Icahn Enterprises L.P. (IEP) Q2 2020 Earnings Report, Transcript and Summary

Good day ladies and gentlemen, and thank you for standing by. Welcome to the Icahn Enterprises Second Quarter 2020 earnings webcast. [Operator instructions] At this time, I would like to turn the conference over to Mr. Jesse Lynn. Sir, please begin.

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 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.

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 position 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 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, and 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.

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. For Q2, 2020, net income attributable to Icahn Enterprises was $299 million as compared to a net loss of $498 million in the prior year period. As you can see on Slide 5, in Q2, 2020 the performance of our investment funds was a significant driver of our net income for the quarter. Adjusted EBITDA attributable to Icahn Enterprises for Q2, 2020 was $695 million compared to a loss of $257 million in the prior year period. I will now provide more detail regarding the performance of our individual segments. Our investment segment had income attributable to Icahn Enterprises of $479 million for Q2 2020. The investment funds had a positive return of 11.7% in Q2, 2020 compared to a negative return of 3.1% for Q2, 2019. Long positions had a positive performance attribution of 22.7% for the current quarter, while short positions had a negative performance attribution of 11%. Since inception in November 2004 through the end of Q2, 2020, the investment funds gross return is 86% or 4% annualized. The investment funds continue to be hedged. At the end of Q2, 2020 the funds were net short 48% compared to net short 73% at the end of Q1, 2020. Our investment in the funds was $4.6 billion as of June 30, 2020. And now to our energy segment. For Q2, 2020 our energy segment reported net sales of $675 million and consolidated adjusted EBITDA of $109 million compared to net sales of $1.7 billion and consolidated adjusted EBITDA of $273 million for the prior year period. Refinery volumes were lower in Q2, running an average of 156,000 barrels per day compared to 216,000 barrels per day in the prior year period. This was due to the turnaround at Coffeyville which was completed in April as well as operating at reduced rates until mid-June due to the weak environment. CVR management indicated volumes in the range of 190,000 to 210,000 barrels per day in Q3. Refining margin per throughput barrel was $10.43 in the second quarter of 2020 compared to $15.66 during the same period in 2019. The refining margin was significantly impacted by narrow crack spreads and tight crude differentials as demand for gasoline and diesel were reduced due to COVID shutdowns. CVR Partners reported Q2, 2020 EBITDA of negative $2 million which included a noncash goodwill impairment of $41 million. Adjusting for this impairment, adjusted EBITDA was $39 million positive compared to $60 million positive in Q2, 2019. The Q2 decline in EBITDA was primarily due to lower-priced ammonia and UAN which are weak due to strong supply and low natural gas prices. CVR energy did not declare a dividend this quarter as it evaluates various high-return investment opportunities including renewable diesel. Now turning to our automotive segment. Q2, 2020 net sales and service revenue for Icahn automotive group was $587 million, down $157 million from the prior year period with $43 million of the decline related to store closures and the remainder primarily related to the sales slowdown due to COVID-19. Q2, 2020 adjusted EBITDA which excludes the losses associated with closed stores, was a loss of $7 million compared to a loss of $3 million in the prior year period. Icahn automotive continues to push forward with a multiyear transformational plan to restructure the operations and improve profitability. Icahn auto accelerated closures of certain parts stores, adjusted store hours and staffing to match reduced demand, implemented significant cost-savings measures and reduced capital spending to minimum levels. All these initiatives helped Icahn auto offset the impact of significant sales decline and position the company for profitability as sales return. Now turning to our Food Packaging segment. Q2, 2020 net sales increased by $6 million or 6%, and consolidated adjusted EBITDA was flat at $16 million compared to the prior year period. Net sales increased due to an increase in volumes and an increase due to price and product mix, offset in part by unfavorable effects of foreign exchange. Demand for Viskase casing products remained strong with increased global volume related to the COVID-19 pandemic. And now to our metals segment. Q2, 2020 net sales decreased by $61 million and adjusted EBITDA decreased by $4 million compared to the prior year. Net sales were impacted by lower shipping volumes and market selling prices for most grades of metal due to unfavorable market conditions. And now to our real estate segment. Q2, 2020 net operating revenues decreased by $2 million compared to the prior year. Adjusted EBITDA for the quarter increased by $5 million compared to the prior year period. Revenue from our real estate operations for both Q2, 2020 and Q2, 2019 were substantially derived from income from the sale of residential units and club and rental operations. The real estate segment generated $10 million of adjusted EBITDA compared to $5 million in the prior year period. Now turning to our home fashion segment. Q2, 2020 net sales decreased by $7 million compared to the prior year period primarily due to decrease in existing WestPoint Home sales, offset in part by increases attributable to face mask sales and the VSS acquisition. As previously disclosed, the VSS acquisition strengthens WestPoint's focus in the institutional and hospitality businesses and extends its addressable market to international markets outside the U.S. WestPoint achieved adjusted EBITDA of $1 million in Q2 compared to losing $1 million in the prior year period. Early in the COVID-19 crisis, WestPoint started producing and donated nonmedical face masks to frontline personnel and continues to see strong medical -- the strong demand for this new product line. 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 Q2, 2020 cash, cash equivalents, our investment in the investment funds and revolver availability totaling approximately $7 billion. Our subsidiaries have approximately $727 million of cash and $582 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.

[Operator Instructions] Our first question or comment comes from the line of Dan Fannon from Jefferies. Your line is open.

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?

Sure. Thanks. This is Keith. Yes, so I think -- well, I'll start in our investment segment. I think we're -- we have a really large cash balance down at our investment segment. And so as a result of some recently closed M&A transactions that have us on the lookout for potential new activist investments. And we're also finding some stuff at the investment segment level in the distressed credit space that's interesting and prior to the pandemic I would say that we weren't seeing very many interesting opportunities in the credit space. So that's something that's changed at the investment segment level. As far as our other segments, I think each -- I mean, we sort of laid them out on the call. I think we're seeing particularly in energy with CVR energy, and they held their earnings call yesterday. So they've been pretty vocal about this, but we're seeing a couple -- a number of potential high return projects whether it be an acquisition of another refinery in another pad to diversify our regional exposure or even where exploring some renewable diesel plant conversion projects that again pay extraordinarily high returns with quick paybacks. So I'd say those are really the two areas where we're seeing the most opportunities.

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 onetime 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.

Yes, sure. I think -- I don't anticipate any material onetime costs in ramping back up. I think frankly, the unfortunate pandemic has really forced companies to operate on a more lean basis and increase productivity. And our management team at Icahn automotive group on both sides of the business, but particularly the service side of the business really made some drastic moves to preserve the value of the business. And I think they're seeing as business volumes improve, the cost structure doesn't need to nearly improve at the same percentage as it once was. So I actually, not only do I not see sort of onetime charges, I sort of see better operating leverage going forward.

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.

Yes. So I mean our commercial real estate portfolio at this point is pretty small. Basically, we have -- the most material asset we have is a 30 storey building in Atlanta. That is the tenant who has left, but their leases continues to pay until 2021. We are currently redesigning that -- that was a single-tenant building. And so we're redesigning and repurposing it for multi-tenanting and are making pretty good progress with a number of potential lessees to fill the building up for with longer-term leases. But yes, look no doubt that the pandemic has certainly put -- or certainly at least has people corporations thinking about their real estate footprint and do they need all of their employees and offices, and that puts pressure on it. But I think we still feel okay about this particular building in the demographics in Downtown Atlanta and being able to ultimately lease it up. That's really the most material, that's the only corporate exposure in our triple net lease portfolio.

Got it. Thanks Keith.

Yes. Thanks for the question.

[Operator instructions] 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.

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

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