Icahn Enterprises LP (IEP) 2005 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the American Real Estate Partners Conference Call. [Operator Instructions].

I will now turn the conference over to Mr. Adrian Hanian (ph), Chief Accounting Officer. Please proceed, sir.

Good morning. I will now read the forward-looking statements as presented on Page 1 of today's Investor Presentation. This document contains forward-looking statements within the meaning of the federal securities laws. These forward-looking statements include, among others, estimates, projections, goals, forecasts, assumptions, statements of expectations, beliefs, future plans and strategies, anticipated results from operations and developments and other matters that are not historical facts. The forward-looking statements are based on management's belief as well as a number of assumptions concerning future events. Any forward-looking statement is based on information current as of the date when made and we undertake no obligation to update any forward-looking statement or statements.

Examples of factors that you should consider with respect to any forward-looking statements made in this document include, but are not limited to, the following. Certain of our management are committed to the management of other businesses. We may be subject to the pension liabilities of affiliates. We are subject to the risk of possibly becoming an investment company. We may be taxable as a corporation; risks related to our real estate operations including, our investment in property development may be more costly than anticipated, competition for acquisitions could adversely affect us, and new acquisitions may fail to perform as expected.

We may not be able to sell our real estate properties, which would reduce cash available for other purposes. We face potential adverse effects from tenant bankruptcies or insolvencies, the development of our New Seabury property may be limited by governmental authorities. We may be subject to environmental liability as an owner or operator of development and rental real estate.

Risks related to our hotel and casino operations including, the gaming industry is highly regulated and the gaming authorities and state and municipal licensing authorities have significant control over our operations; rising operating costs for our gaming and entertainment properties could have a negative impact on our profitability. We face substantial competition in the hotel and casino industry, economic downturns, terrorism and uncertainty of war, as well as other factors affecting discretionary consumer spending, could reduce the number of our visitors or the amount of money visitors spend at our casinos. Our hotels and casinos may need to increase capital expenditures to compete effectively. Increased state taxation of gaming and hospitality revenues could adversely affect our hotel and casinos results of operations.

Risks related to oil and gas operations including, the oil and gas industry is subject to environmental regulation by state and federal agencies. We may experience difficulty finding and acquiring additional reserves, and may be unable to compensate for the depletion of proved reserves. Difficulties in exploration and development could adversely affect our financial condition. Oil and gas prices are likely to be volatile. Operating hazards and uninsured risks are inherent to the oil and gas industry. Our use of hedging arrangements could adversely affect our results of operations. The oil and gas industry is highly competitive.

Risks related to our investments including, we may not be able to identify suitable investments, and our investments may not result in favorable returns or may result in losses, and our investments may be subject to significant uncertainties.

These and other risk factors are detailed from time to time in our filings with the Securities and Exchange Commission. All such factors are difficult to predict, contain uncertainties that may materially affect actual results, and may be beyond our ability to control or estimate precisely. New factors emerge from time to time, and it is not possible for management to predict all such factors or to assess the effect each such factor will have on us. Please note that quantitative reconciliations between each non-GAAP financial measure contained in this presentation, and its most directly comparable GAAP measure are available in the Investor Relations section of our website at www.areplp.com.

With that I'd like to turn the call over to Keith Meister, the Chief Operating -- Chief Executive Officer of American Real Estate Partners LP.

Good morning. And welcome to second quarter 2005 American Real Estate Partners earnings conference call. I will begin by providing an overview of the key highlights from the second quarter, and then provide a brief update on subsequent events. After that I will turn it over to Jon Weber, President of American Real Estate Partners. Jon will review the detailed results of the second quarter on a consolidated as well as segment-by-segment basis. After that, Jon and I will be joined by Bob Alexander, who runs our oil and gas businesses in Dallas; and Rich Brown, who runs our gaming businesses from Las Vegas, and we will be available to take your questions.

The second quarter of 2005 was another strong quarter for American Real Estate Partners. During the quarter, our core operating segments performed well. Oil and gas, gaming and real estate each had solid quarters, and we will get into those numbers. In addition, we closed on several key corporate level transactions, which position us well for the future.

During the quarter, we closed the acquisition of a 50% membership interest in NEG Holding, TransTexas Gas Corporation, Panaco, and the securities of GB Holdings and Atlantic Coast Entertainment Holdings that indirectly owns The Sands Hotel and Casino in Atlantic City. Our financial results for the second quarter as well as for the first six months have been restated to reflect these acquisitions.

As a result of strong organic growth and operating performance at our core segments, consolidated AREP revenue for the second quarter 2005 were up 37.7% to 220.7 million from 160.3 million for the comparable quarter in 2004.

Driven by strong revenues, our operating income is up substantially as well. Operating income reached 48.3 million from 15.4 million in the second quarter of 2005 versus the second quarter of 2004. This represents 213.6% growth in operating income. Our oil and gas and gaming businesses were the primary drivers of our revenue and operating income growth. These results have been in line with our expectations, and in certain pockets, specifically our Las Vegas Gaming properties, have even exceeded expectations.

While Jon will get into these results in more detail, I think it is important to note a few key elements of the results from these segments. Within our oil and gas businesses, we continue to benefit from both increased production - over 30% increase in gas production, as well as continued robust commodity prices. As we've stated before, the lifeblood of any E&P company is its inventory of drilling opportunities.

As a result of the acquisition of a 50% membership interest at NEG Holdings, TransTexas and Panaco, as well as our organic investment in CapEx and bolt-on acquisitions we've completed, specifically the acquisition of an increased ownership interest in Longfellow Ranch, our West Texas property, we are in a strong position in our AREP oil and gas subsidiary to continue to take advantage of the current robust environment for oil and gas and our inventory of low risk, repeatable drilling opportunities.

In our gaming business, our ACEP Properties, our 3 casinos in Las Vegas continued to exceed our expectations. Rich's team is not yet satisfied with the results from The Sands at Atlantic City. However, we are starting to see positive signs, including a very strong July. And while there's a lot of work to be done, we are cautiously optimistic of our ability to turn around results at The Sands as well as to invest additional capital in order to grow and support that asset.

The key highlight in the quarter within our real estate segment was the final resolution with the Cape Cod Commission on a plan for the development of New Seabury. We have reached agreement to develop approximately 457 units at New Seabury. And during the quarter, we began that process by pulling permits, putting shovels in the ground, and beginning unit sales during the 4th of July weekend.

Ultimately, our ability to achieve profits from our rental real estate segment will be driven by the timing of housing starts and the absorption rates. I remind you that as Jon Weber reviews the detailed results of our real estate segments, these numbers do not yet include any revenues and profits from the sales of newly built units at New Seabury and Vero Beach, our two large development projects which have recently commenced construction. We remain very confident in the prospects for each of these projects.

The next slide focuses on events subsequent to the end of the second quarter 2005. Subsequent to the quarter end AREP announced and completed the acquisition of WestPoint Stevens. As many of you are familiar, approximately 1 year ago, AREP acquired on a cost basis approximately 206 million of first secured and second secured indebtedness of WestPoint Stevens. These securities positioned us advantageously to ultimately acquire WestPoint Stevens through a 363 bankruptcy sale.

We've acquired the assets of WestPoint and left the legacy liabilities behind. The WestPoint acquisition adds a fourth core operating subsidiary to American Real Estate Partners. WestPoint will emerge from bankruptcy with a strong balance sheet, and we are committed to provide them the capital and resources to help succeed.

Jon Weber will review the details of the transaction with you during his remarks. On July 8, 2005 American Real Estate Partners made an offer to acquire the 49.9% minority ownership interest in Natural Energy Group Inc. that was not held by American Real Estate Partners for $3 per share or approximately 16.5 million of total consideration. While there can be no assurances that this transaction will close, the closing of this transaction would enable American Real Estate Partners to own and consolidate 100% of its holdings in oil and gas.

By completing this last leg of the rollup of our oil and gas assets, we believe we position our oil and gas business to have increased efficiencies in the operations of our assets, increased ability to attract and retain talented employees, and increased access to the oil and gas equity and debt capital markets.

Furthermore, today the American Real Estate Partners Board announced that it has approved the adoption of a $0.10 per unit quarterly distribution to all depository unit holders. Moreover the board intends to consider the declaration of a $0.10 per unit distribution on a quarterly basis. The board's decision to adopt a distribution policy at this point reflects, among other things, the Company's strong balance sheet and cash flow, and the change in Company's business and growth within the value of its assets over the last several years. Management believes this policy allows us to return money to unit holders while continuing to maintain the financial resources necessary to invest in and grow our businesses.

Before I turn the call over to Jon, I would like to review the detailed results of our second quarter operations. I think it's important to make a comment on AREP strategy and positioning. Over the last 2 years, we've completed numerous corporate transactions that have positioned AREP not only as a company with a strong balance sheet, but also with strong revenues and cash flows from our operating subsidiaries.

Today, AREP has a well positioned oil and gas business with significant opportunities for organic investment, as well as a thriving gaming business with opportunities for expansion both in Atlantic City and Las Vegas. Our rental real estate operations continue to be very healthy, and we have 2 new unique assets in New Seabury and Vero Beach that are now ready to be developed.

Finally, as a result of the acquisition of WestPoint Stevens, we've added another core operating subsidiary to our holdings. WestPoint today has emerged from bankruptcy with no debt. We've acquired the assets and left the legacy liabilities behind. With AREP's strong balance sheet and long-term commitment to value creation, we are prepare to provide the capital and support to help WestPoint succeed.

With that, I'll now turn it over to Jon Weber.

Thanks Keith and good morning. Before reviewing the financial performance for American Real Estate Partners for the quarter just ended, I would like to highlight a few significant changes to the way that we are presenting our results. As we've now completed the acquisitions described earlier, results for NEG Holding, TransTexas, Panaco and the Sands are included in AREP's revenue and operating income.

Previously we had 6 segments. This quarter, we will now present our results in 3 core operating segments, consisting of oil and gas, gaming, and real estate. Gaming will include our hotel, casino and related activities, and our real estate segments will include net leasing, development and development related resort activities such as golf operations at our New Seabury and Grand Harbor properties.

Previously, we reported net income from interest and dividends on securities as revenue and included it in operating income. In the second quarter and going forward, interest and investment income will be shown below the operating income line. We believe that these changes will ease comparison and analysis for our component businesses, and are consistent with our increased focus on our core operating activities.

Now I would like to turn to our results for the quarter. As Keith mentioned earlier, our revenue reached $221 million for the quarter, a 38% increase and operating income was up $48 million, an increase of 214%. Depreciation, depletion and amortization or DD&A was $36 million for the quarter, so our quarterly operating income plus DD&A reached $84 million.

We attribute these strong results to having have bought attractive assets at the right time in cycle, continued favorable industry fundamentals for the energy, gaming, and real estate industries, importantly having adequate capital to invest and expand selectively in the areas in which we have competitive advantage and our operating management's relentless focus on running lean and highly operable operations.

And, not withstanding the strong operational improvement, we did report a decline of $62 million in net income quarter-over-quarter for reasons unrelated to our core operations. For example, in prior quarters we completed the sales of many net leased properties to take advantage of favorable conditions in the real estate markets. Gains from these sales are treated as discontinued operations.

During the second quarter of 2004, we sold 25 such properties and had a gain from discontinued operations of $48 million. However, as the sales program neared completion in the quarter just ended, we sold only seven properties for a gain of $2.6 million. That resulted in a decline in net income from discontinued operations of $45 million. Also affecting the decline in net income was a $28 million drop in other income, mostly attributable to net losses on our securities activities. Over time, we expect to see increased focus and resources directed toward our operating as opposed to our investment activities and will work to diminish the adverse impact of these losses.

Our net income for the quarter was also negatively impacted year-over-year by a $14 million increase in interest expense, principally associated with the issuance of 353 million and $480 million in senior notes issued in May of 2004 and February of 2005. Lastly, we incurred an incremental $5 million in income tax expense as our book income tax for the quarter rose to $9 million. It's worth noting that all but $2.5 million of that expense were supported.

I'll now explain in greater detail our second quarter operating results on a segment-by-segment basis. Our gaming activities include hotel and casino activities for our 4 properties, The Stratosphere, Arizona Charlie's East and Arizona Charlie's West in Las Vegas, and the Sands Casino and Hotel in Atlantic City. Revenues for these four properties, was up $4 million, owing principally to a $2 million increase in hotel related revenue benefiting from a 9% year-over-year increase in our average daily room rate.

Quarter-over-quarter revenue in Las Vegas was up 11%, while it was down 10% in Atlantic City, reflecting a change in the Las Vegas visitor mix and competitive and other developments in Atlantic City. Our operating income for the 4 properties was also up by $4 million, representing a $6.5 million a year-over-year increase in Las Vegas, offset by a $2.4 million decline at the Sands.

Our 3 Las Vegas properties are consolidated into an entity known as American Casino Entertainment Properties, or ACEP, which reports its results separately. A reconciliation of ACEP's EBITDA to net income appears later in this presentation. I'd like to point out that ACEP's reported EBITDA and net income for the second quarter of 2005 was 23.2 million and $8.7 million, up 33% and 74% year-over-year respectively. Rich Brown and his team have done a terrific job in both controlling expenses, while driving growth in Las Vegas and with Rich and his team, we've identified a course of action to address the performance issues in our Atlantic City property.

Now I will turn to our oil and gas operations. Our oil and gas business consists of the consolidated operations of NEG Holdings, TransTexas, and Panaco. The revenues for these 3 units was up $52 million year-over-year, including an $18 million contribution from Panaco, which did not appear in prior year results, as well as a $21 million favorable swing from energy derivatives related transactions. Now I'd like to take a moment to explain the effect of those derivatives transactions as they have been important bearing in understanding the revenue and operating income from our oil and gas business.

We hedge portions of our energy production, taking advantage of what we perceive to be a favorable price environment. You'll note that we benefited from a $6.9 million unrealized gain on energy derivatives in the second quarter of 2005, which reflects the mark-to-market gains on hedges in place for future periods. We account for these hedges in a way that requires us to take the entire unrealized gain or loss for all future hedges, as we close each quarter. As a result the $6.9 million gain impacts both our revenue and operating income at second quarter. Of course, without reflecting the effect of those unrealized gains, both our revenue and operating income for oil and gas would have been $6.9 million lower.

Not withstanding that gain, and not withstanding the inclusion of Panaco in our results, we had a terrific quarter in the oil and gas business. We experienced a 17% increase in gas prices, a 53% increase in crude oil prices, and our gas production, excluding Panaco, was up by some 32%. As a result, our operating income was up $35 million. We are very enthusiastic about the work that Bob Alexander and his management team have done and with them have developed and implemented an investment plan to further develop resources that should lead to sustained growth in production and profitability of our oil and gas business in quarters and years to come.

Now I'd like to turn my attention to the real estate segment. Our real estate activities include as mentioned earlier, the development activities and associated resort operations in New Seabury, Vero Beach and Naples Florida, and Westchester County New York, and as well as the remaining properties in our net lease portfolio. Revenues for the segment were up $5 million, principally, from the inclusion of the Grand Harbor 975 unit residential development in Vero Beach and ongoing sales in our condominium development in Naples Florida.

Our operating income, however, was down $3 million as a result of the decline in a number of net leased properties owned, the inclusion of higher expenses from Grand Harbor and the sale of some lower margin condominium units in our Naples market. Note that our operating income does not reflect the development potential or underlying value of either Grand Harbor or our New Seabury property development. Results for the quarter do not include any revenues from new home development at these locations, where we have not yet begun full-scale development activity.

In closing our segment review, I'd like to touch upon our holding company's general and administrative expense not allocable to any specific segment, which increased year-over-year by about $3 million. We monitor carefully our corporate overhead and attribute the increase to increased transactional expenses associative with the purchases of our interests in TransTexas National Energy Group, Panaco, GB holdings, Atlantic holdings - the operators at the Sands, and the recently closed acquisition of the purchase of the assets of WestPoint Stevens.

Now turning to the next slide. For ease of comparison and analysis we have presented the operating income by segment together with DD&A. As mentioned earlier, our reported total quarterly operating income was $48 million and DD&A was 36 million. DD&A for oil and gas was up about $10.7 million, principally as a result of the inclusion of Panaco, higher production volumes and our higher averaged depletion rate.

Turning now to our balance sheet. You can see that we ended the second quarter with a very strong cash position reflecting an increase of $323 million in cash and equivalents. We also have a strong current position with about 1.6 billion in current assets, offset by only 305 million in current liabilities. I should point out, that our balance sheet property, plant and equipment, and equity count are impacted by the adoption as if pooling (ph) for assets acquired from affiliates.

As a result, we inherit the cost basis of those asset acquired using their historical cost rather than purchase accounting reflecting their value at time of acquisition. Accordingly, our balance sheet values may not reflect and cannot reflect the market value of these assets when acquired.

Before turning to questions and answers, I would like to a keep to mention (ph) quickly provide a summary of recently completed purchase of the assets of WestPoint Stevens. This was an asset purchase, so we have the ability to select only among the best value enhancing assets and to leave behind the liabilities and legacy costs. We will control a new business to be named to WestPoint International, which will have no net debt, more than $200 million in cash and liquidity with significant unencumbered working capital that will provide additional access to resources.

Our cost for this acquisition will be the $206 million cost of the first and second lien debt of WestPoint Stevens previously acquired by AREP, plus up to $312 million in incremental cash invested, resulting in a total contemplated investment by AREP at this time of up to $518 million. WestPoint International will conduct a rights offering, pursuant to which its investors will have the opportunity to subscribe to its shares. If that rights offering is fully subscribed AREP's cash commitment to the transaction could be reduced by as much as $75 million.

AREP's equity participation in WestPoint International will range from 50.4% to 79%, depending upon the results of the rights offering. Now, these numbers may be subject to a minor adjustment based upon matters still under consideration but should serve to convey an overall pressure of the economics for AREP in this important transaction. That concludes my remarks. And at this time, I would now like to welcome participants on our call to direct questions to us.

Thank you. [Operator Instructions].

Our first question comes from the line of John Mulkey, Wachovia. Please proceed with your question.

Hi, guys. Just calling about the Amecas (ph) subsidiary specifically. I think you'd given some guidance for EBITDA for the full year. Looks like you've blown through that pretty comfortably just in the first half. Any chance to update us on the guidance, or do you have any sense where numbers are going from here?

Hey John, this is Keith. I don't know if we are going to provide updated guidance, but maybe we can let Rich Brown give you a little bit of his views on what he is seeing in Las Vegas and a little bit of his views from a sort of contributors to sort of the good results on what he sees going forward. Rich, you want to take a crack at John's question. I think we are having trouble with Rich's line. Operator, do you want to open up Rich Brown's line?

Hello.

Yes. Rich. We can hear you.

Okay. John, good morning. As you take a look at second quarter results for gaming, I would essentially say it was a tale of 2 cities. The Las Vegas market, obviously, continues to be extremely vibrant here. We've been able to improve our hotel ADR in the Las Vegas market extremely dramatically. We're controlling our cost extremely well and that's leading to enhanced EBITDA margins and the turnaround over at the Boulder property continues to have a lot of steam behind it so that, again, a very, very vibrant market over there. But I think we're operating extremely well.

In the case of Atlantic City, an extremely competitive market, as you know. I think what took us out of the second quarter a little bit at that property was the hold in June there. We only held 11%. Didn't get beat by any big players actually, it was against the grind, versus a hold of 18% last year. That actually was a turnaround of about 1.4 million in EBITDA just in terms of the hold versus the prior year. We -- looking forward in Atlantic City continue to work at our marketing. It's a marketplace right now, where you have to be extremely aggressive in order to get drive your share of revenue. And we continue to work on those initiatives as well as adamant cost control in the business.

Okay. One quick follow-up. Of your 11% growth in that subsidiary, was it Stratosphere? Did it exceed that growth or was that sort of average in line with the properties, all 3 of them together?

The strongest growth right now in terms of our plan and prior year is frankly coming from the 2 local properties. The Stratosphere is exceeding plan, but not as strongly as the 2 local properties.

Okay. Thank you.

Our following question comes from the line of Larry Clark, TCW. Please proceed with your question.

Yes. A couple of questions, can you give us an idea, what you think the EBITDA for WestPoint is going to be for 2005? And where you think it can go in '06 and beyond? And then the other question has to do with your expansion plans at the Stratosphere?

We are going to decline to provide any guidance at this point with respect to WestPoint's operating results. The company will be going through an important transition and we will provide guidance at the appropriate time on that. I'll defer to Keith on the second question.

Got you.

With regard to the expansion of the Stratosphere, we have begun work on reviewing -- management has begun reviewing proposals and doing preliminary work and spending some money. They are yet to have a plan approved by the Board. But we are working to be able to provide the Board with materials surrounding a redevelopment plan that could involve additional rooms as well as convention center space at the Stratosphere. We have, as you know, tremendous excess land at that end of the strip. And we're looking at the most efficient ways to monetize that, and think the economics of expansion there make a lot of sense at the point ...

Okay.

... I don't know if there's anything else you want to add, Rich.

No, that's appropriate, Keith.

Back to WestPoint, could you give us an idea what the LTM EBITDA was? And maybe how much of that well -- what was the LTM EBITDA?

The results for WestPoint are still being finalized by the Company's auditors. I am really not prepared to provide any information beyond the existing public filings of WestPoint at this time.

Fair enough.

Thank you.

[Operator Instructions].

Our following question comes from line of Rishi Parekh (ph), KPC Financial (ph). Please proceed with your question.

Hi. How are you? Got a couple of questions regarding the Amecas credit. I was wondering if you could provide a little more color on the new holding company for the casino assets and the amount of debt this holding company may assume? And I guess more importantly how this may affect the Amecas credit? And the last question just going back to what you have stated earlier, you stated that there will be an additional capital invested in The Sands. Where is that money going to come from? Is that going to come from The Sands or this new holding company i.e. your Las Vegas assets?

Let me take a crack at the question. In terms of the holding company set up between the American Real Estate holdings and ultimately the company that issued the debt for American Casino Entertainment Properties, that was a company set up in order for us to hold our gaming asset through one entity. It is in no way involved in the American Casino Entertainment property credit. It is just the entity through which we own our stock in that subsidiary. So, its activity should have no affect on the credit at ACEP.

With regard to the Sands and expansion, I don't think at this point it is inappropriate to comment on where that capital will come. Obviously, AREP has a very strong balance sheet, we continue to look at the appropriate ways to get capital to expand that asset.

Thank you.

Mr. Meister, there are no further questions at this time. I'll now turn the call back to you. Please continue with your presentation or closing remarks.

We had a few questions from the web. So I'm just going to address a couple of those questions before some closing remarks. There's a question about the units outstanding and why they're showing as 46 million as the question states, and why aren't they hired to reflect the transactions and the acquisition of NEG, Panaco, and TransTexas, which involve -- and GB Holdings, which did involve unit consideration.

If you look at the face of our 10-Q, you'll see that there is 61.856 million depository units outstanding. As you remember those transactions closed at the backend of the second quarter and the GAAP accounting requires you to use weighted average shares outstanding, and that is a time-weighted concept. So, when you look at our financials, the full effect of the issuance of those shares, are not shown in weighted average shares outstanding.

Great, with that I just wanted to make a quick closing remark. Thanking everyone for joining and participating, and we look forward to communicating with you again at the end of our third quarter. Thank you very much.

Thank you, ladies and gentlemen. And that does conclude the conference call for today. We thank you for your participation and ask you to please disconnect your line.