Icahn Enterprises L.P. Q4 FY2022 Earnings Call

Good morning and welcome to the Icahn Enterprises L.P.'s Q4 2022 Earnings Call with Rob Flint, Director of accounting; David Willetts, President and CEO; and Ted Papapostolou, Chief Financial Officer. I would now like to hand the call over to Rob Flint, who will read their 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. Forward-looking statements may be identified by words such as expects, anticipates, intends, plans, believes, seeks estimates, will, or words of similar meaning and include but are not limited to statements about the expected future business and financial performance of Icahn Enterprises L.P. and its subsidiaries. Actual events, results, and outcomes may differ materially from our expectations due to a variety of known and unknown risks, uncertainties, and other factors that are discussed in our filings with the Securities and Exchange Commission, including economic competitive, legal, and other factors including the severity, magnitude, and duration of the COVID-19 pandemic. 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 David Willetts, our Chief Executive Officer.

Thank you, Rob. Good morning and welcome to the fourth quarter 2022 Icahn Enterprises earnings conference call. Joining me on today's call is Ted Papapostolou, our Chief Financial Officer. Together, we'll provide an overview of Q4 results and then be available for questions. Before we get into the results, I'd like to reemphasize that we believe activism is the best paradigm for investment. We're putting our activist principles into effect in both our majority-controlled and our minority positions held in our investment segment. Additionally, we strongly believe in hedging our positions to mitigate risk, especially in the volatile markets that we're living in today. For the sake of brevity, all net income and EBITDA amounts we’ll discuss are attributable to Icahn Enterprises, unless otherwise specified. Now on to the numbers. Full year 2022 net loss was $183 million, which represents a year-over-year improvement of $335 million. Full year adjusted EBITDA for 2022 was $758 million, which represents a year-over-year improvement of $485 million. For Q4 2022, we had a net loss of $255 million and adjusted EBITDA negative $54 million, compared to a net loss of $396 million and an adjusted EBITDA of negative $443 million in the prior year period. Our indicative net asset value as at quarter end increased by $522 million to $5.6 billion as compared to December 31, 2021. The change in indicative net asset value includes, among other things, changes in the fair value of certain subsidiaries, which are not included in our GAAP earnings reported above. Regarding our segments, year-to-date, our investment funds had a negative return of 2.4%. For comparison, the S&P 500 was down approximately 18% for the year. CVI ended the quarter with continued strong performance, largely due to a $20.42 increase in crack spreads in Q4 2022 versus 2021, with flat volumes. Dividends were increased to $0.50 per share for quarter 4, 2022 to bring the total 2022 dividends to about $5.30 per share. CVR Partners performed strongly in Q4 2022, largely due to strong pricing markets for ammonia and UAN, both of which were up versus Q4 2021 by approximately 30%-plus. For Automotive Services, revenue growth remained strong at over 13% for the full year of 2022. In Q4, the team executed the first phase of efficiency actions targeting corporate SG&A cost discipline. Although additional efficiency actions are planned in the first half of 2023, the company is intensifying its focus on customer service and upgrading its premium services offerings. The new CEO and CFO are now in place with the company, and the overall leadership team is rapidly executing the plan for 2023 performance. The IEP board declared a $2 quarterly distribution payable in cash for additional units. With that, let me turn it over to Ted for a detailed discussion of all of our segments.

Thank you, David. I will begin by reviewing our consolidated results and then highlight the performance of our operating segments and comment on the strength of our balance sheet. For Q4 2022, we had a net loss of $255 million and adjusted EBITDA of negative $54 million, compared to a net loss of $396 million and adjusted EBITDA of negative $443 million in the prior year period. I will now provide more detail regarding the performance of our segments. The investment funds had a negative return of 4.6% for the quarter, which was driven by the negative performance of our short positions, offset in part by certain long positions. For the quarter, long positions had a positive performance attribution of 4.5%, while short and other had a negative performance attribution of 9.2%. The investment funds had a net short notional exposure of 47% at the end of the year, compared to a net short notional exposure of 54% at the end of Q3. Our investment in the funds was approximately $4.2 billion as of year-end. Now to our Energy segment. In Q4 2022, our Energy segment reported net sales of $2.7 billion compared to $2.1 billion in the prior year quarter. Adjusted EBITDA was $168 million for Q4 2022 compared to $40 million in Q4 2021. CVI declared a $0.50 per share cash dividend and CVR Partners declared a fourth quarter cash distribution of $10.50 per unit. Q4 2022 refining margin per throughput barrel was $17.14, compared to $7.13 in the prior year quarter. This increase was primarily due to widening crack spreads. The cost of RINs continues to have a negative impact on our refining business with $142 million of related expense for the quarter. Q4 2022 average realized gate prices for UAN improved by 31% to $455 per ton, and ammonia improved by 30% to $967 per ton when compared to the prior year quarter. Now to our Automotive segment. Q4 2022 net sales and other revenues for the Automotive segment was $585 million, an increase of $22 million from the prior year quarter. Q4 2022 adjusted EBITDA was negative $43 million compared to negative $97 million in Q4 2021. Q4 2022 Automotive Service revenue increased by $43 million as compared to the prior year period, due to price increases offset by lower volumes. Q4 2022 aftermarket part sales decreased by $25 million as compared to the prior year period, mainly due to lower volumes. During the quarter, the segment was negatively impacted by increased inventory reserves and out-of-period adjustments. Subsequent to year-end, Auto Plus, an aftermarket parts distributor held within the segment, filed a voluntary Chapter 11 bankruptcy. This proceeding is limited to Auto Plus and will not have a significant impact on Icahn Enterprises. Now to our Real Estate segment. Q4 2022 net sales and other revenues increased by $8 million compared to the prior year quarter. Adjusted EBITDA was $3 million for Q4 2022, compared to negative $3 million for Q4 2021. The segment continued its strong performance and the management team is highly focused on increasing occupancy across the portfolio. Now turning to our other segments. Q4 2022 net sales and other revenues for all other operating segments were relatively flat compared to the prior year quarter. Adjusted EBITDA was $6 million for Q4 2022, compared to $12 million for Q4 2021. This case improved during Q4 2022 as compared to the prior year quarter, mainly due to price increases, which more than offset inflationary pressures in energy and raw materials. Management continues to prioritize manufacturing productivity and efficiencies across the company. During the quarter, Home Fashion was negatively impacted by products within its retail business, particularly in e-commerce. Management has decided to exit unprofitable retail products to focus on its hospitality business and reduce overhead costs. Now to 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 the quarter with cash, cash equivalents, our investment in the investment funds, and revolver availability totaling approximately $6.8 billion. Our subsidiaries have approximately $617 million of cash and $305 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 liquidity to enable us to capitalize on opportunities within and outside our existing operating segments. Thank you. Operator, can you please open up the call for questions?

One moment for our first question, it comes from Daniel Fannon from Jefferies.

Good morning, everyone. I have a question regarding the fund and its positioning. With the short position as we enter this year, it doesn't seem like a favorable start considering the performance of beta. I'm interested in understanding your overall thoughts on the broader macro environment. There's a lot happening, so could you share your perspective as you look ahead to this year and the investment outlook?

Sure. Thanks, Dan. I think this is always the most difficult and least satisfying question, because it's really a crystal ball. There are a number of factors that we're all aware of, such as question marks on interest rates, really less on whether they will go up than on when they'll go up, and what ripple effects that has on the underlying operating economy. We have always, at least for the last several years, looked to hedge both specific positions and broad market positions due to the uncertainty. So, our outlook doesn't remain radically changed. It's an uncertain environment. That said, that's an environment in which there are often opportunities that are very rifle-shot in nature. So we are quite focused on folks that may be in a distressed situation based on all of these changes. But our hedging, depending on the quarter, certainly either helps us or hurts us. But our view is to be hedged appropriately so we can manage out as much risk as we can while we execute our different theses.

Understood. I have a similar question about activist investing in a high interest rate environment. I assume this creates more opportunities for companies that might be struggling and could benefit from some changes. However, I also wonder how buying power and your ability to generate the necessary returns might be impacted by higher rates. I'm interested in how you all are approaching this situation and what it means for your various businesses, especially considering that rates are currently high and may rise further.

Yeah. Interest rates moving up does present more opportunities and it does present realistic operating costs for our debt. I think the one thing that we have to continually snap back to is even though there is a marked difference in interest rates, certainly now probably in 2023 as compared to 2020-21, we're really still not at an abnormally high interest rate environment. We're just recalibrating back to environments that we've all lived in for many, many years. So yes, it is not welcome to pay more interest, obviously, but we're not at nosebleed levels at this point. So it requires us to be as disciplined as we've ever been in terms of choosing investments that have a double-digit return and making sure we execute those quickly. But it's a concern, but it's not one that we'd say is extraordinary based on how we normally operate. We've just gotten a tailwind from some unusually favorable interest rate environments in the last few years.

Understood. And then just last one. You mentioned the bankruptcy of Auto Plus not being significant. I guess, is there a way to quantify that? And it's consolidated within your business. So just a little bit more color on what that means and how that should play through as that process unfolds would be helpful. Thank you.

Yeah. Ted, do you want to take that one?

Yes. We don't break out the Auto Plus business in our financials, but we did deem Auto Plus was not a significant subsidiary of Icahn Enterprises and nor was it a strategic shift getting rid of that subsidiary. So it would not be a significant impact, but we can't quantify it at this time, and it was a subsequent event. So maybe during the Q1 earnings, we'll be able to provide more color.

Okay, thank you.

Thank you. One moment for our next question, please. And it comes from the line of Andrew Berg, Post Advisory Group.

Thanks, guys. Just circling back on the investment funds for a moment. It looked like to me on the single name long positions you guys did reasonably well. Obviously, the biggest thing that probably hurt you was the equity short. Was the 7-point change in net notional predominantly an adjustment to that equity short or did you adjust in other areas?

I think the only thing that you really see running through here is the short, as you pointed out, did not perform well. Certainly, Q4 was volatile, as has been the last several quarters. So the shorts did not perform particularly well, but the longs did perform relatively well. So I think on our overall positioning, it doesn't reflect a fundamental change in our positions, just relative performance between them in terms of the equities.

Okay. And I guess we'll see it in the Q as to what the change was between the index funds and the CMBX shorts?

In terms of the CMBX shorts, I’ll provide some broader context. Their impact has declined over time; looking back to 2021 and 2022, our exposure to these shorts has naturally decreased as they wind down. We have observed some effects over the last several quarters that are more pronounced than in previous years, as they are winding down in larger numbers, which is planned and predictable. Therefore, I wouldn't place too much emphasis on this beyond recognizing it as the expected progression for that security.

Okay. My numbers suggest that that was probably somewhere breakeven in the quarter. So I don't think it was a significant detractor from performance, but I might be wrong. When we look at real estate, the $6 million swing in EBITDA, what exactly is driving that? It's great to see the improvement, I'm just wondering what was the improvement there?

I mean the good news is that we have been focused on real estate, and there are still opportunities, certainly in one or two areas. But we've seen continued progress in our development companies. They've done very well despite the interest rate environments. They continue to move forward. We continue to be excited about our strategy and development of the type that we do. And then over the course of really '22 versus '21, we've had continued progress in select net lease properties, really leasing those out where they were idle. We still have plenty of space to lease out and we're focused on that. But what I'd say is real estate has started to come more into its own. And stay tuned in that area. We want to see that continue to perform well.

Okay. Great. And then lastly, just looking at the asset values that you guys provide, there were sort of three big areas where we saw that indicative value change, one of which was in automotive-owned real estate. And you mentioned on the call that there were certain write-downs that were taken. Can you quantify those write-downs? And given the Auto Plus have happened subsequent to quarter-end, I just want to understand that decline in value that you show in automotive a little bit better as we think about it from 3Q to 4Q.

Sure. I mean I think the biggest move that is represented there, we'll separate it into what I consider the operating companies in the real estate. The NAV is a valuation-based approach, which is obviously non-GAAP. And real estate we value once a year. And given the movement in cap rates, which has been relatively significant, we adjusted our net asset values down in the real estate sector. It doesn't really change any of the underlying economics for that sector or for our ability to get market rents that we're getting in the past. But the reality is when you do an independent valuation, then you look at cap rates, you as much as you may not wish to, you have to recognize that based on our methodology. So that was the single biggest change in the automotive real estate sector. I'd say in terms of the operations, there were a number of items that I would characterize as stemming from a new leadership team, particularly in services. We've been focused on a full balance sheet review, cleaning up processes, ensuring that controllership is where it needs to be. And as we really looked back, we saw a number of items that were not to our liking. And so several additional reserves were posted which I would characterize some of them as methodology changes. For example, let's post an excess and obsolete inventory methodology; let's reevaluate some of the capitalized items yield for inventory. Those are just reevaluations of methodology. And then frankly, there are other items that we had to recognize that should have been recognized perhaps a little bit more promptly than they have been between Q4 and Q1, Q2 and Q3.

Okay. So it's pretty much new management coming in and a bit of a cleanup. That makes sense.

It's a bit of a cleanup.

Got it. Thanks, guys.

We're really focused on the integrity of the numbers there.

Okay. Helpful.

Thank you. One moment for our next question. And it comes from the line of Bruce Monrad with Northeast Investor Group.

Hi, guys, can you hear me okay?

Yes, we can.

Okay. Great. Thanks as always for hosting the call and hopefully, okay. Food packaging question. And nice to see the improvement at this case and both the EBITDA and the marking up of the value, that's great. A question on sort of production there. What inning or how is it going with production there? What inning are you in, in that would you say? Maybe that's the first question.

Regarding the North American plants, I want to highlight that the production line is running consistently at volumes, although we are still addressing some scrap rate issues. They are close to our targeted scrap rates but haven't fully met them. However, this isn't a major concern; it's more of an opportunity for improvement. I would liken our progress to being in the first quarter of a game. We have implemented various stabilization measures, including changes in personnel and improvements in measuring our indicators and line performance. While the plants are not operating perfectly, they are performing steadily. Moving forward, our focus will be on making consistent enhancements. On a positive note, we have seen a recent three-month increase in efficiency at Oceola, though it is not quite at our ideal level. In my experience, improvements in plants tend to occur in small increments rather than large leaps, especially when dealing with multiple challenges such as labor, machine reliability, and scheduling. So, while we're progressing, we're not starting from scratch; we are making meaningful strides. One concern that always lingers is the potential for power interruptions and weather-related issues, which we've experienced to some degree in this first quarter; however, these do not impact our overall positive trajectory for the period.

Okay. Good. And I'm sorry, OEE stands for?

It's basically Equipment Efficiency. Overall Equipment Efficiency.

And then in terms of how management is budgeting for '23, do you do it off? Do they do it off of a 4Q and say, okay, Oceola is back up and running and let's go after that and budget some improvements? Do you do it off of last year? Last year, 1Q was pretty good, but obviously, it was down. So how are they going about budgeting, would be a question if you can answer that?

Budgeting is not strictly a science. We've asked management for a year-over-year improvement plan based on various factors, including plant improvements, sourcing, costs, and adjusting the mix to enhance our performance across all continents. When we budget, we don’t simply take an average from the previous year. Instead, we analyze exit run rates, comparing them to fully executed and planned initiatives. While this may seem complex, the essence is that we avoid relying on averages. We assess what each plant or initiative is expected to achieve and consider our end-of-year position to prevent any management gaming the system. However, we aim for a budget in 2023 that is highly achievable, reflecting meaningful growth, with a confidence range of 75% to 85% and clearly defined risks and opportunities.

It does. Very much appreciated. Great. Again, congratulations. I know you had some FX headwinds in the quarter. So you've got other things there, but I appreciate the chance to ask the question. Thank you.

You're welcome.

Thank you. And with that, I will conclude the Q&A session. And I'll turn the call back to David Willetts for final remarks.

Great. Thank you. Thank you very much, everyone, for attending. As always, if you have questions that we weren't able to get to, I would refer you to our website, and there are several means in which you can ask your questions or concerns or comments, and we will attempt to get back to you in a reasonable time frame. Thank you very much, and we look forward to talking in roughly three months. Take care.

And with that, we conclude our conference for today. Thank you for participating. And you may now disconnect. Thank you, and good day.