Q3 2021 Icahn Enterprises LP Earnings Call
Okay.
Good afternoon, and welcome to the Icahn Enterprises L. P Q3 'twenty.
'twenty one earnings call.
Jesse Lynn General Counsel.
Vicki Chairman President and CEO.
David Chief Financial Officer.
I would now like to hand, the call over to Jesse Lynn, who will read the opening statement.
Thank you operator.
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 maybe 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 theres.
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.
Now I'll turn it over to Aric occasion, our Chief Executive Officer.
Thanks, Jessie good afternoon, and welcome to the third quarter 2021, Icahn Enterprises earnings conference call join.
Joining me on today's call is David Willis, our Chief Financial Officer, I will begin by providing some brief highlights David 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 before.
Before I begin my comments on the quarter I would like to acknowledge that on October 27th IAP officially launched a tender offer to acquire 100% of the shares of southwest gas holdings for $75 a share given.
Given the active nature of this campaign, we will not be addressing the details of the proposal or the associated properties proxy contest on this call and would refer you to the public filings in statements made in recent weeks.
I would like to highlight however that the southwest gas campaign is reflective of a long and successful track record of activism in IEP, which has contributed to the long term performance of our depository units.
We have the capital flexibility and brand recognition to maximize the activist strategy. This track record has a lot of IEP to pay 66 consecutive distributions to its unit holders since 2005.
While increasing the distribution over time on November one 2021, the IP board declared a $2 quarterly distribution payable in cash or additional units. This represents a healthy annual yield of almost 14%.
In the year 2000, and Icahn enterprises began to expand its business beyond traditional real estate activities into fully embraced the activist strategy. Today IP is one of the last active is because barriers to entry to this lucrative area are extremely high and this is due to the fact that money and most active as hedge fund is not permanent often it would be accurate as hedge funds money.
Well, we withdrawn by an investor at the very time, it is most needed and an activist campaign.
This can be extremely costly if not fatal another advantage IAP has as its brand name targeted companies understand that we are not going away, we will not relent.
As it was said in the art of war, the best way to win awards not having to fight it.
We much more often than not get invited to be onboard without having a fight.
Interestingly our presence on these boards is often provided proved to be successful not only for IP, but for all shareholders.
There would be actavis must prove their mettle before their targets make peace. This can be extremely expensive for those who first entered this arena.
Activism is still the best paradigm for investing the proof of the putting us in the eating.
On January one 2000, the closing sale price of IEP depository units was $7 63.
On October 29, 2021, IEP depository units closed at $57 60.
2051% increase this translates to an annualized return of approximately 15%, including a reinvestment of distributions into additional depository units.
Comparatively the S&P 500, Dow Jones industrial Russell 2000 indices in Berkshire Hathaway class a shares increased approximately 376%, 422%, 505% and 672% respectively in the same period.
Which translates to an annualized return of approximately 789% and 10%, respectively, including reinvestment of distributions into those investments.
Now turning to highlights for the quarter.
For the nine months ended September 32021, indicative net asset value increased by $1 8 billion to $5 4 billion compared to $3 6 billion as of December 31, 2020.
Drivers include the performance of our investment funds market value of our energy positions in CVR and Delek the sale of PSC metals in the improvement of our real estate operations within Icahn automotive group.
As a reminder, the company uses indicative net asset value as an additional method for considering the value of the company's assets and we believe that this information is more indicative of value than GAAP.
For Q3, 2021, net income improved by $566 million over the prior year period with a net loss attributable to Icahn enterprises of $148 million or 55 per LP unit.
This compares to a net loss of $714 million or $3 14 per LP unit in the prior year period.
Net income improved by 1.6 $77 billion over the comparable nine months period.
The year over year improvement was driven mainly by better performance in our investment and energy segments.
Adjusted EBITDA for Q3, 2021 improved by 638 million to $88 million compared to a loss of $550 million in Q3 of 2020.
Year to date, the investment funds had a positive return of eight 8% compared to a negative 18, 8% in 2020, our performance reflects broad improvements largely in our energy and consumer non cyclical positions.
At the end of Q3, the portfolio had a net short position of 11% comprising of equities being net long, 9% in the credit portfolio being net short 20%.
During 2021, we have returned to a more normalized hedging strategy as compared to 2020 when were too reliant on broad market hedges.
As a result of recent acquisitions the investments segment successfully exited its navistar position during the quarter and cloud area during October.
Adjusted EBITDA attributable to Icahn enterprises in our energy segment increased by 178 million to 143 million for Q3 2021 compared to a loss of 35 million in the prior year period.
Our petroleum business was positively impacted by higher throughput volumes and increased product crack spreads while RIN pricing remains exorbitantly high compared to last year lower RIN prices over the quarter resulted in a favorable impact due to mark to market adjustments. Our fertilizer business continues to benefit from very strong pricing for ammonia and <unk>, which have more.
And then doubled from a year ago. These dynamics are driven by higher crop prices driving demand and very tight fertilizer supplies due to heightened turnaround activity downtime related to hurricane Ida and global energy shortages.
At this point I'd like to take a moment to comment on CVR energy transformation efforts.
While we believe fossil fuels will certainly be necessary for many years to come we recognize that renewable fuels into the future.
For this reason CVR began exploring utilizing excess hydrogen capacity at its refineries for renewable diesel production nearly two years ago and has invested nearly $150 million. Since then on these initiatives.
<unk> is uniquely positioned and renewable fuels given its transportation and logistical connections to the farm Bill the company intends to be at the forefront of the screen resolution and has made progress on several fronts.
First the previously announced conversion of the Wynwood refinery to renewable diesel production using soybean oil is scheduled for startup in April of 2022.
With annual production slated at 100 million gallons per year.
Q4, 2022, CVR also intends to build out a $60 million pretreatment unit for processing, a variety of alternative feedstocks, including corn oil animal fats and used cooking oil.
Lower carbon intensity and generate higher low carbon fuel standard credits in soybean oil.
Renewable diesel process design work is also being evaluated at the larger Coffeyville facility, where expected capacity you may reach a 150 million gallons per year with the added option to produce up to 25 million gallons of renewable aviation fuel.
In addition to these initiatives since 2013, you Ann has been capturing cotwo and the production of ammonia fertilizer and sequestering it through a partnership for enhanced oil recovery. It is now progressing efforts to monetize these activities through 45 tax credits.
In conjunction with these numerous activities CVR is currently evaluating breaking out the renewables business as a separate entity. This creates strategic optionality, including the opportunity to access a greater pool of investors and financing.
Our auto segment has improved adjusted EBITDA by $72 million on a year to date basis versus 2020, our services team continues to outperform and is improving customer margins in core operational performance.
The parts business and as it is in its early stages of executing a comprehensive set of productivity initiatives.
As part of our transformation efforts the Icahn automotive group team is aggressively start underutilized real estate locations and has over 131, new lease contract signed or are in advanced negotiations.
Our auto services business competes in a fragmented industry with annual revenues of $246 billion.
Over 50% of the industry is made up of smaller chains and independent operators. We believe this industry is ripe for consolidation and we are well positioned to actively participate as a buyer or seller.
The age of the car park, increasing vehicle complexity and high barriers to entry provide the optimal opportunity for the auto services business that leverages large national footprint of over 1000 company operated locations and over 800 franchisees.
Our historic brands strong balance sheet, and leading position was fleet operators. It gives us a strong competitive advantage to win in the marketplace. In addition, many of our locations provide the flexibility to offer dedicated base for electric vehicle services, giving us an early mover advantage in this rapidly growing market.
On October 27th 2021, we entered into a definitive agreement to sell our PSC metals business for a total consideration of approximately $290 million subject to customary working capital adjustments and including indebtedness that will be repaid at closing the.
The transaction is expected to close in the fourth quarter and should result in a gain of approximately 154 million over Q3 book value when including working capital adjustments.
Additionally, we retain ownership of valuable riverfront real estate asset, which will we will seek to redevelop in the future.
Finally, IEP closed the quarter with holding company cash and investments in the funds of $5 9 billion.
Providing us with significant strategic flexibility.
With that let me turn it over to David.
Thank you Eric.
I'll now discuss overall IEP results segment highlights and our balance sheet.
Ip's overall performance on our revenue adjusted EBITDA and net income basis is up strongly in Q3, and Q3 year to date versus prior year.
I'd refer you to the chart on the upper right, which shows the year over year improvement on adjusted EBITDA attributable to IEP, which for the quarter was $638 million for the year $1 9 billion.
This page shows a breakout of our performance by operating segment showing a year over year comparison of net income and adjusted EBITDA attributable to IEP for the quarter and year to date as you look through the companies with only one or two exceptions, we've improved in Q3 and Q3 year to date on a year over year basis, and each one of our segments.
Okay.
The investment funds had a positive eight 8% return for year to date Q3, with a slightly negative return of one 8% for Q3 2021.
Both figures were up considerably from 2020 performance, which had negative returns of 18, 8% and 11, 8% percent in the comparable prior year periods.
Long positions had a negative performance attribution of one 6% in Q3, 'twenty, one while short positions and admin expenses.
Drove a negative performance attribution of approximately 2%.
Since inception in November 2004 through the end of Q3 'twenty one the investment funds gross return is approximately 87, 9% or three 8% annualized.
The investment funds had a net short notional exposure of 11% at the end of Q3 dollars 21 compared to a net long notional exposure of 5% at the end of Q2 'twenty one.
Our investments in the funds was approximately $4 6 billion.
September 30 of 'twenty one.
And now to our energy segment.
In Q3, 'twenty, one our energy segment reported net sales of $1 9 billion compared to $1 billion in the prior year period.
Consolidated adjusted EBITDA was 243 million for Q3, 21 compared to a loss of $39 million in Q3 'twenty.
Total throughput was approximately 211000 barrels in Q3 21 compared to 201000 in Q2 Q3 2020.
Q3, 'twenty, one refining margin per.
Per throughput barrel was $15 three compared to $5 47 in the prior year.
Increased crack spreads higher throughput volumes and a favorable mark to market adjustment on open wins position contributed to the improvement in refining margins.
Yeah.
CVR partners reported Q3, 2021, EBITDA of $64 million compared to 15 million for Q3, 2020 higher crop prices and very tight fertilizer supplies are driving record product pricing as.
As Erez mentioned CVR plans to begin renewable diesel production at the Wynwood refinery in April of 2022.
Now turning to our automotive segment.
The automotive segments Q3, 'twenty, one adjusted EBITDA was $14 million compared to 6 million in the prior year period.
<unk> has been driven by our services B, which.
Which is experiencing performance gains due to improved operations and groups gross margins over prior year.
Parts business remains a focus of improvement efforts core gross margin performance is improving due to pricing and customer profitability management.
Operational efficiencies remain a large opportunity and a key focus area, but are not yet reflected in the Q3 results.
We are beginning to see the results of a multi quarter effort to improve the returns on owned real estate and IAG through an aggressive program to release underutilized space. The team has successfully negotiated over a 104 leases this year with benefits starting to accrue in Q3 and ramping up through 2022 and 2024.
Now turning to our food packaging segment.
Q3, 21, net sales decreased by $1 million or approximately 1% and adjusted EBITDA attributable to Icahn enterprises was $11 million for Q3, 21 compared to $12 million for Q3 2020.
These cases actively worked with its customers to adjust product pricing to offset inflation in raw materials and distribution costs. The Q3 financials show at the beginning of this improvement.
Anticipate an imbalance throughout Q4, and Q1 'twenty two as our customer pricing lags.
It will take effect later this year.
And aggressive productivity program is under development to reduce operating costs with a heavy reliance on automation and factory performance equivalents.
And now to our metals segment.
Q3, 2021, net sales increased by $61 million and adjusted EBITDA increased by 4 million compared to the prior year period.
Volumes and prices continue to be strong driven by high demand from steel mills and robust scrap steel pricing.
And now to our real estate segment.
Q3, 2021, net operating revenues increased by $9 million compared to the prior year.
Adjusted EBITDA for the quarter was 2 million compared to earnings of 5 million in the prior year period.
Our financials continue to show the impact of a major kind of exiting 2020 within our leased properties with renovations and upgrades now complete our real estate team is in active discussions with multiple parties to improve overall occupancy rates at this location.
Our development properties, However continued to perform with strong demand for new units in the market.
Now turning to our home fashion segment.
Q3, 21, net sales decreased by 2 million compared to the comparable prior year period, primarily due to a decrease in face mask sales due to the reduced impact of COVID-19 pandemic.
West Point's adjusted EBITA was a net loss of $1 million for Q3 21 in earnings of 4 million for Q3 2020.
Of note supply chain challenges have compromised west points ability to deliver contracted volumes to the U S market.
Its current order backlog stands at approximately $28 million, which will convert into revenues as and when shipping can be arranged.
Now turning to our pharma segment.
We started to consolidate the results of <unk> beginning in December of 2020 within our New Pharma segment Q3, 2020, net operating revenues were $1.
$19 million and adjusted EBITDA was flat for Q3 2021 now.
Now I'll 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 Q3 'twenty one cash.
Cash equivalents and our investment in the investment funds and revolver ability, Italy totaling $7 1 billion or.
Our subsidiaries have approximately $688 million of cash and $43 million of Undrawn credit facilities to enable them to take advantage of attractive opportunities in.
In summary, we continue to focus on building asset value and maintaining ample liquidity to enable us to capitalize on opportunities within and outside our existing operating segments.
Thank you.
Operator could you. Please open the call up for questions.
If you would like to ask a question at this time. Please press Star then the number one on your telephone keypad.
So with jewelry question.
<unk>.
Your first question comes from the line of Dan Fannon at Jefferies.
Hi, Thanks, good afternoon.
Wanted to just talk about the differentiation in the hedging strategy I believe you mentioned this year is slightly different than what you've done in the past. So if you could just expand a bit I think macro hedges before.
Just wanted to get into the specifics of what is actually different.
Well I'll give you some idea of just to give some context.
You look at the first quarter and second quarter of last year, we were net short, 73% and 48% year to year end last year was net short, 52%. So we had significant broad market hedges in place in 2020.
Those have come down significantly while we are still hedged company and continue to hedge as part of our strategy as part of our active strategy to much more formulaic approach that is.
Focused on on single names and industry hedges more so than it is on.
Broader market hedges than it was in 2020.
Got it and then the difference between an credit any.
Where youre short in the credit side is that still through Cvs or are there other.
Is it more specific industry stuff or other things just trying to differentially between equity and credit within that strategy.
The credit position is primarily <unk>.
We have increased our position a little bit over the last year, but.
The majority of the credit position as the <unk> position portfolio position.
Okay.
And then just on the auto.
Segment, and the real estate optimization.
Thanks for the stats around the leases that have been signed but any update or what's left in terms of.
What is still vacant or how.
How much progress has been made in terms of.
What was what was the peak in terms of vacancies versus kind of where you sit and as I said, what's what's kind of left to still potentially rent up.
Sure.
So when we take a look at the there is approximately 216 properties that we own that we've been focusing on.
Throughout really 2020 in 2021 when.
When we take a look at what's left right now in terms of.
Vacant properties or properties that you are undervalued and we're actively seeking to release its about 56, so 56 versus a 2016.
Cross your fingers, we're getting close to the end line.
Although the last ones are always the toughest ones to actually get leased out.
Understood.
I know you're limited on what you can say around the southwest.
Transaction, but was curious if this would be part of your energy segment or as you think about the successful completion of that at a later date would that be a separate new subsidiary or is there some strategic benefit to existing parts of the.
Icon portfolio.
I think as a general rule.
It would become part of our segment our wholly owned segment, if we own more than 50% and control it.
But beyond that I'm not going to comment.
Okay alright, thank you.
Your next question comes from Andrew Berg with post Advisory group.
Thanks, guys. If we can just go back to the investment portfolio.
Excuse me.
On your short exposure can you breakout how much is short.
Equity versus short credit I think at the end of last quarter. It was 83% short.
Equity in like 20% short credit.
Or do you need to wait for the queue to get that.
Last quarter I think we were.
Not at 86% I think we were 24% long and credit.
Alright, along in equities and about 18% short and credit this quarter were about 9% long in equities and about 20% shortened credit.
Okay.
And with the change in the approach on automotive can you just give us a better sense.
Of how each of those valuations were determined.
Assuming you probably were taking.
Multiple for the services and the parts of the business, but then the on the real estate just help us get a better understanding of how you came up sure.
And youre, referring to the net asset value.
Yes.
As you guys reported since I broke it out in this relationship.
Certain services and the parts group has been valued at a book value basis.
Certainly if those mature and get closer to you.
Some form of transaction, we might reevaluate how we are doing that but the real estate portfolio was evaluated frankly much more on <unk>.
Real estate.
Appropriate method looking at discounted cash flows fair market values on a property by property basis and cap rates all of the details are spelled out.
In a fairly lengthy footnote in the earnings release, but the only thing that was valued differently was the real estate given the substantial change and that's done on the real estate.
Mike.
Okay, and you said you had 56 properties remaining out of 200 and harmony.
216.
2016.
Okay.
You would hope to get those leased out over.
Should we be thinking <unk>.
Six months nine months a year.
I hesitate to give you a date certainly my own desire as soon as possible, but oftentimes it is very location by location specific.
Marketing plan.
So certainly think of Q4 Q1 Q2 is the optimal window to do that but we can't commit to that obviously.
Okay.
At the holding company on a sequential basis I believe your cash was down by about $300 million or so can.
Can you just give us a sense of where where that capital went.
Deployed for.
Sure I mean, there are always puts and takes and when we take a look quarter to quarter that it's.
Moving within what we would consider to be a normal range.
I think the only notable item in Q3, we had a external facility at the automotive group roughly $375 million, we remove that facility, which was an external one and we put our own cash into that.
As Deb.
We didn't do that because frankly, we wanted to but the fees that were being charged just seemed in excess of what's reasonable.
And as we get through the transformation and have distinct audited financials for each segment, we would certainly look to get a more market appropriate external debt and sometime in 2022.
Does that help Andrew So just yes, just turns into an intercompany that could get payback, you'll get paid back over.
Correct.
Okay, and then lastly, with respect to PSC.
Congratulations on the sale to 90 was the number listed then I think it was a bit of an earn out to go with that.
Can you give us any sense of what the net.
These will be do you guys I'm not sure. If this tax leakage on that or weather losses that youre 90, as kind of you're going to get all of it.
Almost in terms of cash proceeds.
There is a.
<unk> hundred 90, as the deal value and then there is a working capital adjustment.
That will work through the system over the next several months until closing, but we estimate it.
Plus or minus in.
In the 300 to.
305 to $3 10 range.
It will be the cash received and Theres no. We don't have to think about tax leakage there.
Our estimate right now is it's relatively de Minimis cash tax issue.
Okay.
Yourself.
Alright, perfect I appreciate it guys. Thank you very much.
Thank you.
Your next question comes from JP Mckim with northeast.
Yes.
Hi, guys. Thanks for taking my question.
Regarding this case.
I noticed on the sales side, they think down slightly versus last year and also versus last quarter and I'm, assuming that's about volumes and wondering if theres any color you can provide on that and thats sort of like a temporary COVID-19 related issue.
That may be made up or is it more of like a sustainable decrease in end demand.
Well.
This case is an unusual company in terms of their volume during Covid went up.
Yeah.
Premium placed on sausage and similar.
<unk> so volumes last year were really at what we consider to be our peak.
This year, you don't have the benefit of that headwind and we have a maintenance issue.
Planned maintenance activity, where we've had to take a line down in one of our plants in Arkansas, which is reducing our overall volumes. So I would I would treat it as I'm sorry in Q3, taking down overall volumes. So I would take a look at a headwind that's not going to repeat in terms of COVID-19 bump last year as well as more of a maintenance issue.
That's reduced it in Q3, and we will be getting that lineup over the course of Q4 and Q1.
Alright, Thanks, and then just.
Anything else on the pricing I mean, I know you touched you talked about it it sounds like it's going to be a first half of 'twenty two.
Price increases are I mean, our customers are receptive to that understanding what everyone's going to with.
Cost increases.
I'll put it this way it's a grieving process.
We're dealing with.
Core raw material commodity increases and distribution costs and many of our contracts. Unfortunately, we are not structured to contemplate. This degree of inflation that we're feeling so surcharges have gone into place we're talking customer by customer about the appropriate increase that we can get through this year.
But given the raft of contract explorations really through Q4, Q1, Q2, and a little bit of Q3 next year, we would expect our pricing to start to snap back into line with what is really appropriate given our cost position.
Great. Thank you so much appreciate it youre welcome.
There are no further questions at this time I will now turn it over to Eric Zhou Chen for closing remarks.
Well. Thank you for attending our Q3 earnings call today, we very much enjoyed the time and we look forward to regrouping once again for our Q4 results in a couple of months in three months time.
And with that I'd like to wish everyone a happy afternoon.
This concludes today's conference call. Thank you for participating you may now disconnect.
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