Good morning, welcome to the Icahn Enterprises L.P. Q2 2015 earnings call with Andrew Langham, General Counsel, Keith Cozza, President and CEO, and SungHwan Cho, Chief Financial Officer. I would now like to hand over the call to Andrew Langham, who will read the opening statement.
Thank you. 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. Now I'd like to hand it over to Keith Cozza, President and CEO.
Thanks, Andrew. Good morning, welcome to the second quarter 2015 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. Net income attributable to Icahn Enterprises for the second quarter of 2015 was $212 million, or $1.68 per L.P. unit, compared to an adjusted net income after adding back the loss on extinguishment of debt of $520 million or $4.32 per L.P. unit in the prior year period. Adjusted EBITDA attributable to Icahn Enterprises for the second quarter of 2015 was $619 million, compared to $883 million in the prior year period.
Our investment funds earned a return of 3.9% in the second quarter of 2015, compared to 10.7% in the prior year period. Second quarter performance was driven by gains in our core long equity positions, as well as positive performance from various hedging activities. Year to date through June 30th, 2015, the funds have earned a return of 8.4%. Federal-Mogul had record sales of $2 billion for the second quarter of 2015, an increase of 16% in constant dollars compared to the prior year period. Federal-Mogul's Powertrain division maintained strong performance in the quarter, with revenue increasing 12% on a constant dollar basis compared to the prior year period. Powertrain's revenue reflects the inclusion of TRW's engine valve business, which closed in February of this year, as well as organic growth.
Subsequent to quarter end, the Powertrain division closed on phase two of the acquisition of TRW's engine valve business, which included the purchase of engine component plants located in Tennessee and Thailand. Federal-Mogul's Motorparts division reported sales growth driven by acquisitions as well as organic growth. The Motorparts division continues to make progress on a number of strategic initiatives designed to accelerate growth and increase value. During the quarter, IEH Auto Holdings, a wholly owned subsidiary of IEP, acquired substantially all of the US auto parts assets of Uni-Select USA, now known as AutoPlus, for a purchase price of approximately $330 million. The acquisition included 39 distribution centers and satellite locations, and 240 owned jobber stores in the United States, and supports a network of more than 2,000 independent wholesalers. This business is reported as part of our Automotive segment and will be operated independently of Federal-Mogul.
We are excited about the opportunity this presents and would like to welcome all the members of the AutoPlus team to the IEP family. In our Energy segment, CVR's petroleum and fertilizer subsidiaries performed well during the second quarter. The petroleum business benefited from favorable product margins and had combined refinery crude throughput of over 210,000 barrels per day. The fertilizer business also had a strong quarter, with on-stream rates ranging from 97%-100% for all facility operating units. Our Railcar segment had strong quarterly railcar shipments in the second quarter and continues to build its lease fleet, with over 43,000 railcars at quarter end. In our Gaming segment, Tropicana had a strong operational quarter, with improved performance at a majority of the properties.
Trop AC experienced higher gaming volumes as it has benefited from the closure of several competitors and the recent completion of an extensive room renovation project in the north tower, as well as growth from its online gaming operations. Finally, during the quarter, IEP obtained a controlling interest in Ferrous Resources Limited, a Brazilian iron ore mining operation, through a tender offer for a majority of the outstanding shares. Ferrous Resources owns rights to certain iron ore mineral resources in Brazil and related infrastructure to produce and sell iron ore products to the global steel industry. With that, let me turn it over to Sung.
Thanks, Keith
I will begin by briefly reviewing our consolidated results for the second quarter of 2015, then highlight the performance of our operating segments and comment on the strength of our balance sheet. Net income attributable to Icahn Enterprises for Q2 2015 was $212 million, or $1.68 per LP unit, compared to adjusted net income after adding back the loss on extinguishment of debt of $520 million, or $4.32 per LP unit in the prior year period. Adjusted EBITDA attributable to Icahn Enterprises for Q2 2015 was $619 million, compared to $883 million in Q2 2014. As you can see on slide five, most of the decrease from the prior year is tied to the performance in the investment segment in the respective periods. I will now provide more detail regarding the performance of our individual segments.
Our investment segment had a gain attributable to Icahn Enterprises of $176 million for Q2 2015. The investment funds had a return of 3.9% in Q2 2015, compared to a return of 10.7% for Q2 2014. Long positions had a positive 5.5% return for the current quarter, while short positions and other expenses had a negative performance attribution of 1.6%. Since inception in November 2004 through the end of Q2 2015, the investment fund's gross return is 258%, or 13% annualized. The investment funds continue to be significantly hedged. At the end of Q2 2015, net long exposure was 3%, compared to 14% at the end of 2014. IEP's investment in the funds was $4.6 billion as of June 30th, 2015. Now to our energy segment.
For Q2 2015, our energy segment reported net sales of $1.6 billion and consolidated adjusted EBITDA of $230 million, compared to net sales of $2.5 billion and consolidated adjusted EBITDA of $215 million for the prior year period. Q2 results reflect the solid financial and operational performance of our fertilizer and petroleum subsidiaries. CVR Refining reported Q2 2015 adjusted EBITDA of $194 million, compared to $193 million in the prior year period. CVR Refining posted solid results operationally and financially for Q2 2015. The Coffeyville and Wynnewood refineries ran well during the quarter, posting a combined crude throughput of approximately 211,000 barrels per day. The refineries also benefited from favorable product margins during the quarter. CVR Partners reported Q2 2015 adjusted EBITDA of $36 million compared to $26 million in Q2 2014.
The fertilizer facility performed well in the quarter, with on-stream rates ranging from nearly 97%-100% for all facility operating units. For Q2 2015, average realized gate prices for UAN and ammonia were $269 per ton and $546 per ton respectively, compared to $283 per ton and $521 per ton respectively for the same period in 2014. Now turning to our automotive segment. As Keith discussed earlier, on June 1, 2015, a wholly owned subsidiary of IEH Auto Holdings acquired substantially all of the U.S. auto parts assets of Uni-Select USA for a purchase price of approximately $330 million. This business will operate independently of Federal-Mogul, and all transactions between the two entities have been eliminated in consolidation.
In Q2 2015, net sales for our consolidated automotive segment, which includes both Federal-Mogul and IEH Auto, increased by $144 million from the prior year period, and adjusted EBITDA was $181 million for Q2 2015, compared to $184 million in Q2 2014. Federal-Mogul, on a standalone basis, reported sales of $2 billion, up 5% from prior year and up 16% in constant dollars. This reflects organic growth both in Powertrain and Motorparts division, as well as Powertrain's acquisition of the TRW engine valve business and Motorparts acquisition of the Honeywell brake component business. Operational EBITDA was $180 million, compared to $184 million in the prior year, due to a $28 million negative impact from currency changes. Subsequent to quarter end, Federal-Mogul's Powertrain division closed on phase two of the acquisition of TRW's engine valve business. IEH Auto is included in Q2 2015 results for only one month.
On a standalone basis, net sales were approximately $65 million, and there was minimal contribution to segment adjusted EBITDA. Turning to our railcar segment. Our railcar segment had strong railcar shipments in Q2 2015 of approximately 2,400 railcars, including approximately 1,760 railcars to leasing customers, as compared to 2,140 railcars for the prior year period, of which 1,020 railcars were to leasing customers. As of June 30th, 2015, ARI had a backlog of approximately 8,450 railcars, including 2,060 railcars for lease customers. According to the Railway Supply Institute, the railcar manufacturing backlog has dropped from a record of nearly 143,000 railcars at the end of 2014, down to approximately 136,000 at the end of Q2 2015. Tank cars are now only 34% of the industry backlog, down from a peak of 85% in Q1 2013.
Total manufacturing revenues for Q2 2015 were $268 million, which is in line with the prior year before the elimination of railcar sales to our railcar segment's leasing operation. Gross margin from manufacturing operations before intercompany eliminations for Q2 2015 was $72 million, compared to $65 million for the prior year period. Gross margin from manufacturing operations as a percentage of manufacturing revenues increased to 27% for Q2 2015 as compared to 24% in the prior year period. The increase in gross margin percentage was primarily due to stronger efficiencies and favorable pricing. The leasing businesses within the railcar segment continue to perform well. In Q2, we grew the combined leased car portfolios to roughly 43,500 railcars from approximately 39,700 railcars at the end of 2014. Consolidated adjusted EBITDA attributable to IEP grew to $127 million in Q2 2015 from $102 million in the prior year period.
The increase was primarily driven by higher railcar manufacturing margins and higher leasing revenues. Our railcar segment's liquidity position is strong, with $432 million of cash at the end of Q2 2015. ARI recently announced that its board has authorized a share repurchase program, pursuant to which ARI may repurchase up to $250 million of its shares from time to time. Turning to our gaming segment. Our gaming segment posted solid Q2 2015 results with consolidated adjusted EBITDA of $33 million, compared to $26 million in the prior year. A majority of the properties experienced year-over-year improvement in operating performance. Tropicana Atlantic City's gross casino win increased 1.8% in Q2 2015 as compared to the prior year period, as a result of increased customer volumes. In addition, promotional gaming credits redeemed at Trop AC were reduced by 16% during that time period.
Internet gaming revenues also increased during Q2 2015 as compared to the prior year period. Based on market data, the Atlantic City market experienced year-over-year declines in gross casino win of 10.9% for Q2 2015. Results have also improved significantly at Lumière Place as promotional spending intended to relaunch the casino under new ownership in 2014 has been reduced. Tropicana has a solid balance sheet with $185 million in cash and cash equivalents as of June 30th, 2015. Tropicana recently announced that its board has authorized a share repurchase program, pursuant to which Tropicana may repurchase up to $50 million of its shares from time to time. Turning to our food packaging segment. Net sales for Q2 2015 decreased by $2 million, or 2% compared to the prior year.
The decrease was primarily due to unfavorable foreign currency translation and unfavorable price and product mix, offset in part by higher sales volumes. Consolidated adjusted EBITDA was $18 million in Q2 2015, which was a $1 million increase from the prior year period. Gross margin as a percentage of net sales was 26% in Q2 2015, which was consistent with the prior year. Viskase's cash balance at the end of Q2 '15 was $37 million. Now to our metal segment. Net sales for Q2 2015 decreased by $85 million, or 45% compared to the prior year. The decrease was primarily due to lower shipment volumes and lower prices of ferrous and non-ferrous scrap. Ferrous scrap volumes decreased approximately 28%, and the average ferrous selling price per ton decreased approximately 35%, from $377 to $246.
Adjusted EBITDA was a loss of $3 million in Q2 2015, compared to a loss of $4 million in the prior year. Gross margin as a percentage of net sales was a loss of 7% in Q2 '15 compared to a loss of 2% in Q2 '14. The market environment remains challenging, with reduced demand from domestic steel mills, a weak export market, declining iron ore prices, and competition for shredder feedstock. The company continues to invest in its operations with a focus on strengthening our competitive position within our existing markets. Now to our real estate segment. Q2 real estate revenues were $23 million compared to $26 million in the prior year period. Revenues were higher than the prior year, primarily due to residential development sales. Revenues from our rental and resort operations were consistent with prior year period.
Our net lease portfolio continues to drive earnings in this segment, with its 27 properties generating strong cash flows. The real estate segment generated $12 million of adjusted EBITDA in Q2 2015. So far in 2015, we have sold two rental properties and the Oak Harbor operations for $41 million, which was over double the book carrying value. Subsequent to quarter end, we have also completed a transaction to sell a portfolio of 11 net lease properties for $25 million, generating a gain of approximately $17 million. Turning to our mining segment. IEP obtained control of Ferrous Resources Limited during the second quarter of 2015 through a tender offer for outstanding shares. Prior to the tender offer, IEP owned 14% of the company's common stock, and as of the end of Q2, we own 77%.
Ferrous Resources owns rights to certain iron ore mineral resources in Brazil, and develops mining operations and the related infrastructure to produce and sell iron ore products to the global steel industry. Of the six properties acquired, three are already extracting and producing iron ore, while the other assets are at an early stage of exploration. Turning to Home Fashion. Q2 2015 net sales increased by $6 million compared to the prior year due to higher sales volumes. We are continuing to concentrate on higher margin lines and believe we will have solid placements for the remainder of 2015. Adjusted EBITDA was $1 million in Q2 2015, compared to $2 million in the prior year. Gross margin as a percentage of sales was 14% for Q2 '15, compared to 16% in the prior year. The decrease was primarily due to a sell-off and write-down of aging inventory.
As of June 30th, 2015, Westpoint had $7 million of unrestricted cash. I will discuss our liquidity position. We maintain ample liquidity at the holding company and at each of our operating subsidiaries to take advantage of attractive opportunities. We ended Q2 with cash equivalents, liquid assets, and our investment in the investment funds totaling approximately $6.8 billion. Our subsidiaries have approximately $1.9 billion of cash and $0.8 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 enable us to capitalize on opportunities within and outside our existing operating segments. Thank you. Operator, can you please open it up for questions, please?
Thank you. We'll now take questions as part of our Q&A session. If you have a question, please press star one. Our first question comes from the line of Daniel Fannon of Jefferies. Your line is open.
Good morning, guys. I'd actually like to start, touch base first just on the liquidity. I noticed that the cash at the holding company level is down to about $230 million or so. That's the lowest level it's been in some time. How are you guys thinking about that in terms of going forward? What is the right level, and maybe are we looking at maybe raising some more capital if you continue to see some interesting opportunities out there?
Hey, Dan, it's Keith. I think we had two, as we discussed, very big acquisitions that obviously took down the holding company cash. We acquired the Auto Plus assets or the formerly known as Uni-Select assets. Then we acquired this Ferrous Resources. That was the reason for it. Just to answer your question, I do not think we have plans to. If you are asking about equity issuances or anything like that, we certainly do not see that as being necessary. That will always be price dependent. We think we will see that cash balance build back up over the next quarter or so from the typical dividend upstreams. I think you are pretty familiar with them, we have a number of cash flows that are upstream-
Yep
from CVI and American Railcar Industries. Then we paid for the Auto Plus assets fully in cash. That is a business that is highly concentrated on inventory and accounts receivable. It is frankly ripe for probably some debt at that level of the capital structure for our Auto Plus business. That could also-
What?
result in some cash flow up top as well. We see it rebuilding over the next couple of quarters. What is the right level? We have always talked historically of the $500 million level as kind of a base level. More, if we are not finding lots of opportunities, it has gone up, as you know, in history over $1 billion. We are generally seeing a lot of good opportunities in the marketplace.
That is helpful. I guess maybe on the topic of opportunities, it seems like the market for M&A activity seems to be picking up a little bit. Would you agree with that? In the past, in our previous conversations, we have talked about that maybe M&A activity has been a little bit light. Do you think we are potentially entering a cycle where we may see some more activity and opportunity?
100%. From an IEP's perspective, obviously we agree. We bought two companies this quarter alone. We have a bunch of stuff that we're looking at in the pipeline at our subsidiary levels of tack-on acquisitions. We see the M&A activity very robust. From an overall global perspective, or at least the U.S. perspective, we were recently looking at data, and this year, M&A activity is on pace to exceed $2 trillion. It's double what it was five years ago. There's a lot of M&A going on. We're picking our spots where it makes sense, where we either have industry expertise or where we already have a company or a segment where we could expand that segment.
Is that maybe one of the things is that the investment fund continues to take a relatively cautious outlook. Is maybe the M&A activity a sign of we're maybe nearing a market top at this point? Are there certain segments of the market that you guys are seeing that are maybe much more interesting than perhaps other segments that may be overvalued?
I would say I have to break the question into two components. From the nine operating segments that we have, we have, I would say, more of a balanced approach because if we already have a company and we're doing a tack-on acquisition, we may be paying a multiple that is higher than we would normally pay, but their pro forma of synergies and things of that nature, it may still make a lot of sense for us, and that gives us a lot of cushion on the downside or comfort level in what we're paying. At the investment fund level, I think we're finding opportunities in certain segments. Obviously, there are certain segments that are beaten down pretty substantially, we've been pretty aggressive in building positions in a couple of opportunities that will be disclosed over the next quarter or so.
We are finding segments that are beaten down, obviously we're very cautious on overall market levels, and hence the Sung's reference earlier to net equity exposures in the single digits. Very cautious. Our chairman's been very vocal about that over the last quarter in seeing various aspects of the market in bubble state.
Fair enough. That's helpful. Maybe just a final question here. Any thoughts on maybe how the market environment might change as we potentially enter a rising rate environment here, or will it simply be business as usual for you guys? Do you see any maybe slight change in strategy or anything like that going forward?
You will not see a change in the strategy of IEP. How the market reacts to higher interest rates, again, our chairman has been very, very vocal on we'd be very, very cautious, especially in the high yield debt space as to how that reaction will be absorbed by the market in a rising rate environment. Again, we've been pretty vocal about credit spreads for low-quality corporate companies, and there could be a problem there. I don't think it'll change our approach, and I think we've positioned ourselves from an IEP perspective. We hope to be able to make money in a rising rate environment or a lower rate environment. We're cautiously optimistic, but very, very cautious. The answer is we don't know what the reaction will be, but we have worries.
Fair enough. Maybe just a quick tack-on. Is there anything that would make you less cautious? That maybe you would get a little more bullish or optimistic about what's out there or a change in stance?
It's hard. For us, it always comes down to risk-adjusted returns, risk/reward, to say it simply. We see a lot of risks. I'm not going to name every one of them.
Sure
they're the popular risks that everybody talks about in China, in the high yield market, rate environment. We see a lot of risks. Simply put, paying 20 times P/E ratios when weighing those risks is not, in our opinion, a great risk/reward return. If we see those risks subside or valuations come in to reflect a better risk return ratio, then we would probably adjust accordingly. It's hard to say what would cause us to adjust. I think the single-digit equity exposure speaks for itself on our view of the markets.
Okay, excellent. Again, thanks for your help.
Yeah. Thanks, Dan.
Thank you. I am currently showing no more questions in queue.
Okay. Thanks, everybody. We'll look forward to talking to you in November for the third quarter results. Have a good day.