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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning, and welcome to the Icahn Enterprises L.P. Q3 2019 Earnings Call with Jesse Lynn, General Counsel; Keith Cozza, President and CEO; and SungHwan Cho, Chief Financial Officer.
I would now like to hand over the call to Jesse Lynn, who will read the opening statements.
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. These forward-looking statements involve risks and uncertainties that are discussed in 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.
Thanks, Jesse. Good morning, everyone, and welcome to the third 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 Q3 2019, we had a net loss attributable to Icahn Enterprises of $49 million, or $0.24 per LP unit, compared to net income of $118 million, or $0.64 per LP unit in the prior year period. The quarterly loss was primarily driven by losses in our Investment Funds, offset in part by the gain from the sale of Ferrous Resources, which closed during the quarter. Adjusted EBITDA attributable to Icahn Enterprises for Q3 2019 was a loss of $121 million, compared to a gain of $5 million for Q3 of 2018.
Our Investment Funds had a negative return of 7.4% in Q3 2019, compared to a negative return of 6.3% for the prior year period. Our negative performance in Q3 was driven by net losses in our short equity index positions and certain core long equity positions. The Investment Funds continued to be defensively positioned, finishing the quarter with net short exposure of 16%.
In our Energy segment, our Q3 2019 net sales were $1.6 billion and consolidated adjusted EBITDA was $235 million. CVR Energy had a strong third quarter, led by improved capture rates, high throughput volumes, and increased fertilizer sales volumes and pricing.
Last week, CVR announced an increase in its quarterly dividend from $0.75 per share to $0.80 per share, as well as the authorization of a $300 million stock repurchase program.
Net sales and service revenues for our Automotive segment in Q3 2019 were $744 million, compared to $735 million in the prior year period. The increase was primarily due to higher automotive service revenues, offset in part by a decrease in aftermarket parts sales. Icahn Automotive Group continues to push forward with the multi-year transformational plan to restructure the operations and improve profitability.
During Q3, IEP issued $500 million of new senior notes due in 2024, had a coupon of 4.75%. We also paid down $1.7 billion of IEP senior notes due in 2020 in Q3 with cash on hand. Total debt outstanding at the holding company now stands at $5.6 billion.
In Q3, we closed on our previously announced agreement to merge Ferrous Resources with a wholly-owned subsidiary of Vale. IEP received proceeds of approximately $450 million for our equity and debt interest in Ferrous Resources subject to future closing adjustments, realizing a gain of approximately $250 million.
We closed the quarter with a strong balance sheet and continue to search for undervalued investment opportunities across all of our business segments.
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. In Q3 2019, net loss attributable to Icahn Enterprises was $49 million, compared to net income of $118 million in the prior year period.
As you can see on Slide 5, in Q3 2019, the performance of our Investment Funds was a significant driver of our net loss for the quarter. This was partially offset by the gain recorded on the sale of Ferrous Resources that Keith mentioned earlier. Adjusted EBITDA attributable to Icahn Enterprises for Q3 2019 was a loss of $121 million, compared to a gain of $5 million in Q3 2018.
I will now provide more detail regarding the performance of our segments. Our Investment segment had a loss attributable to Icahn Enterprises of $342 million for Q3 2019. The Investment Funds had a return of negative 7.4% in Q3 2019, compared to a negative 6.3% for Q3 2018.
Long positions had a negative performance attribution of 5.2% for the current quarter, while the short positions and other expenses had a negative performance attribution of 2.2%. Since inception in November 2004 through the end of Q3 2019, the Investment Funds gross return is 101%, or approximately 4.8% annualized.
The Investment Funds continue to be significantly hedged. At the end of Q3 2019, net short exposure was 16%, compared to a net short exposure of 37% at the end of Q2 2019. IEP’s investment in the funds was $4.3 billion as of September 30, 2019.
And now to our Energy segment. For Q3 2019, our Energy segment reported net sales of $1.6 billion and consolidated adjusted EBITDA of $235 million. Net sales were down 16% from the prior year period, while adjusted EBITDA was flat.
CVR Refining had a solid third quarter performance. Despite tighter crack spreads and crude differentials in the third quarter this year, CVR generated strong quarterly results through improved capture rates and higher throughput volumes.
CVR Refining reported Q3 2019 adjusted EBITDA of $228 million, compared to $219 million in the prior year period. Combined total throughput was approximately 222,000 barrels per day for the quarter, which was slightly above the prior year period. Refining margin for total throughput barrel was $16.34 in Q3 2019, compared to $15.70 per barrel in the prior year period.
CVR Partners reported Q3 2019 adjusted EBITDA of $18 million adjusted for turnaround expenses, compared to $19 million for Q3 2018. East Dubuque successfully completed its planned turnaround in October, and is now coming back up to full production.
CVR Energy recently announced a $300 million stock repurchase program and increased its quarterly cash dividend by 7% to $0.80 per share, which represents an annualized dividend yield of approximately 7%.
Now to our Automotive segment. Q3 2019 net sales and service revenues for Icahn Automotive Group were $744 million, up 1% from the prior year period. The increase was attributable to higher automotive service revenues, partially offset by a decrease in aftermarket part sales. Higher service revenues were due to growing do-it-for-me and fleet businesses.
Adjusted EBITDA attributable to IEP for the Automotive segment was a loss of $23 million in Q3 2019, compared to a gain of $8 million in the prior year period. Profitability was impacted by margin rate contraction for services and parts businesses, due to the reduction in vendor support funds and other unfavorable margin adjustments.
As previously disclosed, Icahn Automotive is implementing a plan to separate its aftermarkets parts business from the service business. We have started to execute on a multi-year transformation plan to improve profitability in our parts business and continue to invest in our growing service business.
Now turning to our Food Packaging segment. Net sales for Q3 2019 were flat with the prior year period. Favorable price and product mix was offset by unfavorable foreign exchange and lower sales volumes.
Consolidated adjusted EBITDA was $12 million in Q3 2019, which was down $2 million in the prior year period. Gross margin as a percentage of net sales was $18 million for Q3 2019, compared to 21% in the prior year period.
Now to our Metal segment. Net sales for Q3 2019 decreased by $38 million, or 32% compared to the prior year period. The net sales decrease was due to lower volumes and lower average pricing for all product lines.
Non-ferrous shipment volumes continued to be significantly impacted by the ongoing trade dispute with China. Adjusted EBITDA was $1 million for Q3 2019, which is $4 million below the prior year period.
And now to our Real Estate segment. Real Estate operating revenues were $28 million in Q3 2019, which was $1 million below the prior year period. Revenue from our real estate operations for both Q3 2019 and Q3 2018 were substantially derived from income from club and rental operations.
The Real Estate segment generated $7 million of adjusted EBITDA in Q3 2019. The decline from 2018 is due to the loss of income related to several properties that were sold and the loss of income due to the repayment of a loan related to the sale of the former Fontainebleau property in Las Vegas.
Now turning to our Home Fashion segment. Q3 2019 net sales for our Home Fashion segment were up 34% compared to the prior year period, due to higher sales volume attributable to the VSS acquisition in Q2 2019.
As previously disclosed, the VSS acquisition strengthens WestPoint’s focus in the institutional and hospitality businesses and extend its addressable market to international markets outside of the U.S.
Adjustable EBITDA – adjusted EBITDA was a loss of $2 million for the quarter, compared to a loss of $1 million for the prior year period. Gross margin as a percentage of net sales was 16% for Q3 2019, as compared to 13% for Q3 2018.
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 2019 with cash, cash equivalents, our investment in the Investment Funds and revolver availability totaling approximately $8.2 billion. Our subsidiaries have approximately $800 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 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?
Thank you. [Operator Instructions] And our first question comes from Dan Fannon from Jefferies. Your line is open.
Hey, this is actually James Steele filling in for Dan. Good morning.
Hey, James.
Hey, James.
So my question is just on kind of your outlook on valuation nothing that the hedge fund is getting less net short, or got less net short throughout the quarter. So just kind of wondering what the house view is on valuation and how you’re approaching things there?
Yes, sure. I had [ph] described the adjustment of net exposures from previous quarter-end to this quarter-end as sort of specific view on the debt that we basically had at the end of August, beginning of September, regarding trade negotiations and whether progress would be made. And so I would describe that more as a tactical trading opportunity, which we do once in a while, I described it as rarely. But I would even say that some of those shorts have been sort of reestablished at higher levels. It was sort of a – it was a short-term view for the month of September related to China trade negotiations.
Understood. And then just…
Yes, for valuation, sure. So your second part of your question for valuations. I mean, look, it’s – I mean, we’ve been pretty consistent. There are certain pockets, certain investment themes within the fund that we’re seeing, where the act of this model can create a good favorable risk reward profile.
But broadly speaking, yes, we’re finding less opportunities then in a market that would be 25% lower, that sort of goes without saying. But we’re still finding, picking spots here or there. But it’s been very long in the cycle this bull market. You’re approaching 10.5, 11 years valuations across theme. [ph] We’re much – we, as you know, we have a value approach – value investing approach. And so it’s a little bit harder to find names, but I think we’re still doing okay.
Got it. And secondly, I guess, since the last time we heard from you guys, the outlook for interest rates just sort of changed. So just knowing that you just finished paying down debt, issuing some more debt and have some more cash on the balance sheet from Ferrous. Just curious what the appetite might be for – or what the need might be for more debt, just given the outlook for future acquisitions?
Yes. I think we’ll really approach that on an opportunistic basis. So what I mean by that is, I’m sure you’re familiar with our current debt stack, or debt maturity ladder, and it’s pretty, pretty well-balanced from 2022 through 2026. As we get closer to 2022, obviously, we’ll look to do some normal refinancings eventually.
And as far as adding incremental debt, it will really just be what the market looks like from a rate perspective, meaning, if we can add some new seven or eight-year debt compelling rates, we will do that. I mean, we like the – we view cash as our raw material effectively. And we don’t mind stockpiling it for short periods of time, or even intermediate periods of time, while we look for investment opportunities.
Inevitably, there will be another market correction, there will be another recession, there’ll be some great opportunities, and it’s always better to have the money on the balance sheet when that happens, rather than to go search for it at that time. So I think you can see us again, it’ll depend on the opportunity set, but it wouldn’t be surprising if we were back in the marketplace looking to extend debt maturity.
Got it. And then just lastly, there were some headline throughout the quarter on Mr. Icahn moving down to Florida that has any impact on the financials or the operations of the business in the near-term?
I don’t think so. It’s been a fairly smooth process. It’s something we rolled out around May and the move will take place at the end of Q1 of next year. And I think we have a number of plans and employees moving and we certainly don’t expect any disruption to operations or financials or anything like that.
Perfect. Thank you.
Thanks.
Thank you. [Operator Instructions] And I’m showing no further questions from our phone lines.
Okay. Thanks, everybody. We’ll look forward to speaking with you in the New Year to discuss Q4 results. Have a good day.
Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program. You may all disconnect. Everyone, have a wonderful day.