Earnings Call Transcript - IEP Q2 2020

Operator, Operator

Good day everyone, and thank you for being here. Welcome to the Icahn Enterprises Second Quarter 2020 earnings webcast. At this point, I would like to hand over the conference to Mr. Jesse Lynn. Please, go ahead.

Jesse Lynn, Presenter

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 those related to 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 Keith Cozza, our Chief Executive Officer.

Keith Cozza, CEO

Thanks, Jesse. Good morning, and welcome to the second quarter 2020 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 Q2, 2020, we had net income attributable to Icahn Enterprises of $299 million or $1.36 per LP unit compared to a net loss of $498 million or $2.49 per LP unit in the prior year period. Quarterly income was primarily driven by investment gains at both the investment and holding company segment. Adjusted EBITDA attributable to Icahn Enterprises for Q2, 2020 was $695 million compared to a loss of $257 million in Q2 of 2019. Our investment funds earned a positive return of 11.7% in Q2, 2020 compared to a negative return of 3.1% for Q2 of 2019. The positive performance was primarily driven by certain large long equity positions and a significant short credit position, partially offset by negative performance from our short index market hedges. Net sales for our energy segment decreased by $1 billion for Q2, 2020 compared to the prior year period. Our petroleum segment within CVR energy was negatively impacted by narrow crack spreads and tight crude differentials that resulted from the COVID-19 demand disruption and global crude oil price wars. Our fertilizer segment had strong utilization rates at both facilities, offset by a weaker price environment as agriculture markets continue to be hampered. Net sales and service revenues for our automotive segment were $587 million for Q2 of 2020. The COVID-19 pandemic and the impacts of the actions taken by governments and others have significantly contributed to the decline in revenues, particularly the automotive services revenue and commercial sales revenue which, until recently, were experiencing growth on an organic basis. Icahn automotive group continues to push forward with the multiyear transformational plan to restructure the operations and improve profitability. We have made significant progress separating our automotive service business from our aftermarket parts business and are on track to substantially complete the separation by the end of this year. We closed the quarter with holding company cash and investments in the funds of over $5.7 billion. We continue to look for investment opportunities that align with our activist philosophy. With that, let me turn it over to Sung.

SungHwan Cho, CFO

Thanks, Keith. I will start with a brief overview of our consolidated results and then discuss the performance of our operating segments and the strength of our balance sheet. In the second quarter of 2020, net income attributable to Icahn Enterprises was $299 million, compared to a net loss of $498 million in the same period last year. In Q2 2020, the performance of our investment funds significantly contributed to our net income for the quarter. Adjusted EBITDA attributable to Icahn Enterprises for Q2 2020 was $695 million, up from a loss of $257 million in the prior year period. Now, I will provide more details on the performance of our individual segments. Our investment segment reported income attributable to Icahn Enterprises of $479 million for Q2 2020. The investment funds delivered a positive return of 11.7% in Q2 2020, compared to a negative return of 3.1% in Q2 2019. Long positions contributed positively with a performance attribution of 22.7% for the current quarter, while short positions had a negative attribution of 11%. Since their inception in November 2004, the investment funds have achieved a gross return of 86%, or 4% annualized. The funds remain hedged, with a net short position of 48% at the end of Q2 2020, down from 73% at the end of Q1 2020. Our investment in the funds stood at $4.6 billion as of June 30, 2020. Next, in our energy segment, we reported net sales of $675 million and consolidated adjusted EBITDA of $109 million in Q2 2020, down from net sales of $1.7 billion and an adjusted EBITDA of $273 million in the same quarter last year. Refinery volumes averaged 156,000 barrels per day in Q2, compared to 216,000 barrels per day in the prior year, largely due to the turnaround at Coffeyville, which was completed in April, and reduced operations until mid-June amid a challenging environment. CVR management forecasted volumes of 190,000 to 210,000 barrels per day for Q3. The refining margin per throughput barrel was $10.43 in Q2 2020, a decrease from $15.66 during the same quarter in 2019, largely due to tight crack spreads and crude differentials caused by reduced demand for gasoline and diesel due to COVID-19 shutdowns. CVR Partners reported an EBITDA of negative $2 million for Q2 2020, which included a noncash goodwill impairment of $41 million. Adjusting for that impairment, adjusted EBITDA was $39 million, down from $60 million in Q2 2019. The decline in EBITDA was mainly due to lower ammonia and UAN prices driven by strong supply and low natural gas prices. Additionally, CVR Energy did not declare a dividend this quarter as it evaluates high-return investment opportunities, including renewable diesel. Moving on to our automotive segment, Q2 2020 net sales and service revenue for Icahn Automotive Group was $587 million, a decrease of $157 million from the prior year, with $43 million of the decline attributed to store closures and the remainder primarily due to the sales slowdown from COVID-19. Adjusted EBITDA for Q2 2020, excluding losses from closed stores, was a loss of $7 million, compared to a loss of $3 million in the same quarter last year. Icahn Automotive continues to advance a multi-year transformational plan to restructure operations and improve profitability. They have accelerated closures of certain parts stores, adjusted store hours and staffing to match reduced demand, implemented significant cost-saving measures, and minimized capital spending. These initiatives have helped to mitigate the impact of the significant sales decline and positioned the company for profitability as sales recover. In our Food Packaging segment, Q2 2020 net sales increased by $6 million, or 6%, and consolidated adjusted EBITDA remained flat at $16 million compared to the previous year. The increase in net sales came from higher volumes and an improved product mix, partially offset by unfavorable foreign exchange effects. Demand for Viskase casing products has remained strong, driven by increased global volume related to the COVID-19 pandemic. In our metals segment, Q2 2020 net sales decreased by $61 million and adjusted EBITDA decreased by $4 million compared to the previous year, due to lower shipping volumes and market selling prices for most grades of metal amid unfavorable market conditions. In our real estate segment, Q2 2020 net operating revenues fell by $2 million compared to the prior year, while adjusted EBITDA increased by $5 million. Revenue for both Q2 2020 and Q2 2019 largely came from residential unit sales and rental operations, producing $10 million of adjusted EBITDA versus $5 million last year. Lastly, in our home fashion segment, Q2 2020 net sales decreased by $7 million from the previous year, mainly due to a decline in existing WestPoint Home sales, although this was partially offset by increases from face mask sales and the VSS acquisition. The VSS acquisition enhances WestPoint's focus on institutional and hospitality businesses, expanding its market to international territories outside the U.S. WestPoint achieved adjusted EBITDA of $1 million in Q2 2020, compared to a loss of $1 million in the prior year. Early in the COVID-19 pandemic, WestPoint began producing and donating nonmedical face masks to frontline personnel and continues to experience robust demand for this new product line. Moving on to our liquidity position, we have maintained substantial liquidity at both the holding company and our operating subsidiaries to capitalize on attractive opportunities. At the end of Q2 2020, our cash and cash equivalents, along with our investments in the funds and revolver availability, totaled around $7 billion. Our subsidiaries have approximately $727 million in cash and $582 million in undrawn credit facilities available for pursuing attractive opportunities. In summary, we remain focused on building asset value and ensuring ample liquidity to capitalize on opportunities within and outside our existing operating segments. Thank you.

Operator, Operator

Our first question or comment comes from Dan Fannon from Jefferies. Your line is open.

James Steele, Analyst

This is actually James Steele filling in for Dan. Thanks for taking our questions. So first, I just wanted to sort of start off high level and just talk about how you're seeing the landscape for investment opportunities in M&A. Obviously, things are different from the plans that you had when you started the year. So I just wanted to see how you're assessing the landscape and which of your segments might be more opportunistic for M&A?

Keith Cozza, CEO

Sure. Thanks. This is Keith. I'll start with our investment segment. We currently have a significant cash balance in that area. Following some recently closed mergers and acquisitions, we're actively searching for new activist investments. Additionally, we're noticing interesting opportunities in the distressed credit sector, which wasn't the case before the pandemic. Regarding our other segments, we've outlined them in the call. Particularly in energy, CVR Energy held their earnings call yesterday and has been quite vocal. We're noticing several potential high-return projects, including acquiring another refinery to diversify our regional presence or exploring renewable diesel plant conversions, which offer exceptionally high returns with quick paybacks. These are the two main areas where we see the most opportunities.

James Steele, Analyst

Okay, thanks. And then on the automotive segment obviously, you pivoted pretty quickly and you were able to cut costs. But I'm just curious when the environment improves, will there be any one-time costs or just kind of any ramifications from what you've done in the past couple of months to limit costs? Just curious on how quickly you can ramp back up there and what you might tell.

Keith Cozza, CEO

Yes, I don't expect any significant one-time costs as we ramp back up. The pandemic has pushed companies to operate more efficiently and boost productivity. Our management team at Icahn Automotive Group, especially on the service side, took significant steps to maintain the business's value. As business volumes increase, the cost structure does not need to improve at the same rate as before. Therefore, I not only don't foresee any one-time charges, but I also anticipate improved operating leverage moving forward.

James Steele, Analyst

Okay, thanks. And then lastly for me, on the real estate segment. I think this is an area where a lot of people think there could be some more permanent evolutions resulting from the pandemic. So I'm just curious on what your thoughts are there and how you view your capacity in your commercial real estate portfolio.

Keith Cozza, CEO

Our commercial real estate portfolio is currently quite small, with our most significant asset being a 30-story building in Atlanta. The tenant has vacated, but their lease remains active until 2021. We are in the process of redesigning this building, which was initially single-tenant, into a multi-tenant space, and we are making good progress with several potential long-term lessees. There's no denying that the pandemic has led companies to reconsider their real estate needs and whether they require all employees in office spaces, which certainly adds some pressure. However, we remain optimistic about this building and its prospects in Downtown Atlanta, believing we can successfully lease it out. This is really our only significant corporate exposure in the triple net lease portfolio.

James Steele, Analyst

Got it. Thanks Keith.

Keith Cozza, CEO

Yes. Thanks for the question.

Operator, Operator

I am showing no additional questions in the queue at this time. I'd like to turn the conference back over to management for any closing remarks.

Keith Cozza, CEO

Okay, thank you operator, and thank you everybody for your interest in IEP. We look forward to discussing third quarter results with you later this year. Have a good day.

Operator, Operator

Ladies and gentlemen, thank you for participating in today’s conference. This concludes the program. You may now disconnect. Everyone have a wonderful day.