MidOcean.

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Robert Sullivan, MidOcean Partners LP - Analyst [7]

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(technical difficulty) open market sales of stock, in terms of how you're thinking about that, is it to improve the liquidity of the stock? Is it to give yourself more flexibility on the investment side for control and noncontrol investments? Is it to delever? You guys are obviously sitting on a lot of cash right now, so I was a little curious in terms of what your intention was there.

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

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Yes, sure. I think a number of the reasons you stated are valid. So from building an even bigger war chest, we obviously endeavor to have as much firepower as possible and could be used for potential acquisitions, new investments.

But broadly speaking, there can be -- there's no assurances that we'll actually sell all of that stock or we're going to be very judicious about it. But we also think, hey, it further improves the credit profile, and we're certainly looking to expand our investor base as well as improve the daily liquidity of the underlying trading volumes. So we think it ultimately can lead to positives to all of that.

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Robert Sullivan, MidOcean Partners LP - Analyst [9]

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Got you. And why wouldn't you just engage in kind of a normal stock sale process in terms of how you've done in the past in terms of offering in a more traditional offering?

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

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Well, I think we evaluate all the methodologies to effectively raise capital, and we think this as a better path to give us more optionality. We don't think -- we don't want to -- in a traditional offering, I think you'll have to sell the stock at some discount, and we like the flexibility of this and we don't think the stock should be sold at a discount.

The stock is paying an $8-a-year dividend. It trades under 80. So obviously, by definition, mathematically, that's greater than a 10% yield. And if it trades lower, we like having the optionality of not selling stock. And if it trades at what we think is a fair entry point or a fair level to raise capital, we may sell some stock.

But doing it the traditional way generally historically required a large discount. We were willing to do that in years past in order to get some float out there and try to improve the liquidity, but this, we think, is a better option for all unitholders.

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Robert Sullivan, MidOcean Partners LP - Analyst [11]

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Okay. And final question on your 6% notes call steps down August 1, just wondering if you could give us a little -- just in terms of how you're thinking about that.

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

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We're aware that they step down August 1. No internal decisions have been made, but I can obviously certainly commit that they will be paid back sometime between -- I don't expect them to be paid down earlier than August 1 given the call premium, but I -- obviously, they'll be paid down sometime between August 1 and maturity.

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Operator [13]

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We currently have no more questions in queue.

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

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Okay. Thanks, everybody. We'll look forward to talking to you about second quarter results. Have a good day.

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Operator [15]

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This concludes today's conference call. Thank you for joining. Have a wonderful day. You may all disconnect.