ICAHN ENTERPRISES L.P. Q3 FY2024 earnings call

• Investment Funds: Positive returns from single name longs (healthcare, refining hedges) and interest income, but broad market hedges caused losses.
• CVR Energy: Down during the quarter due to cracks and external power outages.
• Auto Service Division: Struggled with lower revenue, but management changes made, and signs of improvement seen.
• Liquidity: Holding company had $1.6 billion cash and cash equivalents, funds had $800 million. Board reduced quarterly distribution from $1 to $0.50.
• Investment Segment: Top five disclosed names have value creation potential: SWIX gas utility, AEP new management, IFF high-quality ingredients, Caesars great business with strong management, Bausch considerable value.

Energy Segment

EBITDA was negative $38 million for Q3 2024 compared to $347 million in Q3 2023. Refining margin per throughput barrel was $2.53 vs $31.05 prior year. UAN average realized gate price increased 3% to $229 per ton and ammonia increased 9% to $399 per ton.

Auto Segment

Net sales and other revenues decreased $70 million y-o-y. Automotive services revenues down $51 million due to operational challenges; aftermarket parts revenues down $20 million due to business winding down.

Other Segments

• Real Estate: Adjusted EBITDA down $10 million y-o-y, driven by sale of investment property in 2023 and reduced single-family home sales.
• Food Packaging: Adjusted EBITDA down $6 million y-o-y, impacted by product mix shift and lower pricing.
• Home Fashions: Adjusted EBITDA down $1 million y-o-y, due to lower demand from international and e-com.
• Pharma Segment: Adjusted EBITDA up $2 million y-o-y due to higher prescription growth.

Investment Funds

Up approximately 8% for the quarter, led by healthcare investments and refining hedges, but broad market hedges caused losses.

• Board reduced quarterly distribution from $1 to $0.50.
• Proposed tender offer to buy additional CVR shares.
• Expectations for EBITDA margins in auto service to improve to high single digits or double digits over multiyear period.

• Refining market softening led to CVR dividend cut.
• Auto service division continued struggles with staffing, inventory, and consumer spending.
• Unplanned downtime in energy segment due to external power outages impacting volumes and margins.
• Food Packaging affected by product mix shift and lower pricing.

Q: Good morning. Just to want to talk about the dividend, liquidity and obviously, the CVR discussion. So just how at the IP level, are you looking to manage the overall liquidity to kind of come up with the dividend level versus maintaining the flexibilities you talked about for new investments as well as obviously running the business?

A: Hi, Dan. Good morning. So first off, I’d just say we have a significant war chest of liquidity. If you look at IEP, we have, call it, $1.5 billion to $1.6 billion of cash at the holding company. We have $800 million of cash or so at the hedge funds. And so we retain significant liquidity whether we want to make – wherever we want to make investments. Now when we think about the CVI tender decision, look, we think it’s just an attractive investment. We generated significant cash over time, something like $3 billion in dividends. And we think at some point, the crack cycle will swing and then we’ll go back to making significant cash [indiscernible]. Unfortunately, we can’t really promise you when that will happen, but we think the decisions we made today will actually help cash flow in the future. I’d also point out, we have – not only do we have the $1.6 billion of cash at the holding company, the $800 million of the funds, but we’re always looking at our assets. And so Ted mentioned a little bit in his comments, and he said, we have, call it, some acres that’s in Nashville. So a while back, we owned a segment called PSC Metals. We sold the business. We retained the land. It was a very good decision. And you have an asset on our books today for, call it, something like $25 million. And there have been press reports out there that said we’re exploring a sale and some people think it could be – it could go for north of 10x that, right? So between the cash, between the undervalued assets that we have in our portfolio and look at our job to prove that out that we think we’ll have plenty of liquidity to come.

Q: Understood. And then just on the auto business, you mentioned kind of another round of restructuring. So did that actually happen in the third quarter? Is that subsequent to the fourth quarter, where you talked about some of the management changes and seeing improvements? Or is that something that’s – and also just how quickly do you think we can see some of those changes actually come through?

A: Yes. So a lot of the changes happened, Ted, it was right around quarter end… Ted Papapostolou: At the end of the quarter, yes. Andrew Teno: Yes, so it’s right around quarter end and the individual who’s now running the organization, we’ve seen significant changes already. So the trends in the quarter, as you went through the quarter, it got worse and worse. And as soon as we made a change, we’ve seen kind of the trends improve now. Look, it’s not – we’re not seeing what we should be, right? What we should be seeing eventually is same-store sales growth. We should be seeing margin improvement. We’re not seeing that, but we are seeing quite a significant reversal. Right. So, I think there were times we were seeing revenue minus 20% year-over-year, and that’s declined. Now we’re seeing some high single digits. So we’re already seeing an improvement. And I’d say, look, some of the – obviously the business didn’t do well in the quarter, but there were good ideas that were – some of the initiatives that were being worked on were good ideas. They were just poorly executed. Right. So it is a good idea to run an RFP to purchase tires cheaper so we can make more money when we sell them to our customers. It’s a bad idea to run out of inventory so that when your customers show up, there is nothing to sell them. Or you say, hey, it’s going to be a week when they can just go across the street and it’s going to take them a day. So good ideas, bad execution, and now it’s up to us to execute and turn it around.

Q: Given the change in the White House, and as you look at the portfolio today and its constructs, as well as both the long positions you highlighted as well as the kind of hedges, any changes to how you’re thinking about the mix or the overall net exposure, given what has transpired this past week?

A: I’d say not too many changes in terms of the hedge book, but it is nice to be able to rely and use the M&A tool a bit more, right. So things that were off the table maybe won’t be off the table. I think there was an article not too long ago in the, I think, it was the journal, right, where they were highlighting that activists were replacing CEOs as the primary tool to improve the business and moving away from M&A. And I think this changed in administration hopefully will give us more options to push for more ways to make money. It’s also nice to have, I think, a bunch of our businesses or at least if you look at CBI, I think, the Trump administration will be much more favorable towards refining than the prior.

Q: Just on the dividend and the outlook, as you think about the change today, with also the proposals around CVI and others, and knowing that you can’t predict when the dividend at CVR is coming back, is that like – what is contemplated as we think about the go forward in terms of sustainability of the current dividend here versus what’s coming off of the business and the liquidity overall?

A: Yes, look, I think it comes back to the same thing we’ve been discussing, which is we evaluated every quarter, clearly it’s been an important part of our story in the past, but it’s something we evaluate all the time. I think if we are right in that the assets that we own are attractive, they’re undervalued, and we can do important things to unlock that, then we’ll probably continue to stick to our knitting.

Q: If we go back to Automotive real quickly, was it just a change in the CEO spot or were there other management changes? And if so, which changes were done?

A: Yes, I think that there were a few changes that were made, the CEO and the CFO have changed. There were some others as well. I would just say that the changes – the other changes that were made were for people to do, I’d say rather than having mid-level management or senior level management is more to have more people doing the actual work, getting back to basics to improve the core business.

Q: When you are looking at food, you had mentioned the need for CapEx there to modernize the facility. How much CapEx do you think needs to be invested there to get it to a level that you guys would be happy with?

A: It’s too early to spit out a number. So management is working on a capital plan, but it is apparent that we need to bring cost out of the P&L to increase the bottom line. So, they have been working on that for the past two quarters. I am expecting to have an update on the next call to see how much of an outlay the timeframe and get more into the nitty-gritty of the details.

Q: Given that last comment, it sounds like any needs they would have would be something then they could just be financed and handled at that subsidiary level would require any downstream of cash or equity investment from you guys. Or if it was, it wouldn’t be notable.

A: I think this case is a certain size, we’re a certain size and so we just evaluate each capital structure and figure out the best decision for each business.

Q: Okay, just wanted to confirm that. And then can you help me reconcile the holdings in the investment funds? You noted that the performance was up and up nicely ex the hedge you had on. But the value that’s shown on Slide 11 is down a little bit, which suggests to me there was distributions that came out of that. I think the number was probably around $500, but I just want to make sure I’m understanding the math and the movements there.

A: Yes. So, there was a distribution during the quarter. And so, you would see a movement from the investment funds into the IEP holding company cash. And then we’d use that cash for – it goes into a big bucket and we use it as we did in the quarter. So, you’d see some bond repurchases that were there. That would probably be one of the bigger uses of cash during the quarter.

Q: And the repurchases that I’m just trying to recall, was that for maturity or were you buying bonds in the open market?

A: There were some repurchases in the open market. So, if you look on that bottom row, where you look at the unsecured debt balance, you can see that it ticked down.

Q: With respect to the dividend, I think, that Carl had elected to take some in cash in the recent past, but historically have been taking more of it in stock. Given the reduction and given the desire to use the company’s capital to help fund the CVR investment, is he going to switch back to taking it predominantly or entirely in stock versus cash going forward?

A: Yes. So that’s a decision for Carl. He has the same decision that all the other shareholders have.

Q: And he hasn’t communicated things either way on that or does want to say?

A: Does not.

Q: Question on Food Packaging if I could. So in May at the annual meeting of this case, you guys said or your management said that budget for 2024 was for EBITDA profitability to be higher than that in 2023. And so my question is, what changed so suddenly here? What – did you – what didn’t you know then that you learned subsequent. Can you help me on that?

A: Yes. Just to give more context, what happened this quarter is, as I mentioned, volume was up compared to the prior year period, but the mix of product we’re selling was at a lower margin. And then there is price, which let me touch on price. As I mentioned in previous call, the supply chain has stabilized. And what that’s done for the industry is it brought back the price competitiveness to what I call pre-pandemic levels when things were more normalized. So, that layer in the higher waste that we have as compared to historical periods and that all affects the bottom line. And there is some upside in tackling the waste, and management has initiatives to do so. But like I mentioned in the previous question, the biggest impact we see to improve 2025 and beyond would be a capital plan to take further costs out of P&L.

Q: And with regard to waste, with regard to this, again, what was the epiphany that occurred in the summer that we didn’t know about, management didn’t know about in May when we were guided higher?

A: It’s really just the pricing competitiveness, I would say, and the mix of business. They were budgeting for a better mix, and that didn’t come to fruition.

Q: And is the mix issue, is that mostly U.S. or is that Europe, would you say, the change in that?

A: It’s throughout every region, mostly in Europe.

Q: Can I just ask one more, which is just to say, do you think the industry would benefit from consolidation?

A: Yes, throughout our portfolio, we look at opportunities and put in hurt, but there’s nothing that we see right now that makes sense.