Good morning, welcome to the Icahn Enterprises third quarter 2016 earnings conference 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.
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 in the back of the investor presentation. Now I'll turn it over to Keith Cozza, the CEO of Icahn Enterprises.
Good morning. 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. Sung 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. For Q3 2016, we had 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 positions, 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 powertrain 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, its 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 obligation to the party that can control the blending of renewable fuels. In our railcar segment, investments in our railcar services and railcar leasing businesses continue to complement our manufacturing operation. The segment's lease fleet was over 45,000 railcars 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's consolidated adjusted EBITDA for Q3 2016 was $42 million.
We closed the quarter with our balance sheet remaining strong and are optimistic we have our portfolio of investments positioned for positive returns going forward. With that, let me turn it over to Sung.
Thanks, Keith. I will begin by briefly reviewing our consolidated results and then highlight the performance of our operating segments and comment 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 five, in Q3 2016, our net loss was primarily driven by holdco 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 funds had a return of positive 6.5% in Q3 of '16, compared to a return of negative 10.3% in Q3 2015.
Long positions had 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 in November 2004 through the end of Q3 2016, the investment fund's 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 as of September 30th, 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 and 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 RINs 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.
Turning to our Automotive segment. Our Automotive segment's 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. Turning to our Railcar segment. Our Railcar segment had railcar shipments in Q3 2016 of 1,177 railcars, including 322 railcars to leasing customers, as compared to 1,908 railcars for the prior year period, of which 1,163 railcars were to leasing customers.
As of September 30th, 2016, ARI had a backlog of 5,083 railcars, including 1,902 railcars 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 primary railcar types manufactured and leased by our Railcar segment. The leasing businesses within the Railcar segment continue to perform well. In Q3 2016, we grew the combined leased car portfolios to roughly 45,500 railcars from approximately 44,600 railcars at the end of Q3 2015. Average lease rates in Q3 2016 improved slightly from the prior year period.
In September, the Federal Railroad Administration, or FRA, issued a directive that requires inspection and repairs on certain tank cars manufactured by ARI. Our Railcar 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 costs 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. 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 and table hold percentage at Tropicana Atlantic City. Our gaming segment slot hold percentage was 9.6% for Q3 2016 compared to 9.7% for Q3 2015. The gaming segment's 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 segment's consolidated adjusted EBITDA for Q3 2016 was $42 million. While EBITDA increased by 12.5% at Tropicana, overall EBITDA for the segment was lower by $6 million from the prior year due to losses at Trump Entertainment.
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. Turning to our 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 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. Turning 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 our resort and rental operations for both Q3 2016 and Q3 2015. Our net lease portfolio continues to drive earnings in this segment with its 15 properties generating strong cash flows. The real estate segment generated $9 million of adjusted EBITDA in Q3 2016. Turning 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. Turning to home fashion. Q3 2016 net sales 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 '16 as compared to 15% for Q3 2015. Profitability in the quarter was impacted by higher costs and inefficiencies in our supply chain. 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 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. We continue to focus on building asset value and maintaining ample liquidity to help us capitalize on opportunities within and outside our existing operating segments. Thank you. Operator, can you please open the call to questions?
Ladies and gentlemen, if you have a question for the speakers at this time, you may dial star, then the number one key on your keypad. That's star, then one. If your question has been answered or if you wish to remove yourself from the queue, you may press the pound key. Once again, ladies and gentlemen, star then one will place you into the queue. We have a question from the line of Dan Fannon from Jefferies. Your line is open.
Thanks. Good morning, guys.
Good morning, Dan.
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 holdco, but the subsidiaries there didn't pay a dividend this quarter. I want to get your outlook just on just the cash flows coming up to IEP and then sustainability of the dividend. Just with that, I think historically we've thought of the dividend as kind of covering the cost of the holdco, both from a debt financing and kind of corporate costs. Can you let us know how you guys are still thinking about that or what those, I don't know, comparisons are at this point?
Sure. Hey, Dan, it's Keith. Starting with CVI. CVI, the holdco, continues to have significant excess cash, so the CVI board evaluates it every quarter, but they could continue to pay their normal dividend with excess cash for a few more quarters. At the CVR level, the refining level, again, it really ties back to the RINs problem that we've referenced. 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. We continue to press, and we believe sooner or later they will fix this program. It's illogical the way it's structured right now.
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. Long term, we're optimistic that that's going to get corrected and CVRR will be able to resume distributing cash flow, which will ultimately rebuild the coffer at CVI. 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 other entities, ARL, American Railcar Leasing, continues to have robust cash flow that continues to distribute approximately $100 million a year up to IEP. ARI's dividend, we believe, is sustainable given the excess cash they have on their balance sheet.
Although there may be some small shortfalls versus historically being able to cover the full kind of carrying cost at holdco, including the debt expense, we think there's ample liquidity to Ultimately, your question, I assume, is to maintain the IEP dividend, which Carl has continued to take his share of that dividend in additional units for the most part. It's a relatively small cash outflow on an annualized basis. Again, our goal is to, over time, improve performance and grow that dividend, but at a minimum, to sustain it.
Okay. That's helpful. 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?
I would say that we still maintain a significant net short exposure to high yield credit. Our views haven't changed on that, although we are opportunistic as far as when spreads blow out. Occasionally we'll take some profits off the table. But 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.
Great. Thank you.
Thanks.
Thank you. Our next question comes from the line of Andrew Berg from Post Advisory Group. Your line is open.
Hey, guys, couple questions at the various segment levels. With respect to ARI, and I guess it's ARL as well, the issue with FRA, the directive and the $32 million loss, that was a non-cash charge, right?
Yes. They're accruing, depending on which entity. ARI had increased some warranty reserves, and ARL had 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. All non-cash at this point.
Over what timeframe would you expect those to start paying out in cash?
I don't think we're in a position to answer that right now because we've provided several data sets to the FRA to articulate our issues with the directive as written and the challenges of complying with that directive, given certain standards that they've embedded in it. Depending on how that dialogue goes and how they review that data will depend on the ultimate cost set. There's a number of different scenarios that can 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. Hopefully we'll have more data within the quarter.
Okay. With respect to food packaging, can you give us any sense what you're seeing on a price versus volume?
Yeah. Lower prices. There's too much supply in the industry, plus we have FX headwinds where competitors have pricing advantage. FX works two different ways, obviously. One, and obviously, it flows through that we're a U.S. reporting entity, but it also affects pricing, where we're at a price disadvantage in a number of countries that have local producers. Volumes are down and price is down. There's a lot of supply in the marketplace.
Given the top line probably in low mid-single digits for each in terms of price and volume? Way to think about it?
Yeah. That's right. Yeah.
With respect to gaming, can you comment at all at this point on plans for Taj? Can you comment on what carrying costs are for that now that it's shut down?
We have no plans right now. Obviously, we shut it down October 10th, it was three weeks ago. We're continuing to evaluate the situation and determine effectively what to do with the asset.
Okay.
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.
Is there any reason to think that the carrying cost for this would be grossly dissimilar from the carrying cost for Fontainebleau? That's not a bad way to think about it? Too early to tell?
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 Nevada versus New Jersey. It's too early to tell, but I don't think that's a fair comparison.
Okay. Fair enough. Sung, did you say that there was a charge in the quarter at Tropicana for Taj? The $66 million?
We impaired the assets of Taj Mahal.
That's a charge at the gaming segment level, not at Tropicana level.
Got it. That's where the $92 was.
Yes.
Can you give any update on Fontainebleau at this point? Is that still being marketed?
I guess as a technical matter, it's still being marketed. We've had a lot of interest. I would say we've had challenges in structuring a deal that would make sense from our point of view. 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, it's technically still being marketed.
Great. Thank you.
Thank you. Ladies and gentlemen, as a brief reminder, you can queue up for a question with star then one on your keypad. If your question has been answered or if you wish to remove yourself from the queue, you may press the pound key. We have a question from the line of Josh Lipchin from Eaton Vance. Your line is open.
Hi, thanks. Just curious about the holdco debt. I know you have a maturity in the first quarter. Is the thought to keep around the same level of debt at the holdco or what are you expecting?
Yeah, I think right now, we're going to evaluate the market dynamics as we get a little bit closer here to the maturity. I think everything is always price dependent, but we would look to refinance that in rolling. Keeping the same level of debt effectively.
Okay, great. Thank you.
Thank you. Our next question comes from the line of Cindy Boyle from Wells Fargo. Your line is open.
Yes. Can you comment on the role of Brett Icahn and his partner in the management of the Icahn Funds?
Sure. As we announced, I believe we announced back in early August, Brett Icahn and David Schechter, their agreements expired at the end of July. They continue to be consulting on our investment portfolio for Icahn Enterprises while they negotiate with Carl and, effectively, the board on a new longer-term deal. Negotiations are ongoing, and I think Carl and Brett and Dave have all said publicly that they're in no particular rush, given market valuations and our particular outlook on the overall market. They continue to negotiate, but it's a slow process.
Thank you.
Ladies and gentlemen, one more call for questions. Star then one will place you into the queue. I'm seeing no other questioners in the queue at this time, I'd like to turn the call back over to management for closing remarks.
Okay. Thanks, everybody. We appreciate your interest in IEP. We'll talk to you in the first quarter.
Ladies and gentlemen, thank you again for your participation in today's conference. This now concludes the program. You may all disconnect at this time. Everyone, have a great day.