Icahn Enterprises L.P. (IEP) Q3 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Third Quarter 2020 Icahn Enterprises Earnings Conference Call. At this time all participants remain on the listen-only mode. After the speaker's presentation there'll be a question-and-answer session. [Operator instructions] I would now like to hand the conference over to your speaker today, Jesse Lynn. Thank you. Please go ahead, sir.

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 third 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 Q3 2020, we had a net loss attributable to Icahn Enterprises of 714 million or $3.14 per LP unit compared to a net loss of 49 million or $0.24 per LP unit in the prior year period. The quarterly loss was primarily driven by losses in our investment segment. Adjusted EBITDA attributable to Icahn Enterprises for Q3 2020 was a loss of 550 million, compared to a loss of 121 million in Q3 of 2019. Our investment funds are in the negative return of 11.8% in Q3 of 2020, compared to a negative return of 7.4% for Q3 of 2019. The negative performance was driven by net losses in both our short index and short single name equity positions, as well as certain long equity positions in the energy industry. Net sales for our energy segment decreased by 617 million for Q3 of 2020 compared to the prior year period. Our petroleum business was negatively impacted by narrow crack spreads, tight crude oil differentials that resulted from COVID-19 demand disruption and the global crude oil price wars and high Brent prices. Our fertilizer segment had strong utilization rates at both facilities offset by a weaker price environment as agricultural markets continue to be hampered. Net sales and service revenues for our automotive segment were 660 million for Q3 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. Icahn Automotive Group continues to push forward with a multi-year 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. On October 1, we announced an agreement with Brett Icahn to return to IEP and join our Board of Directors. Pursuant to the agreement, Brett Icahn and a new team of portfolio managers will manage a portfolio of assets within our investment segment over a seven-year term. We also announced the adoption of management succession plan pursuant to which it is currently anticipated that Bret Icahn will succeed Carl Icahn as Chairman a VP and CEO of our Investment segment following the end of the seven-year term. We closed the quarter with cash and investments in the funds of over 5.1 billion and continue to look for investment opportunities that fit a favorable risk reward profile. 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 Q3 2020, net loss attributable to Icahn Enterprises was $714 million as compared to a net loss of $49 million in the prior period. As you can see on Slide 5, in Q3 2020, the performance of our investment funds was a significant driver of our net loss for the quarter. Adjusted EBITDA attributable to Icahn Enterprises for Q3 2020 was a loss of $550 million, compared to a loss of $121 million in the prior year period. I will now provide more detail regarding the performance of our segments. Our investment segment had net loss attributable to Icahn Enterprises of $543 million for Q3 2020. The investment funds had a negative return of 11.8% in Q3 2020, compared to a negative return of 7.4% for Q3 2019. Long positions had a negative performance attribution of 3% for the current quarter, while short positions had a negative performance attribution of 8.8%. Since inception in November 2004 through the end of Q3 2020, the investment funds gross return is 64% or 3% annual high. The investment funds had a net long notional exposure of 8% compared to net short of 48% at the end of 2 2020, our investment in the funds $4 billion as of September 30 2020. Now to our energy segment, for Q3 2020, our energy segment reported net sales of $1 billion and consolidated adjusted EBITDA of a loss of $39 million, compared to net sales of $1.6 billion and consolidated adjusted EBITDA of $235 million for the prior year period. The Q3 2020 EBITDA loss includes a loss of $65 million related to CVRs investment in Delek. Q3 2020 combined total throughput was approximately 201,000 barrels per day, compared to approximately 222,000 barrels per day for Q3 2019. This decrease was primarily attributable to a change in the crude slate towards maximizing light crude and weather-related power issues. Refining margin per throughput barrel was $5.47 in the third quarter of 2020 compared to $16.34 during the same period in 2019. The refining margin was significantly impacted by narrow crack spreads, and tight crude differentials as low air travel continues to force excess jet fuel into the diesel fuel market resulting in low diesel prices. CVR Partners reported Q3 2020 EBITDA of $15 million, compared to $11 million in Q3 2019. While UAN volumes increased 7%, UAN prices were down 23% due to low natural gas prices. CVR Energy did not declare a dividend this quarter, as it evaluates various investment opportunities including renewable diesel. Now turning to our automotive segment, Q3 2020 net sales and service revenues for Icahn Automotive Group were $660 million, down $84 million from the prior year period, with $48 million of the decline related to store closures and the remainder primarily related to the sales slowdown due to COVID-19. Q3 2020 adjusted EBITDA, which excludes losses associated with closed stores was $6 million, compared to a loss of $23 million in the prior period. Icahn Automotive continues to push forward with a multi-year transformation 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, Q3 2020 net sales increased by $7 million or 7% and consolidated adjusted EBITDA was $15 million, compared to $12 million in the prior year period. Net sales increased due to increases in both volume and price. Demand for Viskase casing products remain strong and steady with increased global demand related to the COVID-19 pandemic. In October 2020, Viskase completed an equity private placement with IEP for $100 million. Viskase also entered into a credit agreement providing for $150 million term loan and a $30 million revolving credit facility. The proceeds from the new term loan plus the equity private placement were used to repay in full the existing term loan. And now to our metal segment, Q3 2020 net sales increased by $1 million and adjusted EBITDA increased by $6 million compared to the prior year. Volumes and prices have recovered from the low point in Q2 contributing to a return of profitability. And now to our real estate segment, Q3 2020 net operating revenues decreased by $7 million compared to the prior year. Adjusted EBITDA for the quarter decreased by $2 million compared to the prior year period. Revenue from our real estate operation for both Q3 2020 and Q3 2019 were substantially derived from income from the sales of residential units and rental operations. Now turning to our home fashion segment, Q3 2020 net sales increased by $2 million compared to the comparable prior year period. Sales to hospitality customers were down significantly, but were offset by strong sales of facemasks. WestPoint achieved adjusted EBITDA of $4 million in Q3, compared to a loss of $2 million in the prior year period. Sales of higher margin facemasks and cost cutting were the primary drivers of increased profitability. Now I will discuss our liquidity position. We maintain ample liquidity at the holding company, and at each of our operating subs to take advantage of attractive opportunities. We ended Q3 2020 cash, cash equivalents, our investment in the investment funds and revolver availability totaling approximately $6.5 billion. Our subsidiaries have approximately 775 million of cash and $591 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, please?

Thank you. [Operator Instructions] Our first question comes from Dan Fannon with Jefferies. You may proceed with your question.

Hey, good morning. Thanks for taking the question. So first, it's just on the new agreement in terms of the succession planning and thinking about the team coming over. You mentioned multiple investment professionals. I guess if you could just put some numbers around that. And will there be any changes in terms of the AUM that's coming with them? Or thoughts around potentially looking at raising external capital or any - just kind of shifts in terms of the mandate of what you guys are currently doing across the investment - kind of the current hedge stock [ph]?

Sure. Yeah. Sure. Thanks, Dan, for the questions. Yeah, let me take them, maybe try to address each one. So Brett came back as we brought him back October 1, as part of the - we had been negotiating with him for a while on him returning to the firm. And obviously, I think both sides, Brett and us thought that we would ultimately get to a deal. So I believe he started a process six, seven months ago of building - interviewing and looking for people that could be part of the team and that he was comfortable with and agreed with investment philosophies and styles and he did a lot of diligence on that. And at the end of the day, he ultimately found three guys that he viewed as a very good fit. And so it all sort of came together and worked out that he came back the October 1, and these three portfolio managers who will report up to him, came with him, but they weren't necessarily a team together at another fund or anything like that. And there's no AUM coming over with them. So there's sort of four new, Brett and the three portfolio managers underneath him that started October 1. Then they're often running looking at new ideas. As far as I would discuss - some of your other questions I would answer. No, there is no current plans to pivot and start taking in third party money. At this point, we'll just continue to manage the existing investment segment as it is, which as you know, is quite sizable, it's $8 billion, $9 billion. And they'll work within that construct of capital.

And will they be carved out separately from the existing kind of investment team?

Well, we've had and I think you'll see it in our public presentation that we put out every quarter should be out on our website in a week or two. We have a slide on current sort of the team. I think we've had some turnover so I sort of view them as a significant new part of the investment team. There's been a couple of senior people that have left year-to-date. And so I think you'll see some familiar names and then these guys coming in. So I think it's - no, it will not be. It'll be integrated from the point of view of you'll see no difference in the investment segment reporting. Obviously, certain things are tracked separately for purposes of the deal, that we brought Brett back on there. But for all intents and purposes, it's still one sort of overall strategy.

Understood and then just, I guess, from a high level this day, I guess, four years ago, you guys were in the headlines, a lot of call [ph] was given his view of what was going to happen with the change in the White House. And now obviously, we don't know exactly what's going to happen with that. But I guess just an overall kind of view of the market and kind of where you guys sit today, in terms of what you're looking at, in terms of new investment opportunities, kind of positioning of the funds you guys give it, but just is there any shift in terms of how you're thinking?

No, I think a lot of the themes are similar and sound. So I don't mean to bore you, but I think we sort of always have a cautious bend to our investment outlook. You can see that in our quarterly exposures that we've disclosed every quarter for the last 10 years. You tend to see either very low net long exposures, if not outright net short exposure, so I think we're very cautious in a sort of S&P 500 market that trades at whatever 25, 26 times earnings. We like to buy - you know the story with us, we like to buy things that we view as cheap, sort of with a value bench where we can be a catalyst through the activist model to unlock value. And so in a high multiple market, it's obviously always hard to define those type of names, but we're finding certain spots, we're picking our spots. The new team has been here a month, so they found a couple of things that are interesting that we're looking at and sort of maybe building toehold positions on. So I'm cautiously optimistic that we'll pick our spots, but I think on the overall market we got to be very careful.

Understood. Okay, thank you.

Yeah, thanks for the question, Dan.

Thank you. [Operator Instructions] And speakers I'm not showing any further questions at this time.

Okay, thanks, everybody. We as always appreciate your interest in Icahn Enterprises. And we'll look forward to talking to you during - in the New Year about fourth quarter results. Have a good day.

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.