Nov 3, 2016
Executives
Louis Pastor - Deputy General Counsel Keith Cozza - President & CEO SungHwan Cho - CFO
Analysts
Dan Fannon - Jefferies Andrew Berg - Post Advisory Group Josh Lipchin - Eaton Vance Cindy Boyle - Wells Fargo
Operator
Welcome to the Icahn Enterprises Third Quarter 2016 Earnings Call. With Louis Pastor, Deputy General Counsel; Keith Cozza, President and CEO; and SungHwan Cho, Chief Financial Officer.
I would now like to hand the call over to Louis Pastor, who will read the opening statement.
Louis Pastor
Good morning. 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 and a reconciliation of such numbers to the GAAP comparable numbers can be found I the back of the investor presentation.
And now I will turn it over to Keith Cozza, the CEO of Icahn Enterprises.
Keith Cozza
Good morning and welcome to the third quarter 2016 Icahn Enterprises Earnings Conference Call. Joining me on today's call is SungHwan Cho, our Chief Financial Officer.
I would like to begin by providing some brief highlights. SungHwan will then provide an in-depth review of our financial results and the performance of our business segment.
We will then be available to address your question. For Q3 2016 we have a net loss attributable to Icahn Enterprises of 16 million or $0.12 per LP unit compared to a net loss of 440 million or $3.40 per LP unit in the prior year period.
Adjusted EBITDA attributable to Icahn Enterprises for Q3 2016 was 458 million compared to a loss of 31 million in Q3 of 2015. Our investment funds had a return of 6.5% in Q3 of 2016 with the positive performance being driven by gains in our core long equity position offset partially by our short equity and credit exposures.
Q3 2016 net sales for our automotive segment were 2.3 billion, an increase of 18% over Q3 of 2015. Higher revenues were primarily due to the Q1 2016 acquisition of Pep Boys.
Federal Mogul had an 11% increase in operational EBITDA from the prior year period due to improved margins in both the power train and motor parts division. In our energy segment our Q3 2016 revenues were 1.2 billion and consolidated adjusted EBITDA was 96 million.
CVR Refining posted solid operational performance during the quarter with combined crude throughput of `198,000 barrels per day however as results continued to be hampered by the increasing cost of RINs which are needed to comply with the renewable fuel standard program. We along with others in the industry continue to push the EPA to address this broken program by changing the point of obligations for the party that can control the blending of renewable fuels.
In our rail car segment, investments in our rail car services and rail car leasing businesses continue to complement our manufacturing operation. The segments lease lead was 45,000 rail cars at the end of Q3, 2016 and continued to be a source of significant cash flow.
In our gaming segment, Tropicana delivered a strong performance for the quarter particularly at its Trop Atlantic City and Evansville properties. Our gaming segment consolidated adjusted EBITDA for Q3 2016 was $42 million.
We close the quarter with our balance sheet remaining strong and are optimistic that we have our portfolio of investments positioned for positive returns going forward. With that let me turn it over SungHwan.
SungHwan Cho
Thanks, Keith. I will begin by briefly reviewing our consolidated results and then highlight the performance of our operating segments and comments on the strength of our balance sheet.
In Q3 2016 the net loss attributable to Icahn Enterprises was $16 million compared to a net loss of $440 million in the prior year period. As you can see on slide 5, in Q3 2016 our net loss was primarily driven by Whole Co [ph] debt service costs and impairments recorded in our gaming segment offset in part by the positive return in our investment segment.
I will now provide more detail regarding the performance of the individual segments. Our investment segment had a gain attributable to Icahn Enterprises of $111 million for Q3 2016.
The investment fund set of return of positive 6.5% in Q3 of '16 compared to a return of negative 10.3% in Q3 2015. Long positions that it has a positive performance attribution of 15.9% for the current quarter, while short positions and other expenses had a negative performance attribution of 9.4%.
Since inception since November 2004 through the end of Q3 2016 the investment funds gross return is 137% or approximately 7.5% annualized. The investment funds continue to be significantly hedged, at the end of Q3, 2016 net short exposure was 138% compared to a net short exposure of 25% at the end of 2015.
IEP's Investment in the funds was $1.8 billion dollars as of September 30, 2016. Now to our Energy segment, for Q3 2016 our Energy segment reported revenues of $1.2 billion and consolidated adjusted EBITDA of $96 million compared to revenues of $1.4 billion in consolidated adjusted EBITDA of $236 million for the prior year.
Operating results for Q3 2016 include the April 2016 acquisition of the East Dubuque fertilizer facility. CVR Refining reported Q3 2016 adjusted EBITDA of $75 million compared to $230 million in the prior year period.
The low regional crack spreads and increasing cost of rents continues to negatively impact the refining operations overall financial results. While refining margins improved slightly quarter-over-quarter sequentially product realizations are still hampered by the large overhang of product inventories in the U.S.
Refining margin adjusted for FIFO impact on crude oil per throughput barrel a non-GAAP financial measure was $10.09 in Q3, 2016 compared to $18.65 the prior year period. CVR Partners Reported Q3 2016 adjusted EBITDA of $17 million compared to $4 million in Q3 2015.
Although the nitrogen fertilizer pricing environment remains challenging. We were pleased to record another period of high on stream rates at both plants.
For Q3 2016 consolidated average realized gate prices for UAN and ammonia were $154 per ton and $345 per ton respectively compared to $227 per ton and $478 per ton respectively for the same period in 2015 for the Coffeyville facility. Now turning to our automotive segment.
Our automotive segment for Q3 2016 net sales were $2.3 billion up 18% from the prior year period primarily due to the Q1 2016 acquisition of Pep Boys. Consolidated adjusted EBITDA for our automotive segment was $205 million in Q3 2016 compared to $155 million in Q3 2015.
Federal Mogul on a standalone basis recorded Q3 net sales of $1.8 billion which was consistent with the comparable prior year period. Higher OE sales were offset by lower aftermarket sales and $13 million of negative impact from currency exchange rate fluctuations.
Operational EBITDA in Q3 2016 was $173 million up $17 million or 11% compared to Q3 2015. The increase was due to improved gross profit margins driven primarily by operational improvements in both divisions.
IEH Auto and Pep Boys together had Q3 2016 revenue of approximately $675 million and adjusted EBITDA of $34 million. During the quarter IEP Auto Holdings replaced the existing credit facilities at Pep Boys and IEH Auto with a new $675 million asset backed facility.
We distributed $75 million back to Icahn Enterprises during the quarter and at the end of September there was $129 million of availability remaining under the new facility. Now turning to our rail car segment.
Our rail car segment had rail car shipments in Q3 2016 of 1177 rail cars including 322 rail cars to leasing customers as compared to 1908 rail cards for the prior year period of which 1163 rail cards were to leasing customers. As of September 30, 2016 ARI had a backlog of 5083 rail cards including 1902 rail cars for lease customers.
According to the Railway Supply Institute, the railcar manufacturing backlog has decreased from a record level of nearly 143,000 railcars at the end of 2014, down to approximately 78,000 railcars at the end of Q3, 2016. 79% of the current industry backlog is comprised of tank cars and covered hopper railcars, the two primarily railcar types manufactured and leased by our railcar segment.
The leasing businesses within the railcar segment continued to perform well. In Q3, 2016 we grew the combined leased car portfolios to roughly 45,500 rail cars from approximately 44,600 cars at the end of Q3, 2015.
Average lease rates in Q3, 2016 improved slightly from the prior year period. In September the Federal Rail Road Administration or FRA issued a directive that requires inspection and repairs on certain tank cars manufactured by ARI.
Our rail car segment is in discussions with the FRA regarding implementation of this directive and we have recorded a loss contingency of $32 million to cover the cost associated with the directive. Adjusted EBITDA attributable to IEP for the railcar segment was $73 million in Q3, 2016, compared to $78 million in the prior year period.
Now turning to our gaming segment. Total gaming segment operating revenues were $268 million in Q3 2016, compared to $219 million in Q3 2015.
The increase was primarily due to an increase in consolidated gaming volumes of 22%, primarily due to the inclusion of the results from Trump Entertainment resorts upon its emergence from bankruptcy at the end of February 2016, coupled with higher gaming volumes in table hold percentage at Tropicana Atlantic City. Our gaming segment lot hold percentage was 9.6% for Q3 2016 compared to 9.7% for Q3 2015.
The gaming segments table game hold percentage was 18.8% for Q3 2016 compared to 15.6% for Q3 2015. Subsequent to quarter-end Trump Taj Mahal closed.
We recorded impairments to the property and associated intangibles of approximately $92 million. Our gaming segments consolidated adjusted EBITDA for Q3 2016 was $42 million while EBITDA increased 12.5% at Tropicana, overall EBITDA for this segment was lower $6 million from the prior year due to losses at Trump Entertainment.
Now turning to our Food Packaging segment, net sales for Q3, 2016 decreased by $5 million or 6% compared to the prior year. This decrease was primarily due to lower sales volumes and competitive pricing dynamics in the core products.
Consolidated adjusted EBITDA was $14 million in Q3 2016 which was consistent with the prior year period. Gross margin as a percentage of net sales was 25% in Q3, 2016 compared to 21% in the prior year.
And now we will turn to metal segment. Net sales for Q3, 2016 decreased by $20 million or 22% compared to the prior year.
The net sales decrease was driven by lower selling prices and lower selling prices and lower shipping volumes across most product lines. Adjusted EBITDA was a loss of $4 million in Q3, 2016 compared to a loss of $6 million in the prior year period.
Scrap prices are still at low levels and volumes continue to be challenging in this market environment. And now to our real estate segment.
Real estate revenues were $25 million in Q3, 2016 which was approximately $17 million below the comparable prior year period. Revenues were higher in Q3, 2015 primarily due to the $18 million of gains recorded on the sale of 12 triple net lease properties.
Operating revenues from our real estate segment were substantially derived from resorts and rental operations for both Q3 2016 and Q3 2015. Our net lease portfolio continues to drive earnings in this segment with 15 properties generating strong cash flows.
The real estate segment generated $9 million of adjusted EBITDA Q3 2016. Now to our mining segment, our mining segment has been concentrating on sales in Brazil.
Although international iron ore prices have improved since year-end to an average of $59 per metric ton during Q3 2016, our mining segment expects the remainder of 2016 to be challenging for the iron ore industry. Now turning to home fashion.
Q3 2016 net sales increased for our home fashion segment were flat with the prior year period. Adjusted EBITDA was a loss of $3 million in Q3 2016 compared to a gain of $1 million in the prior year period.
Gross margin as a percentage of net sales was 13% for Q3 2016 as compared to 15% for Q3 2015. Profitability in the quarter was impacted by higher cost and inefficiencies in our supply chain.
Now I will discuss our liquidity. We maintain ample liquidity at the holding company and at each of our operating subsidiaries to take advantage of attractive opportunities.
We ended Q3 2016 with cash, cash equivalents, liquid assets, our investment in the investment funds, and revolver availability totaling approximately $4.8 billion. Our subsidiaries have approximately $1.8 billion of cash and $1 billion 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 help us to capitalize on opportunities within and outside of our existing operating segments. Thank you.
Operator, can you please open the call up to questions please?
Operator
[Operator Instructions]. We have a question from the line of Dan Fannon from Jefferies.
Your line is open.
Dan Fannon
I guess the first question is just on the dividend and kind of how you guys are thinking about the holding companies and the dividends coming up obviously the energy segment. You're paying out of the Whole Co [ph] but the subsidiaries there didn’t paid dividend this quarter.
So I want to get your outlook just on the cash flows coming up to IEP and then sustainability of the dividend and then just with that I think historically we've thought of the dividend as kind of covering the cost of the whole co [ph] or both from a debt financing and kind of corporate costs and can you kind of think of let us know how that's how you guys are still thinking about that or what those comparisons are at this point?
Keith Cozza
So starting with CVI, CVI the whole co continues to have significant excess cash so they could -- the Board evaluate -- the CVI Board evaluates it every quarter but they can continue to pay their normal dividend with excess cash for you know a few more quarters at their CVR level the refining level. Again it really ties back to the RINs problem that we've referenced you know they've disclosed that the cost of RINs this year is going to be somewhere between 210 million and 250 million at the refining company level, that's versus a historical level of like 30 million call it.
So you know we continue to press and we believe sooner or later they will fix this program it's a logical the way it's structured right now and if you just do some simple math there is a lot of future distributable cash flow at CVR refining if it weren't for this RINs problem. Even in a low margin environment which we're kind of in right now.
So long term we're optimistic that that's going to get corrected and CVR will be able to resume distributing cash flow which will ultimately rebuild the coffer at CVI and you know we're hopeful that CVI will continue to be able to be a significant source of cash flow up to IEP. As far as the remaining -- the other entities that ARL continues to American Railcar leasing continues that robust cash flow that continues to distribute approximately $100 million, a year upto IEP, ARI's dividend we believe is sustainable given the excess cash they have on their balance sheet.
So although there may be some small shortfalls versus historically being able to cover the full kind of carrying cost that whole co including the debt expense. We think there's ample liquidity to ultimately your question, I assume to maintain the IEP dividend which Carl has continued to take his share of that dividend in additional units for the most part.
So it's a relatively small cash outflow on an annualized basis. So again our goal is to over time improve performance and grow that dividend but at a minimum to sustain it.
Dan Fannon
And I guess just one more on the fund and the positioning, I get the net short the 138% I think you said as of the end of the quarter, I guess is there still a bearish component around high yield in other segments or is that predominantly just across equities?
Keith Cozza
No I would say that we still maintain a significant net short exposure to high yield credit, our views haven't changed on that although you know we are opportunistic as far as spreads blowout occasionally we will take some profits off the table but you know shorting high yield credit is still a component of our short exposure but the largest and majority of it is through short equity exposure and obviously we're positioned quite bearishly.
Operator
Our next question comes from the line of Andrew Berg from Post Advisory Group. Your line is open.
Andrew Berg
Couple of questions at the very segment level. With respect ARI, and I guess [indiscernible] as well the issue with the FRA the directive of 32 million loss that was a non-cash charge right?
Keith Cozza
Yes they are accuring depending on which entity ARI had increased to warranty reserves and ARL increased some reserves related to as owner of the cars they may be responsible for certain costs associated with the directive on behalf of lessees. So all noncash at this point.
Andrew Berg
And over what timeframe would you expect those to start paying cash?
Keith Cozza
I don't think we're in a position to answer that right now because we are in a -- we made several -- we've provided several datasets to the FRA to articulate our issues with the directive as written and have the challenges of complying with that directive given certain standards that they've embedded in it and depending on how they -- how that dialogue goes and how they review that data will depend on the ultimate cost, there's a number of different scenarios that can remove -- bring the cost down to a very minimal level or it could be higher. Right now at the quarter end is our best estimate based on the information we have on hand.
So hopefully we will have more data within the quarter.
Andrew Berg
Okay. With respect food packaging, can you give us any sense what you’re seeing on a price versus volume?
Keith Cozza
Yes lower prices. There is too much supply in the industry plus we have that FX headwins where headwins where competitors have pricing advantage.
FX works two different ways obviously one in -- obviously flows through that were U.S. reporting entity but it also FX pricing you know where we're at a price disadvantage in a number of countries that have local producers.
So the volumes are down and price is down, there's a lot of supply in the marketplace.
Andrew Berg
Just given the top line and probably low mid-single digits for each in terms of price and volume?
Keith Cozza
Yes that’s right. Yes.
Andrew Berg
With respect to gaming, can you comment at all, at this point on plans for Taj and can comment on what caring costs are for that now that it's shut down?
Keith Cozza
We have no plans right now. Obviously we shut it down October 10th, so three weeks ago.
We’re continuing to evaluate the situation and determine effectively what to do with the asset. We're still in the process of calculating carrying costs obviously we're going to reduce them to as low as possible while still preserving the asset.
Andrew Berg
Is there any reason to think that the carrying cost for this would be grossly dissimilar from the carrying cost for [indiscernible] or that’s not a bad way to think about it or too early to tell?
Keith Cozza
It's probably too early to tell but I would just tell you that that's not a good way to think about it because property tax situation alone is significantly different in the bottom versus New Jersey. So it's too early to tell but I don't think that it's a fair comparison.
Andrew Berg
And then Sung, did you say that there was a charge in the quarter at Tropicana for Taj of 6 million [ph]?
SungHwan Cho
No, we impaired the assets of Taj Mahal. So that’s the charge at the gaming segment level not at Tropicana level.
Andrew Berg
And then can you give any update [indiscernible] at this point, is that's still being marketed?
SungHwan Cho
Yes, I guess as a technical matter it's still being marketed without a lot of interest. I would say we've had challenges in structuring a deal that would make sense from our point of view.
So it's still being marketed obviously it's still being maintained, it's carried on our books at a very low valuation. We think there's a lot of value there.
It's just a matter of time but it's technically still being marketed.
Operator
[Operator Instructions]. We have a question from the line of Josh Lipchin from Eaton Vance.
Your line is open.
Josh Lipchin
Just curious about the whole co debt I know you’ve a maturity in the first quarter, is the thought to keep around the same level at the whole co or what are you expecting?
Keith Cozza
Yes I think right now we're going to evaluate the market dynamics as we get a little bit closer here to the maturity and I think everything is always price dependent but we would look to refinance that in rolling so keeping the same level of debt effectively.
Operator
Our next question comes from the line of Cindy Boyle from Wells Fargo. Your line is open.
Cindy Boyle
Yes can you comment on the roll of Icahn and it's partner in the management of the Icahn funds?
Keith Cozza
Sure. As we announced I believe we announced back in early August, Brett Icahn and David Schechter continued to be their agreements expired at the end of July, they continued to be consulting on our investment portfolio for Icahn Enterprises while they negotiate with the Carl and effectively the Board on a new longer term deal.
So negotiations are ongoing and I think Carl, and Brett and Dave have all kind of said publicly that they're in no particular rush given market valuations and our particular outlook on the on the overall market. So they continue to negotiate but it's a slow process.
Operator
[Operator Instructions]. I'm seeing no other questioners in the queue at this time, so I would like to turn the call back over to management for closing remarks.
Keith Cozza
Okay. Thanks everybody.
We appreciate your interest in IEP and we will talk to you in the first quarter.
Operator
Ladies and gentlemen thank you again for your participation in today's conference. This now concludes the program and you may all disconnect at this time.
Everyone have a great day.