Icahn Enterprises L.P. (NASDAQ:IEP) Q3 2023 Earnings Conference Call November 3, 2023 10:00 AM ET
Company Participants
Jesse Lynn – General Counsel
David Willetts – President and CEO
Robert Flint – Director of Accounting
Conference Call Participants
Daniel Fannon – Jefferies
Chapin Mechem – Northeast Investors
Andrew Berg – Post Advisory Group
Operator
Good morning, and welcome to the Icahn Enterprises L.P. Third Quarter 2023 Earnings Call with Jesse Lynn, General Counsel; David Willetts, President and CEO; and Rob Flint, Director of Accounting.
I would now like to hand the call over to Jesse Lynn, who will read the opening statement.
Jesse Lynn
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.
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, including adjusted EBITDA. 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.
We also present indicative net asset value. Indicative net asset value includes, among other things, changes in the fair value of certain subsidiaries which are not included in our GAAP earnings. All net income and EBITDA amounts we will discuss are attributable to Icahn Enterprises unless otherwise specified.
I’ll now turn it over to David Willetts, our Chief Executive Officer.
David Willetts
Thank you, Jesse.
Joining me on the call today is Rob Flint, our Director of Accounting, who is filling in for Ted today. I’ll provide a brief overview of quarter three results, and then we’ll be available for questions at the end.
We’re pleased with third quarter performance, which shows improvement over last year and last quarter. Third quarter’s net loss was $6 million, which is an improvement of $117 million over Q3 ’22. Adjusted EBITDA was $272 million, which is an increase of $202 million compared to Q3 ’22.
Our operating companies have performed well, with each of them posting solid gains on a year-over-year basis. CVI has benefited by continued strong crack spreads, good operating utilization, reduced RINs cost and is authorized a $2 total dividend. Our Automotive segment posted strong year-over-year performance on both net income and adjusted EBITDA
As Carl has previously indicated, we are continuing to restructure the portfolio and have exited a number of positions in the quarter. This quarter, the investment funds had a negative return of 4.4%, primarily driven by energy sector shorts.
Indicative net asset value ended the quarter at $5.2 billion, which is up $147 million versus Q2 ’23 and is down $474 million versus Q4 ’22. The Board approved a $1 quarterly distribution per depository unit which is consistent with last quarter.
With that, let me turn it over to Rob for a detailed discussion of all of our segments.
Robert Flint
Thank you, David.
I will begin by reviewing our consolidated results and then highlight the performance of our operating segments and comment on the strength of our balance sheet. For Q3 ’23, we had a net loss of $6 million, which was an improvement of $117 million from the prior year quarter. Q3 adjusted EBITDA was $272 million, an increase of $202 million compared to Q3 ’22. I will now provide more detail regarding the performance of our individual segments.
The investment funds had a negative return of 4.4% for the quarter, which was driven primarily by the negative performance of energy sector shorts and offset in part by broad market hedges. For the quarter, long and other positions had a net negative performance attribution of 1% and short positions had a negative performance attribution of 3.4%. The investment funds had a net short notional exposure of 41% at the end of the quarter compared to a net short notional exposure of 47% at year-end. Our investment in the funds was approximately $3.6 billion as of quarter end.
And now to our Energy segment. In Q3 ’23, our Energy segment reported net sales of $2.5 billion compared to $2.7 million in the prior year quarter. Adjusted EBITDA was $347 million for Q3 ’23 compared to $124 million in Q3 ’22. Q3 refining margin per throughput barrel was $31.05 compared to $16.56 in the prior year quarter. This increase was primarily due to lower RINs related expense and favorable inventory valuations, offset in part by lower crack spreads as compared to the prior year quarter.
Q3 average realized gate prices for UAN decreased by 48% to $223 per ton and ammonia decreased by 56% to $365 per ton when compared to the prior year quarter. CDI declared a $0.50 per share cash dividend and $1.50 per share special dividend.
Now turning to our Automotive segment. Automotive Q3 ’23 net sales and other revenues were $444 million, a decrease of $181 million from the prior year quarter. Adjusted EBITDA was $32 million for the quarter, a $31 million improvement as compared to the prior year quarter. Automotive service revenues were down $4 million compared to Q3 ’22, driven by the closure of unprofitable locations and reduced car count, offset in part by improved pricing. Aftermarket parts revenues were down $178 million as compared to Q3 ’22, primarily driven by the deconsolidation of Auto Plus on January 31, 2023.
Now turning to our real estate segment. Q3 ’23 net sales and other revenues increased by $18 million compared to prior year quarter, driven by the sale of an investment property of $17 million, increased occupancy and hotel rates at our resort and increased membership fees at our Country Club. Adjusted EBITDA was $14 million for the quarter compared to $7 million for Q3 ’22, driven by increased development home sales.
Now we’ll turn to our other operating segments. Q3 ’23 net sales and other revenues for all other operating segments increased by $3 million compared to prior year quarter. Adjusted EBITDA was $24 million for Q3 ’23 compared to $5 million for the prior year quarter. Food Packaging adjusted EBITDA improved by $3 million or 27% for Q3 ’23 as compared to prior year quarter primarily due to improved gross margin management and reductions in distribution costs. Home Fashion adjusted EBITDA increased by $8 million as compared to prior year quarter, primarily due to lower material costs and pricing initiatives. The Pharma segment’s adjusted EBITDA for Q3 ’23 improved by $8 million as compared to prior year quarter, mainly due to margin improvement.
Now turning to our liquidity. We maintain liquidity at the holding company and at each of our operating subsidiaries to take advantage of attractive opportunities. We ended the quarter with cash, cash equivalents, our investment in the investment funds and revolver availability totaling approximately $6.8 billion. Our subsidiaries have approximately $1.1 billion in cash and $329 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 liquidity to enable us to capitalize on opportunities within and outside our existing operating segments.
Thank you. Operator, can you please open the call for questions?
Question-and-Answer Session
Operator
[Operator Instructions] Our first question comes from the line of Daniel Fannon with Jefferies. Please proceed.
Daniel Fannon
Hi. Good morning. I was wanting to talk about the fund. You talked about – we see the performance, the net exposure being short at the start of the quarter still being sure the market was down and the funds still underperformed. So I think you initially said you’ve made some changes to the portfolio. Just curious as to where you are in the process of getting to where you would think it will be based upon what you outlined previously last quarter in terms of change in strategy?
David Willetts
Good morning, Dan. Thank you for the question. Here’s what I’d say about the funds. There are two drivers in the – maybe three drivers in the funds this quarter. The broad market hedges we’ve been taking down every quarter for the last – well, since the beginning of the year. So first quarter, second quarter and third quarter, broad market hedges have come down.
Secondly, as you’ve probably seen, a number of our longer held long positions we’ve been exiting as we’ve been scrutinizing every position that we have and evaluating it versus what we think is an appropriate hurdle rate. If it doesn’t meet the bar, we’ve been exiting the position. So we’ve been skinning down longs and our cash balances have been building up there.
Say the third item which when you take a look at the funds, they’re down slightly this quarter, negative 4% or so. That includes specific positions in terms of both commodities and the single names that are intended to offset any movement in CDI to manage volatility. So when we take a look at it and we’ve executed the strategy, we continue to execute the strategy. And we’re generally in a pretty good position when we look at where we are versus where we’d want to be. We’re going to continue to execute on repositioning our loans and our shorts as we go into the fourth quarter.
Daniel Fannon
And just to follow up on that. Does that – should we still think about the short as being broad market shorts in terms of net, net exposure or more single name?
David Willetts
We still have broad market hedges. But when I take a look at it, the overall short positions for broad market have been coming down. Our single name shorts, frankly outweigh our broad market hedges. So that has been a change that has crept in over the last few quarters.
Daniel Fannon
Understood. And then just shifting to your balance sheet. Can you tell us or remind us when your next maturity is for your debt? And as you think about your liquidity position here, opportunities to buy back debt in the market versus investment in the fund or what you’re seeing opportunistically to utilize the liquidity you have today?
David Willetts
Sure. We have $1.1 billion of unsecured bonds coming due in September of this coming year. We have $1.8 billion of cash on hand of IEP, and we’re evaluating. Right now as you can see the bond market isn’t particularly favorable. So, we’re evaluating what options we have, but we’re in a position where we have options, either to redeem or to refinance. So that’s what we’re watching as we get through the next month’s soon and quarters.
Daniel Fannon
Understood. And then just on the distribution, the dollar per unit. As we think about sustainability of that and how the Board and the management team is looking at what can be paid out, should we just be looking at the cash flows coming off of the underlying businesses? Should be incorporating the liquidity of the balance sheet? Just trying to understand the support of the dividend and where you see it coming from if we were – if you were to maintain this on a sustainable basis?
David Willetts
The Board looks at all of those factors in several more every quarter. So, performance, your liquidity on hand, economic projections for our positions going forward, we look at each one of those every single quarter.
Daniel Fannon
Okay. Thank you.
Operator
Thank you.
David Willetts
Thank you, Dan.
Operator
One moment for our next question please. It comes from the line of Chapin Mechem with Northeast Investors.
David Willetts
Good morning, Chapin.
Chapin Mechem
Hi, good morning guys. Just had a question for you on Viskase. Good quarter year-over-year continued. So that’s great. Thank you. But I’m curious just a little bit on like the sequential, it’s down a little bit versus the first two quarters of the year. And so, I’m just sort of curious, I think you’d mentioned that there were still some improvements coming on the last call, and you, in your comments said gross margins, which I assume is year-over-year. So I guess I’m just wondering if you can provide any additional color on what’s probably top line, if it’s pricing or volumes or just sort of what you’re seeing as the year has progressed from that front?
David Willetts
Sure, Chapin. Several things to think about. There are revenue headwinds right now. The volumes demands are down. Obviously, that’s not just a Viskase problem. You can see that across the market. Folks are doing a little bit of destocking, but it’s also based on what proteins consumers are choosing. Chicken has been a bit cheaper than some of the pork-based or beef-based sausage products that use our casings. Revenue top line has been a bit challenged. Russia and the Ukraine, we finally had embargoes put in place on any cross-border sales of casings, which was not present in Q1 and Q2.
So revenue is softer than we had predicted and hoped. That said, the second issue is, it gets – further up the hill you climb, the harder it gets. So we’re able to take very straightforward margin opportunities in Q1, Q2, Q3. As you take those, it gets harder. You have to stretch a little bit further to get the next chunk. That said, there are more things that we are doing, certainly with regards to factory productivity, certainly with regards to modernization of our equipment. All of those are in the works, but they’re going to be parsed out and the gains will be, I think, a bit slower to be realized than we felt in Q1, Q2, right? That’s just the challenge of being successful.
I’d say, what the team continues to do a very, very good job of in spite of some of that revenue headwind has been contract margin management. They’ve been very, very, very focused on making sure that this case earns what is an appropriate return on its contracts, and they’ve been working aggressively with customers to exit the underperforming economically casings and giving the customer something that is actually value add to them where both parties succeed. So they’ve been very good at that, and that continues to power a lot of the results in Q3 as it has in Q1 and Q2. Does that help?
Chapin Mechem
That’s great. Very helpful. Thank you so much.
David Willetts
You’re welcome.
Operator
Thank you. One moment for our next question please. It comes from the line of Andrew Berg with Post Advisory Group. Please proceed.
Andrew Berg
Thanks guys. Going back to the Investment segment, can you parse out what the returns were in the quarter, if you were to strip out the energy shorts?
David Willetts
I can’t. We have…
Andrew Berg
Was all that decline pretty much the energy short and X [ph] being short of that position, you were actually up in the quarter on everything else?
David Willetts
What I don’t want to do cavalierly, Andrew, is come up with a precise figure. So what I’ll say is directionally, right? Directionally, the fund would have been up if you had adjusted out the energy shorts related to CDI, right? But I’d rather not give a precise figure because we haven’t done the drill that precisely calculated for this call.
Andrew Berg
Good enough. I was sort of expecting something in the up low single-digit area, but obviously have not factored in the energy shorts. So it’s kind of that would strike me as in line with what expectations would have been otherwise. And then, willing to comment on where you are with those energy shorts still expressing that negative sentiment. Any change or I don’t want to say because it’s in the middle of the quarter?
David Willetts
With the energy shorts?
Andrew Berg
Yes.
David Willetts
Right now, our position, frankly, Andrew, is we are long in CVI, and we have one or two other longs in the energy area. So we’re not trying to make a particular bet on energy shorts. What we’re trying to do is we’re trying to manage the volatility so that we don’t have wild swings in our income and earnings with our energy positions. That’s the point of our energy shorts. It’s not a specific investment saying energy is going to go down. It’s trying to balance the long and short exposure.
Andrew Berg
Okay. With respect to automotive, the $32 million of adjusted EBITDA versus the $1 million, is that an apples-to-apples basis reflecting just the automotive services? Or is that a reflection of the deconsolidation of aftermarket? And if it’s the latter, can you give us any commentary on what the services adjusted EBITDA was on a stand-alone basis year-over-year?
David Willetts
I have to be a little careful. We use some terms a little casually, but I’ll answer the spirit of the question. So the services business today also has contributed – its EBITDA has gone up significantly year-over-year. And what I’d say is, if I’m looking at the sub-segment detail, the majority of the earnings for this segment this quarter were from services, these services business, very, very small piece, de minimis from the parts from residual parts operations.
So when I try to contrast what happened year-over-year on EBITDA? You have two things. Auto Plus, which was losing a very sizable amount of money last year went away and services has, frankly, woken up and it started to really put some very good numbers on the board. So the revenue, when you look at the revenue line, that is clearly the impact of Auto Plus going away since the services revenue was basically flat. EBITDA, however, I’d say roughly half of it is due to the services improvement, half of it is due to Auto Plus going away.
Andrew Berg
Okay. And then lastly, with respect to prior question, somebody asked with respect to the balance sheet. Unlike most companies typical operating businesses, who have concerns about debt going current on the balance sheet. Obviously, you guys have a ton of liquidity to cover the four and three quarters. They’re not callable until June next year. And so the expectation would be that, that will go current and as I recall, you guys tend to wait closer to maturities to deal with the refinancing because of the breakage cost that should be the same expectation here, shouldn’t that?
David Willetts
That, I think, is our historical pattern. The markets are so unusual right now that I just underscore, we look at this month by month to determine exactly when the right window is to refinance, if there is the right window to refinance it. So I would just say, past is accurate. We’re closely monitoring every month to determine what we do.
Andrew Berg
Okay. Sounds good. Thank you guys for all the information.
David Willetts
Thank you.
Operator
Thank you. And with that, ladies and gentlemen, I will conclude our Q&A session and turn it back to David Willett for comments.
David Willetts
Well, thank you, everyone, for joining us for the Q3 results. We look forward to speaking to you all when we talk about the quarter four results. Everyone, have a good afternoon. Take care.
Operator
And thank you all for participating. You may now disconnect.
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