May 3, 2013
Executives
Felicia Buebel Daniel A. Ninivaggi - Chief Executive Officer of Icahn Enterprises GP, President of Icahn Enterprises GP and Director of Icahn Enterprises GP SungHwan Cho - Chief Financial Officer of Icahn Enterprises GP and Director of Icahn Enterprises GP
Analysts
Daniel Thomas Fannon - Jefferies & Company, Inc., Research Division Andrew Berg - Post Advisory Group, LLC Kenneth P. Bann - Jefferies & Company, Inc., Research Division
Operator
Good morning, and welcome to the Icahn Enterprises, L.P. First Quarter 2013 Earnings Call, with Felicia Buebel, Assistant General Counsel; Dan Ninivaggi, President; and SungHwan Cho, Chief Financial Officer.
I'd now like to hand the call over to Felicia Buebel, who'll read the opening statements.
Felicia Buebel
Good morning, and welcome to our recorded 2013 earnings call. I'll read the forward-looking statements.
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 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. And thank you.
I'd like to now turn the presentation over to our President and CEO, Dan Ninivaggi.
Daniel A. Ninivaggi
Thanks, Felicia. Good morning, and welcome to the first quarter 2013 Icahn Enterprises earnings conference call.
Joining me on today's call are SungHwan Cho, our Chief Financial Officer; and Keith Cozza, our Executive Vice President. I'd like to 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'll then be available to take your questions.
Icahn Enterprises net income for the first quarter of 2013 was $277 million or $2.50 per depository unit compared to net income of $49 million or $0.48 per depository unit in the prior-year period. The strong quarterly results were driven by the performance of our Investment and Energy segments.
Our investment funds had a return of 9.7% for the first quarter, with strong returns generated by several of our core long positions. In the Energy segment, performance was exceptional at both CVR Refining and CVR Partners.
CVR Refining distributable cash flow per unit for the full quarter was $1.76, and exceeded both its IPO guidance in January and the more recent guidance provided in mid-March. CVR Partners distributable cash flow was a record $0.61 per unit, a 17% increase from Q1 2012.
In other segments, Federal-Mogul had a solid quarter considering the weak environment in Europe and lower commercial vehicle production globally. ARI's profitability and outlook remains strong due to tank car demand, while the company continues to build its lease fleet and repair services.
And this case is achieving the expected benefits for recent investments and capacity expansion in the U.S. and its sharing facility in the Philippines.
At the holding company level, we completed a public equity offering of IEP units in the first quarter. We also adopted a $4 annual dividend policy, resulting in a very attractive yield to our unitholders.
Providing additional liquidity in IEP units and our new dividend policy are part of our strategy to broaden and strengthen our shareholder base. We also believe creating more liquidity in IEP units will provide us more financial flexibility to pursue our activist strategy and make it even more effective.
With that, I'll turn it over to Sung. And then as I said, we'll take your questions.
SungHwan Cho
Thank you, Dan. I will begin by briefly reviewing our consolidated results for Q1 2013, and then highlight the performance of our operating segments, then comment on the strength of our balance sheet.
Net income attributable to Icahn Enterprises for Q1 2013 was $277 million compared to income of $49 million in the prior-year period. We ended Q1 with consolidated cash and cash equivalents of approximately $2.4 billion, and a direct investment in the investment funds was $2.6 billion.
I will now provide more detail regarding the performance of our individual segments. Our Investment segment had income attributable to Icahn Enterprises of $233 million for Q1 2013 due to the return on our direct investment in the investment funds.
The investment funds had a return of 9.7% for Q1 2013, compared to 1.0% for the prior-year period. Since inception in November 2004, the investment funds gross return is 199% through the end of Q1 2013 or 4% per year -- or 14% per year.
During Q1 2013, our net equity exposure remained unchanged at 13% from the end of 2012. Our long equity exposure had a 19% return for the first quarter of 2013, while our short equity exposure had a negative return of 9%.
Our net credit exposure at the end of Q1 2013 was approximately 8% and generated a return of under 1%. As of March 31, 2013, our Investment segment had approximately $6.5 billion of assets under management, including IEP's $2.6 billion investment in the funds.
Now turning to Federal-Mogul. Federal-Mogul's Q1 2013 sales were $1.7 billion, down slightly versus Q1 2012.
The Powertrain segment reported sales of $1.1 billion, which was down 2% in constant dollar terms from the prior-year. This was driven by weakness in Europe, which was down 5%, and global commercial vehicles, which was down 13%.
Federal-Mogul continues to adjust labor and closely manage other cost factors in this challenging environment. The Vehicle Components Solutions segment, VCS, reported sales of $0.7 billion, down 2% in constant dollar terms.
North American VCS revenue was down 7% due to the secession of July nonstrategic business contract from the decline of export shipments into Venezuela. VCS segment is on schedule with its footprint rationalization and shipped to lower cost manufacturing countries.
Operational EBITDA in Q1 2013 was $141 million, down from $165 million in Q1 2012. However, EBITDA margins in both Powertrain and VCS improved from Q3 and Q4 of 2012.
During the first quarter of 2013, Federal-Mogul divested its center tech business, consisting of 3 manufacturing plants in France. In 2012, the center tech business contributed negative operational EBITDA of $13 million and a net loss of $21 million to Federal-Mogul's results.
This divesture eliminates the substantial non-core business from the Federal-Mogul portfolio. And now to our Energy segment.
Q1 was a very busy quarter for CVR Energy. The company completed an IPO of its refining business, retired higher-cost debt, initiated a $3 per share annual dividend and paid a special dividend of $5.50 per share, totaling $478 million.
Operating performance of both the petroleum and fertilizer businesses continue to be strong. Consolidated adjusted EBITDA for Q1 2013 was $351 million.
As a reminder, we began consolidating CVR in May of 2012, so any prior-year comparisons discussed here compare against the period when CVR was not consolidated into IEP results. Net sales for CVR Refining, the petroleum business, were approximately $2.3 billion in Q1 2013.
In Q1, CVR Refining achieved a record crude throughput rate of 195,000 barrels per day, and also gathered over 50,000 barrels per day. Refining margin before FIFO impact remains strong at over $26 per barrel compared to $19 per barrel in Q1 2012.
CVR Refining's adjusted EBITDA for Q1 2013 was $310 million compared to $145 million in Q1 2012. Q1 2012 was impacted by the scheduled turnaround at the Coffeyville refinery.
Net sales for CVR Partners, the fertilizer business, were $81 million in Q1 2013. CVR Partners completed its expansion of its UAN capacity earlier this year.
CVR Partners' adjusted EBITDA was $44 million, up 15% over the prior year. CVR Partners still projects a 19% to 35% increase in distributions to unitholders in 2013 over 2012.
Now turning to our Gaming segment. Net revenues were $143 million in Q1 2013 compared to $155 million in Q1 2012, primarily due to lower volumes at Tropicana AC and Baton Rouge.
Tropicana's consolidated adjusted EBITDA for Q1 2013 was $18 million compared to $21 million in the prior year, primarily due to the entrance of a new competitor in Baton Rouge. The Atlantic City market remains challenging.
Based on market data, the Atlantic City market experienced a year-over-year decline in casino wins of 12.1% for Q1 2013. In addition, Revel opened up in the second quarter of 2012, resulting in increased competition.
All in all, Tropicana AC fared well on a relative basis, with Gaming revenue down only 4.5% on a year-over-year basis. The first quarter was also negatively impacted by the lingering effects of Hurricane Sandy.
Although Tropicana AC did not suffer any significant damage, business interruption to Atlantic City has been significant. During the first quarter of 2013, Governor Christie legalized online gaming within New Jersey.
We think there is a great deal of opportunity here with future online gaming. And Tropicana is in the latter stages of evaluating its options.
On April 25, Tropicana entered into an agreement to sell the River Palms property in Laughlin, Nevada for $7 million. The transaction is subject to regulatory approvals and expected to close in Q3 2013.
Now turning to our Railcar segment. Our Railcar segment is primarily comprised of our controlling interest in American Railcar Industries, or ARI, in addition to a growing lease fleet at our holding company.
IEP's lease fleet at the end of Q1 2013 consisted of 975 cars purchased from ARI. In addition, we have placed orders for an additional 1,530 cars for delivery later this year and in 2014.
This is in addition to the lease fleet of 3,120 cars as of March 31, 2013, held directly by ARI. Industry demand remains strong for tank cars with over 19,000 tank cars ordered during Q1 2013, and industry backlog for tank cars is growing to approximately 60,000 at the end of March.
Covered hopper production slots are less tight right now, with production still available in 2013. Manufacturing revenues were $228 million in Q1 2013, an increase of 8% over the $212 million for the same period in 2012.
The primary reason for the increase was a shift in the sales mix to more tank cars, partially offset by a decrease in the volume of hopper railcar shipments. Manufacturing segment revenues for Q1 2013 included estimated revenues of $118 million related to railcar's build for the segment's lease fleet compared to estimated revenues of $48 million in Q1 2012.
Railcar shipments for Q1 2013 were approximately 1,900 railcars, including approximately 1,030 railcars to leasing customers, as opposed to 2,200 railcars for the comparable period last year, including approximately 460 railcars to leasing customers. As of March 31, 2013, ARI had a backlog of approximately 6,400 railcars, including approximately 2,080 railcars for ARI's lease customers and 1,530 railcars for IEP lease fleet.
ARI-adjusted EBITDA was $43 million for the first quarter of 2013 compared to $30 million for the comparable quarter in 2012. The increase was driven by strong tank railcar sales, with favorable margins, partially offset by losses incurred by ARI's joint ventures.
Gross margin from Manufacturing Operations were 20% in Q1 2013 compared to 17% in the prior year. Revenues and profits on cars put into the lease fleet are eliminated in consolidation, and the cost associated with those cars are recognized on the balance sheet and PP&E.
Our Railcar segment's liquidity position is strong, with $57 million of cash and cash equivalents as of March 31, 2013. ARI regained $175 million of their senior notes during the quarter, using cash-on-hand and borrowing capacity under our lease railcar facility.
Now turning to Food Packaging. Net sales for Q1 2013 increased by $5 million or 6% compared to the prior-year period.
The increase was due to higher volume and favorable product mix, offset, in part, by unfavorable foreign currency translation. Consolidated adjusted EBITDA of $16 million in Q1 2013 was $3 million higher than the prior year, primarily due to growth in volumes, partially offset by higher raw material costs and energy prices.
We are seeing the benefits year-over-year of the capital spending we made in 2011 and 2012. Cash and cash equivalents for our Food Packaging segment were $18 million as of March 31, 2013.
And now to our Metals segment. Net sales for Q1 2013 decreased by $68 million or 20% compared to the prior year.
The decrease was primarily driven by lower fare of shipments and selling prices, in large part, tied to a weak export demand and lower domestic steel capacity utilization. Although non-ferrous shipment volumes increased in Q1 2013 from the prior year, declining prices squeezed margins and impacted profitability.
Adjusted EBITDA declined to a loss of $5 million in Q1 2013 from breakeven in Q1 2012. Material margins continue to be compressed as a weak selling environment, and competition for feed stock continues to negatively impact margin.
And now to our Real Estate segment. Q1 2013 Real Estate revenues were $21 million, which was in line with the comparable period last year.
Revenues from our Real Estate operations for both period were substantially derived from our rental and resort operations. Our net lease portfolio continues to drive earnings in this segment, with its 29 properties generating strong cash flow.
And our resort operations remain profitable. Now turning to Home Fashion.
Q1 2013 net sales decreased by $10 million compared to the prior year. The decline in sales reflects the impact of the loss of largely unprofitable programs, as the company focuses on products and customers that match its manufacturing and distribution strength.
Despite the decrease in sales, EBITDA was close to breakeven in the first quarter of 2013 compared to a loss of $5 million in the prior year. So we have made great improvements in profitability by narrowing our business to select profitable customers.
Gross margins increased from 4% to 11%, and WestPoint continues to rationalize its expense structure. We believe the management team is on the right track here by focusing on these core customers.
As of March 31, 2013, WestPoint had $12 million of unrestricted cash after paying a $45 million dividend to an IEP subsidiary during the quarter. Now I will discuss our liquidity position.
We continue to maintain excellent liquidity as we ended the first quarter of 2013, with cash, cash equivalents, liquid assets and our investment in the investment funds totaling approximately $5 billion. At the end of Q1, the holding company maintained a sizable cash position of $755 million, even after putting over $600 million in restricted cash to defease our convertible notes.
In addition to our strong cash position, our subsidiaries have undrawn credit facilities totaling $910 million as of March 31. 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 it up for questions?
Operator
[Operator Instructions] You have a question from Daniel Fannon of Jefferies.
Daniel Thomas Fannon - Jefferies & Company, Inc., Research Division
I was just hoping to touch base on the 2 of the drivers for the strong results this morning, the CVR Energy segment, as well as the hedge fund. Can you guys talk a little bit about -- looking ahead, we've seen a narrowing in the crack spreads.
And I know that you guys have a big percentage, I think it's about 60% that's hedged for the year. Do you guys have a bias in terms of which way you think crack spreads might move and what your strategy is?
Do you guys generally keep at least about 1 year of activity hedged out? Or how does that work for you, guys?
Daniel A. Ninivaggi
Daniel Ninivaggi. So well, crack spreads are going to be volatile.
We know that as pipeline capacity comes in or other takeaway capacity crack spreads tend to narrow. And then as the production outpaces the pipeline capacity, they tend to go up.
I think if you listened to Jack's call yesterday, I think he said he thinks we're kind of at a lower point in the year, and he expects crack spreads to rebound. But that's just part of a cycle.
We've had some pipeline capacity come in, and that's -- and well, obviously, the Brent-WTI differential has narrowed, but we think that that's likely to reverse. And crack spreads are likely to expand during the course of the year.
Daniel Thomas Fannon - Jefferies & Company, Inc., Research Division
Okay. So that should only be a situation where you would perhaps limit your hedging activity at this point, looking ahead?
Daniel A. Ninivaggi
Well, the hedging, so I think you said you thought we're 60% hedged. I don't think we're that hedged.
It's somewhat lower than that. Yes, if you take a look at the, again, the CVR earnings deck yesterday, they have the exact number in there, so -- but we'll look at the hedging.
We do it opportunistically. I think we've said earlier in the year that they tend to target around 40% on average.
But that'll, obviously, move up and down based on market conditions.
Daniel Thomas Fannon - Jefferies & Company, Inc., Research Division
Okay, perfect. And are you -- let's talk a little bit about some of the dynamics of the hedge fund in a sense that you said that there was a number, a couple of positions, which generated most of the gains.
Just kind of looking through some of your filings, it seems like the bulk of them came through Netflix. Is there any comments you can make on that?
Daniel A. Ninivaggi
No, we won't. We can't comment on our specific position because obviously, Netflix is a public position, and it's been very successful.
It was a big driver in the first quarter, but we can't really comment beyond that.
Daniel Thomas Fannon - Jefferies & Company, Inc., Research Division
Fair enough. And one additional question, this is more, perhaps, for modeling purposes.
There's a number of movements in your cash during the quarter. Can you walk me actually through the quarter-over-quarter changes for the cash?
SungHwan Cho
Dan, which -- but is there anything specific that you're looking at?
Daniel Thomas Fannon - Jefferies & Company, Inc., Research Division
I was just looking -- well, just at the holdco level. But I mean, fine, that's something maybe we can take offline if it makes more sense to take that offline.
Daniel A. Ninivaggi
Yes. I mean, the big -- we can go through the details offline.
The big drivers are, we obviously got a large special dividend from CVR. We had the equity offering, and we had the defeasance of the notes.
So those are the 3 big drivers of the cash in the quarter. But we're happy to go through it in more detail offline, if you'd like.
Daniel Thomas Fannon - Jefferies & Company, Inc., Research Division
Fair enough. And perhaps, one more thing, this is perhaps more macro look.
How do you guys see the kind of the M&A environment at this point in terms of like potential exits or just activity? I know that previously, with so much cash on the balance sheet at so many companies, it looks like you have pretty attractive opportunity.
But just some thoughts as how things have been evolving since the beginning of the year?
Daniel A. Ninivaggi
Yes. I mean, in short, slower than, I guess, we would've expected.
The debt markets continue to be very, very strong. And Carl's talked during the course of the year about how this should be an excellent opportunity for M&A, but it's obviously been slower than most people have predicted.
We do think it'll tick up. It's a function of 2 things, obviously, primarily.
One is the capacity to do deals, and the debt market certainly fuel that. The second is confidence, right?
So the confidence has been a bit up-and-down, and that's probably what's inhibiting it a bit. But we do feel very strongly that there's a great environment for M&A, and that will be a multiyear M&A cycle here.
And we'll be able to participate in that.
Operator
Our next question is from Andrew Berg of Post Advisory.
Andrew Berg - Post Advisory Group, LLC
Just a quick question on Gaming, with the sale of River Palms, can you talk about the EBITDA associated with that?
Daniel A. Ninivaggi
I would say, in a word, negligible. We have 2 properties, as you know, in Laughlin and our -- we just decided to invest in the better of the 2 properties.
And so that's why we divested it.
Andrew Berg - Post Advisory Group, LLC
And in Baton Rouge, can you talk about anything that you want to try and mitigate some of the impacts from the competitive opening there at this point?
Daniel A. Ninivaggi
Yes. So Pinnacle has had an impact, but it actually hasn't been as bad as we feared, I guess.
And we've cut costs significantly. We're driving -- the local gaming has been pretty strong.
And on a relative basis, we've done better than the third competitor in that market. And we think it'll be fine.
Obviously, Pinnacle's property is a high-end property catering to more regional resort destination-type travelers. We're more of a local's market property, and we think the property's doing okay.
Andrew Berg - Post Advisory Group, LLC
Do you feel like it's stabilized at this point?
Daniel A. Ninivaggi
Yes, yes, it's definitely stabilized. Last year's EBITDA was very strong driven by a number of things.
This year, it should stabilize in the $8 million to $9 million EBITDA range.
Andrew Berg - Post Advisory Group, LLC
Okay. And then $620 million of restricted cash, is that all the fund of the business?
Daniel A. Ninivaggi
Yes.
SungHwan Cho
Yes, it is. And we actually had to defease the whole -- the bond, including the piece that IEP has owned.
So some of that money's going to come back and come back to our cash balance in July.
Andrew Berg - Post Advisory Group, LLC
Okay. Can you say how much?
SungHwan Cho
About $43 million, $44 million.
Operator
[Operator Instructions] We have a question from Ken Bann of Jefferies.
Kenneth P. Bann - Jefferies & Company, Inc., Research Division
I was just wondering, the dividend from WestPoint, does that reflect -- you've improved operations there quite a bit over the years, but does that reflect your optimism about their ability to continue to improve going forward? And what liquidity do they still have at that operations in addition to the $12 million of cash that's left there?
Daniel A. Ninivaggi
So yes, the $12 million, we -- basically, they were carrying a large working capital balance for a while. So we've really managed the working capital down very well, and that's really what generated the dividend.
And we think the $12 million is more than sufficient to cover the liquidity going forward. I mean, if we had to, we could put a revolver in or something, but we don't think that will be necessary.
Kenneth P. Bann - Jefferies & Company, Inc., Research Division
Right, okay. And you still -- I mean you -- about breakeven at this point, do you think we'll get to a positive EBITDA in the near future on this operation?
Daniel A. Ninivaggi
Yes. I mean, we're hopeful that we'll be solidly positive EBITDA this year.
Operator
I'm not showing any current questions in the queue. I'd like to turn the call back over to management for any further remarks.
Daniel A. Ninivaggi
All right. Well, thank you, everyone, for joining the call, and we look forward to a successful remainder of the year.
Operator
Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program.
You may all disconnect. Everyone, have a great day.