Icahn Enterprises LP (IEP) 2005 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the American Real Estate Partners 2005 year-end conference call.

During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [OPERATOR INSTRUCTIONS]

I would now like to turn the conference over to Adrian Tanier, who will read the forward-looking statement. Please go ahead, sir.

Thank you. Good morning.

I shall now read the statement on Page 2 of our presentation concerning forward-looking statements.

This presentation includes forward-looking statements within the meaning of the Safe Harbor provided by Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 as amended by public law 10467, particularly statements regarding our future financial and operating results and our businesses.

These statements are based on our management's current expectations or beliefs and are subject to risks and uncertainties that could cause actual results to differ materially from expected or projected results. More detailed information about these risks and uncertainties may be found in our filings with the Securities and Exchange Commission, including in our most recent Annual Report on Form 10-K, including but not limited to, in the section of these reports entitled "Risk Factors".

We are under no obligation to and expressly disclaim any obligation to update or alter our forward-looking statements, whether as a result of new information, future events or otherwise. Please note that quantitative reconciliations between each non-GAAP financial measure contained in this presentation and its most directly comparable GAAP measure are available our Web site which is www. areplp.com.

I shall now turn the conference call over to Keith Meister, our Principal Executive Officer.

Thank you, Adrian. Good morning and welcome to the 2005 American Real Estate Partners year-end earnings conference call.

My name is Keith Meister, I am Vice Chairman of the Board of the general partner and the Principal Executive Officer of American Real Estate Partners. Joining me today on the call is Jon Weber, President and CFO and Adrian Tanier, our Chief Accounting Officer.

I'm going to do a quick overview of some of 2005's key achievements and then turn it over to Jon to walk through the results in more detail. And then we'll be available for Q&A at the end.

The first slide begins with our 2005 key priorities. Our top priority for the year was to enhance value and grow our core operations of Real Estate, Gaming and Oil & Gas.

In each of these three business lines, I think we've made strong achievements in growing our businesses and enhancing the value of each underlying business. In our Oil & Gas business, we completed acquisitions and provided substantial capital for continued organic growth.

In our Gaming business, the Stratosphere and the two Arizona Charlie's each had record years. We entered into an agreement for acquisitions in Laughlin, Nevada and the Traymore site in Atlantic City, New Jersey and we're poised for organic growth in our Gaming segment as well.

In our Real Estate business, we continue to mine our triple net lease portfolio for value and have obtained development approvals for New Seabury. Development there has begun and so far we are off to a good start in selling and buildings homes. And at Grand Harbor, we're proceeding with development activities, as well.

In addition to growing the value of our core operations, the other commitment we had in 2005 was to enhance our corporate reporting, finance, investment and audit capabilities. I think we've made great strides toward during this during 2005 and we look to continue to do so in 2006.

In 2005 net cash from operating activities increased by 155% to 247 million. Assets of American Real Estate Partners were up from 2.9 billion to approximately 4 billion at year-end. Revenues were up from 670 million to 1.3 billion.

Our market capitalization at the end of 2005 was up 81% over the prior year, reflecting the strong operating performance of our underlying businesses.

Let me provide a brief overview of some of the key activities in our core segments.

Our Oil & Gas business ended the year with approximately 500 bcf of proved reserves and a pretax PV 10 value of approximately 1.8 billion. During the year, production grew approximately 40%, reserves grew by over 50% and our pretax PV 10 valuation increased by over 130%.

While many E&P companies were buoyed by strong commodity prices as were we, we also benefited from strong operational excellence. And I would like to commend Bob Alexander and his team.

During the year, we acquired interests in NEG Holding, TransTexas and Panaco for entities affiliated with Carl Icahn. We also acquired properties in the Minden field in East Texas and we acquired an additional interest in Longfellow Ranch, a property in which we already had an interest.

During the year, we invested capital, both through the drill bit and through acquisitions. In 2005, drilling results meaningfully created positive returns for us and we intend to increase the pace of this activity in 2006.

In addition, we completed a bank debt financing and credit facility at NEG Oil & Gas, which provides 335 million of availability as of December 2005 of which 300 million was drawn. We entered into a merger agreement with National Energy Group to acquire the 49% of National Energy Group that was not previously held by AREP.

This transaction will close in conjunction with the planned IPO of NEG Inc. We filed a registration statement for that IPO on February 14th.

Moving on to our Gaming operations.

During the year, we entered into an agreement to acquire the Flamingo Laughlin Hotel and Casino in Laughlin, Nevada and the Traymore site in Atlantic City from Harrah's for approximately $170 million. We also acquired an additional interest in the Sands Hotel and Casino in Atlantic City.

The operating results for our three Las Vegas properties continue to meet and exceed our expectations. The Atlantic City property, as John will discuss, continues to face a challenging environment.

However, with the acquisition of the Traymore land, we believe we are sitting in a good position controlling a total of 14 acres of land on the Atlantic City boardwalk that has the potential for further development and growth in the future. The early results from our pre-closing integration work at Laughlin have only increased our confidence that this will be a successful acquisition for AREP.

Rich Brown and his team are excited about the prospects for this asset and eager to close the transaction, which is anticipated during the second quarter.

Additionally, we continue to invest capital in the Stratosphere and the two Arizona Charlie's and see substantial opportunity to further that effort in the future as we continue to review development plans for expansion. That may involve a convention center and potentially additional rooms at the Stratosphere.

Rich and his team have done a phenomenal job operating those assets and we look forward to providing them capital to continue to grow. In addition, we will continue to look selectively for acquisition opportunities within the gaming space.

Let me spend a minute on our Home Fashion business. During the year, we acquired out of bankruptcy a controlling interest in WestPoint Stevens for approximately $428 million. WestPoint becomes our fourth key operating platform.

As many of you know, the business of manufacturing textiles in the United States is no longer cost competitive with manufacturing in low-cost countries. WestPoint has great brands and a strong position in the textile business, but in order to succeed, needs to move its manufacturing base to low-cost countries.

We're currently beginning the process of undergoing our offshore transformation and the success of WestPoint will be driven by our relationships with our customers and our ability to manage this transformation and manufacture goods for them in low-cost countries. We'll talk about this in much more detail later in the presentation.

During 2005, AREP completed a corporate bond issuance of 480 million of 7 1/8% Senior Notes. Additionally, AREP's board adopted a $0.10 per unit quarterly distribution which was paid in the third and fourth quarters of 2005 and approved by the board with respect to the first quarter of 2006.

Management's recommendation shows our belief and commitment in the underlying health and prosperity of the cash flows generated from our core businesses and the continued strength of our balance sheet.

During the year, we also made management changes to help effectively allow AREP to continue to grow. I have joined the board of directors and assume the title of Vice Chairman and will continue to be the Principal Executive Officer.

Jon Weber joined us in 2005 as President and CFO and Jon has been a valuable resource in managing the day-to-day efforts of our finance and reporting functions and portfolio company management. After acquiring WestPoint, we hired Joe Panacchio as its new Chief Executive Officer.

Buying assets out of bankruptcy can provide great challenges for managements as they attempt to rebuild winning cultures and appropriate cost structures. AREP has experience with this.

Rich Brown and Bob Alexander faced these same challenges and succeeded within the Gaming and Oil & Gas businesses. We think Joe and his team understand the challenges they face and have the energy to succeed in this task. We will provide them the support and effort they need to help ensure that this occurs.

During the year, we also made a significant investment to augment our corporate team. We hired a Chief Accounting Officer, a head of internal audit and a Treasurer.

Working with Jon Weber, this group has done a commendable job and will continue to strive to make our diverse and growing set of assets more readily understandable for the public markets so they can be appropriately valued.

With that, let me turn it over to Jon, who will discuss in more detail our 2005 results and then we will all be available at the end for our Q&A. Thank you. Jon?

Thanks, Keith, and good morning.

As Keith mentioned, AREP is a very different company today than it was just a year ago. We sought to adapt our presentation here and in our filings to changes in our underlying business. So, before reviewing our 2005 results, I'll point out how changes in our business have changed the way we now present our financials.

Beginning in 2005, we consolidated the results of our entire Oil & Gas, Gaming and Home Fashion businesses, some of which we previously carried as investments. For NEG, Panaco, TransTexas and the Sands, we applied as if pooling rules to restate our results as if we owned those businesses throughout 2005 and in earlier years.

We also redefined operating income to exclude interest and investment income. Operating revenues, expenses and income now include only results of businesses we operate, less holding company expense. As a result, interest and investment income shown in 2004 as operating income, now appear below the operating line.

We also eliminated Investments and Securities as a segment and added Home Fashion to reflect the acquisition of the business of WestPoint Stevens. In addition, we changed our segment presentation to facilitate the valuation and analysis of each of our segments by showing substantially all the non-holding company G&A and depreciation in their respective segments.

Lastly, we also included a new measure for our Oil & Gas results, adjusted operating income, to exclude unrealized gains and losses on hedges. Participants in last quarter's call may recall that unrealized hedging losses arised because accounting rules require us to take a non-cash charge for the entire mark-to market value of hedges for future production as if the hedges were closed out each quarter.

Accordingly, the more the value of our Oil and Gas reserves increase, the greater the unrealized loss in our hedges and the lower our income. As a result, many find the accounting treatment of our hedges to be confusing and so in the investor presentation available our Web site, we show adjusted operating income by backing out the unrealized gain or loss on hedges.

Similarly, adjusted EBITDA eliminates the effect of unrealized gains and losses on Oil & Gas hedging transactions. On balance, we believe that you'll find these changes make our performance easier to understand and facilitate comparison of our segments with our industry peers.

Turning now to the results themselves. 2005 was a year of growth, value enhancement and strong cash flow generation for our core operations.

Though non-operating and non-cash items depressed our reported income, the combined performance in our Oil & Gas, Gaming and Real Estate segments exceeded both our expectations for these segments and their 2004 results. Revenues grew 88% year-over-year to 1.2 billion, mainly because of the inclusion of 472 million of Home Fashion revenues.

Operating income declined by some 15 million, despite strong operating performance in our Oil & Gas, Gaming and Real Estate segments. Operating income was adversely affected by unrealized losses on Oil & Gas hedging, losses from our recently acquired Home Fashion business and increased holding company expense.

Our net income declined by $180 million to a loss of 27 million in 2005, due principally to the effect of non-segment, non-cash items that I'll review in a moment.

Year-over-year, AREP's strong performance is demonstrated by the growth in its cash flow from operations, from 97 million in 2004 to $247 million in 2005. Though we had a $50 million loss from continuing operations, AREP generated 247 million in net cash from operations.

The difference results from depreciation, depletion and amortization, unrealized losses on hedging, non-cash charges associated with the impairment of our investment in GBH, and the P&L effect of unrealized losses on certain publicly traded securities.

As we discussed last quarter, the GBH impairment comes from accounting for the bankruptcy of the entity through which we owned a minority interest in the Sands. The loss represents both the write-off of our equity in GBH and the potential loss of up to a 32% equity stake in the Sands owned through GBH, neither of which impact the operations of the Sands itself.

As you can see, non-segment-related items explain why cash flow from operations rose as net income fell. Some of the major factors were: Interest income, interest expenses increased significantly year-over-year by 42 million from the 480 million of senior notes that Keith Meister eluded to earlier that we issued in February of 2005.

The GBH impairment added 37 million to our year-over-year losses. Other income decreased by 27 million, principally driven by investment losses and holding company costs grew by 13 million, mainly because of the high level of acquisition and financing activity in 2005.

For example, we spent more than $8 million in legal fees, most of which was prompted by transactional activity and related litigation. In addition, as we upgraded our compliance, auditing and reporting infrastructure, we increased holding company head count and incurred additional fees for professional services in compliance with Sarbanes-Oxley mandated requirements.

Combined with an increase of 60 million in unrealized hedging losses, these items together account for a $199 million decline net income year-over-year.

Before turning to the individual segments, I'll take a moment to compare how we did in 2005 compared with the outlook that we provided at the beginning of last year. On the whole, we did better than anticipated in our continuing segments.

Adjusted operating income plus depreciation in our Oil & Gas business exceeded our estimate by $20 million. Gaming operating income plus depreciation exceeded our expectations by $7 million.

And operating income in our Real Estate business, though up by 9.5 million over 2004, fell short of our expectations by 14 million, mainly because of slower-than-expected construction at one of our development properties.

As you can see, 2005 was a terrific year for our Oil & Gas segment. Our gross Oil & Gas revenues almost doubled to $312 million.

Even after deducting the effect of unrealized losses on hedging transactions, our revenues rose 44% to $200 million and operating income grew by 13% to 37.5 million. Significantly, our adjusted operating income for Oil & Gas, after backing out unrealized hedging losses, grew to 170 million in 2004, while depreciation increased by $20 million.

The reasons for improved Oil & Gas results are clear from the next slide. We grew production 40% from 28 Bcfe in 2004 to 39 Bcfe in 2005 and had a run rate of production of 113 MMcfe a day for December 2005 when we produced at an annualized rate of 41 Bcfe.

As Keith mentioned, we owe this improvement to having to continue to prudently reinvest our profits in our own development opportunities and in adjacent areas where Bob Alexander and his management team have unparalleled knowledge.

Our operating results in Oil & Gas were also boosted by an increase in prices as the average sales price for the natural gas and oil we sell grew 37% in 2005. After giving effect to the hedges we have in place, our realized prices still grew by 18%.

Importantly, the future for our Oil & Gas business continues to look bright. Net proved reserves increased from 348 Bcfe to 500 Bcfe.

As a result, our PV 10 value, which discounts future production based on known reserves and prices at the end of 2005, increased from 851 million at the end of 2004 to 1.8 at the end of 2005. An impressive year-over-year gain. All in all, we had a terrific year in Oil & Gas.

I'll now turn to our Gaming segment where our three Nevada casinos continue to deliver solid performance, increasing net revenues by 9% and operating income by 37%. That improvement was somewhat offset by a decline in both revenues and operating income in Atlantic City, where we're taking steps to return the Sands to profitability in 2006.

Rich Brown and his team have continued to excel at delivering more for less by controlling overhead, promotional and marketing expenses at all of our properties. Overall, our Gaming properties have continued to deliver consistent growth in cash flow as Gaming operating income grew 17% year-over-year.

We are pleased with these overall results in our Gaming business in 2005 and will work with management to address the challenges in Atlantic City.

Our improved Gaming results stem from both a disciplined management of expenses, coupled with increased Gaming revenue at our Las Vegas properties and an improved average daily room rate in both Las Vegas and Atlantic City. Occupancy in had Las Vegas and at the Sands continue to be strong at 98.8% and 85.8% respectively.

We credit improved market conditions and management having done a good job at attracting better customers to visit, stay and play at our properties. During 2006, we'll continue to focus on enhancing the attractiveness of our properties as we prepare to close on the acquisition of the Flamingo in Laughlin and the Traymore site on the boardwalk adjacent to our property to the Sands in Atlantic City.

I'll now turn to Real Estate where results fell short of expectations despite a 44% year-over-year increase in operating income. The results of our rental real estate business improved despite the continued selldown of our net lease portfolio.

We sold net lease properties for $52.5 million during 2005, yet continued to derive $12 million in operating income from the remaining properties. Our property development experienced the greatest growth, though it was the primary reason that Real Estate results overall fell short of expectations.

We experienced a 158% year-over-year increase in operating income from our development as we continued to sell out units at our Falling Waters residential development in Naples, Florida. However, we failed to complete and sell units during 2005 at the pace we had expected at Grand Harbor in Vero Beach, as we explored the possible sale or financing of that property.

On a more positive note, development at New Seabury in Cape Cod is proceeding ahead of schedule and we expect that New Seabury will be the primary contributor to improved operating results for our development activities in 2006. Our resort operations consisting of golf operations that support residential development at Grand Harbor and New Seabury continued to operate at a loss.

We sold, in 2005, 14 rental real estate properties for a gain of $16.3 million. We're exploring the sale of certain of the remaining 55 properties on an opportunistic basis.

Our property development income of 11.1 million resulted from the sale of 104 units, development units, at a profit margin of 19.1%. The increase in the revenues and decline in operating income in our resort segment reflect the full-year of operations in 2005 compared with the partial year results after its mid year acquisition of Grand Harbor in 2004.

In Home Fashion, which consists of the operations of the former WestPoint Stevens acquired on August 8, 2005, we reported 472 million in revenues for the five months ended December 31 and an operating loss of 22 million, of which depreciation and amortization comprised 19 million.

As I mentioned on our last call, our newest addition, WestPoint Home, is an ongoing restructuring story where we expect to see potentially increased operating losses for some time. Joe Panacchio and his team are addressing the key issues affecting the business by taking steps to lower its cost of goods sold and improve its long-term profitability by lessening WestPoint's dependence upon high-cost U.S. sources of manufactured products, however, this will take time.

During 2006 and 2007, WestPoint will move to establish offshore sourcing arrangements that will likely include a combination of owned and operated facilities, joint ventures and long-term supply contracts. WestPoint is also taking steps to lower its general and administrative expense by consolidating locations, reducing head count, controlling overhead expense in areas where it can save money.

As has been the case in other challenging situations in which we've been involved, we believe patience will be required to realize the full potential of our investment in WestPoint.

There also continues to be some question about our ultimate ownership of WestPoint, as former creditors of WestPoint Stevens have brought legal actions in its attempt to increase their ownership in the new WestPoint home. We're vigorously contesting those efforts, but cannot be certain of the ultimate outcome or whether we'll continue to own a majority of the business.

Turning now to the balance sheet, you can see that we ended the year with an enviable balance sheet.

Our net current position at the end of 2005 was 1.6 billion, up from 900 million just a year earlier. Our cash and cash equivalents plus short-term investments, were about 1.4 billion at year-end 2005, roughly equal to the amount of our long-term debt outstanding.

We expect to continue to manage the balance sheet to provide ample short-term liquidity to enable us to execute on potential opportunities consistent with our strategy.

Our 2006 strategy will be to continue to invest capital in our existing businesses to provide growth as we focus on achieving operating objectives at each of our principal subs. Those operating objectives consist of effectuating the merger with National Energy Group and the concurrent IPO by NEG, completing and integrating our casino acquisitions at Laughlin and Traymore, continuing the offshore manufacturing activities and focusing on cost reduction in our Home Fashion segment, and accelerating the sale of residential units and potential monetization of our investments in New Seabury and Grand Harbor.

I'd like to now open the floor for questions and answers and thank you for your patience as we review this extensive amount of material.

Operator, with that we'll turn it over to you for the Q&A.

[OPERATOR INSTRUCTIONS] One moment for the first question. Ladies and gentlemen, as a reminder, to register a question or a comment, please press the one followed by the four. Our first question comes from the line of Andrew Baird, Post Advisory Group. Please go ahead, sir.

Hi, guys, a couple of questions.

With respect to the WestPoint issue, do you guys have any sense for when we may finally see a resolution to the ownership issue, let's put aside the operating issues for the moment?

I would expect that although there will be decisions, there's a hearing taking place today. We don't expect an eminent decision and suspect that the ultimate resolution will take a long time. Months.

Okay. Would you hope to try and get this resolved, though, before we start -- at least before the end of this year, though, right?

We would hope to but obviously there can't be any assurances that we do. What we can say in the interim we are operating the business under the assumption that we do have control.

We control the board. We've put in a new CEO and we're managing the business according to our plan to maximize value. So while this is spending a lot of legal and corporate efforts, it's hopefully not providing much of a distraction to Joe and their teams down at WestPoint.

Okay.

And then, but based on those comments it sounds like it's certainly not having any impact your ability to operate the Company, which is good to see.

That's correct.

There was a note in the "K" about short positions and equities, one of which you had a loss of about 37 million in realized and another unrealized. I thought there was another piece, it was a fairly, I think it was 24 million in unrealized losses in the second piece? At what point do you guys decide that, you know what, it's a loss, it's not going to achieve what we thought our thesis was and you walk away from that?

That's a good question. Obviously part of why you see both the realized and unrealized loss was a portion of that short was covered really for risk of mitigation purposes. I think we continue to believe in the thesis behind that trade or transaction and we review it with the board with Mr. Icahn on a regular basis and when we lose faith in the risk return associated with that position, that's when we'll exit.

And last question, I'll let others jump on if they're there.

Can you give us any better sense of timing as to when you think you're going to make a decision on Stratosphere and/or AC in terms of moving ahead with expansion?

Sure. I think that Stratosphere is on a bit more accelerated timetable than Atlantic City. We've retained third-party architectural firms and price estimators to begin the work. We're currently assessing various potential plans that include both convention center and additional room expansion, as I'm sure you're aware.

There has been substantial construction cost increases in Las Vegas over the last few years, so we are eager to do the project. We just want to make sure the costs meet our return estimates and I think we'll have more news to share with you on that by the end of the second quarter.

On Atlantic City, we have not yet closed the acquisition of the Traymore site. We expect that to close in the second quarter.

We're beginning the process of planning for how to integrate that with the existing Sands property. But my guess is that will be a back half of the year exercise.

Okay. Thank you.

Gentlemen, there are no further questions at this time. I'll turn the conference back over to you.

Great. Well, thank everyone for their time today and we look forward to chatting with you in May when we provide our first quarter update. With that, thank you.

Thanks very much.

Ladies and gentlemen, this does conclude the conference call for today. We thank you for your participation and ask that you please disconnect all lines.