Icahn Enterprises LP (IEP) 2006 Q1 法說會逐字稿

Good day, and welcome to today's American Real Estate Partners' Q1 2006 earnings call and webcast. [OPERATOR INSTRUCTIONS] I would now like to turn the call over to Adrian [Tanyan.] Please go ahead.

Thank you. Good morning. I shall now read the disclosure about forward-looking statements that appears on page 1 of the 2006 first quarter investor presentation. 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 and/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, included in our most recent Annual Report on Form 10-K, including, but not limited to, 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 capable GAAP measure are available on our web site, www.areplp.com. I would now like to turn the conference call over to Keith Meister, our Principal Executive Officer.

Good morning. Thank you, Adrian, and welcome to the first quarter 2006 American Real Estate Partners earnings conference call. Joining me on today's conference call are Jon Weber, our President and CFO; Adrian [Tanyon], our Chief Accounting Officer; Andrew [Scobey], our Treasurer; and [Felicia Bubell,] our in-house counsel. I will make some brief introductory remarks, then turn is over to Jon to walk through the first quarter results in detail, after which we will be available to address your questions.

During the first quarter, operating income increased to $39.1 million, representing a $42.5 million increase over the first quarter of 2005. Net income was $49.7 million, representing a $21.1 million increase over the first quarter of 2005. Let me make a few quick remarks about our underlying businesses.

In our oil and gas business, production growth was 18% on a year-over-year basis, and our average realized prices after giving effect to our hedges increased by 9%. These factors combined to produce 59% operating income growth. We continue to believe our oil and gas businesses are very well positioned with a large inventory of low-risk, repeatable drilling opportunities that we look to exploit over time.

In our gaming business, despite disruptions associated with planned expansion activities we achieved 3% revenue growth and 4% operating income growth across our portfolio in the first quarter versus the first quarter of the prior year. We are eager to close the purchase of the Flamingo asset in Laughlin, as well as the Traymore site in Atlantic City, and we expect those acquisitions to close later this week. In our real estate businesses we continue to have results that meet our expectations. Our triple net lease portfolio continues to perform as expected and we are actively managing this portfolio looking for opportunities to enhance value.

In home building, our New Seabury project is off to a strong start. We have begun to build and sell homes and the initial results so far are promising. The newest addition to our portfolio, WestPoint International, which was recently acquired out of bankruptcy, has made progress in attracting a new management team and developing a new culture. A lot of work remains to be done in order to move our manufacturing footprint offshore and enable WestPoint to improve margins.

To that end, during the quarter we invested in a new venture in Pakistan to begin this process. We expect this will be the first of many new investments for WestPoint.

Finally, as many of you are aware we recently filed an updated registration statement for the IPO of our oil and gas business, and we look to move through that process as quickly as possible. However, at this point that is all I can say about that process. With that, let me now turn it over to Jon Weber to discuss Q1 '06 results in more detail.

Thanks, Keith. I will begin now with an overview of our results, then I'll talk about the performance of each of our operating segments, as well as other factors that affected financial performance during the first quarter of 2006.

As you said, we had a strong first quarter benefited by solid performance in our oil and gas segment, partially offset by the costs of our ongoing turnaround in the home fashion segment. Overall, revenues grew 220% year-over-year to $500 million, reflecting the inclusion of $243 million of home fashion revenues, as well as increased oil and gas revenues of $93 million.

Operating income for the quarter improved by $42.5 million from a loss of $3.4 million to a profit of $39.1 million. As we will discuss in more detail, operating income benefited from unrealized gains on oil and gas hedging, but was adversely affected by home fashion restructuring charges and holding company expense.

Our net income increased by 74% to $49.7 million, despite an $18.6 million year-over-year decline in income from discontinued operations as we wind down the sell-off of our net lease portfolio. For the first quarter 2006, net cash used in operating activities was $29.8 million, compared to net cash provided by operating activities of $27.7 million in the first quarter of 2005. The main uses of operating cash during 2006 were increases of restricted cash for investment activities and increased inventories to meet customer requirements in our home fashion segment.

Our oil and gas business continues to do well. Gross reported revenues increased by $92.6 million to $108.3 million. Operating income rose to $65 million from a loss of $21.4 million a year earlier. The jump in revenues and operating income reflect both fundamental improvements in the effective -- and the effect of unrealized hedging gains and losses. As we mentioned in prior calls, accounting rules require us to take into revenue the quarterly profit or loss from marking-to-market of the entire value of hedges covering future periods.

These hedges reflect a conservative approach to the commodities market where we lock in prices we believe to be attractive covering about 50% to 60% of our annual production, with maturities out two to three years. Also, as we discussed in our 10-Q we added to our hedges in April of this year.

Accordingly, we will profit on our hedges when energy prices go down as they did from Q4 of '05 to Q1 of '06. And we will incur expense when energy prices increase. This is a non-cash gain or loss recorded in revenues and operating income. After adjusting out the gains and losses for unrealized oil and gas hedging transactions, Q1 2006 revenues was still up 30% to $71 million, and adjusted operating income was up by 59% to $27.7 million.

These strong results were due to an increase in production volume, as well as higher year-over-year average realized prices for the commodities we produce. Q1 2006 production increased by 18% to 10.2 MMcfe year-over-year as we reinvested cash flow throughout 2005 to develop our reserves. Accordingly, we both increased production and substantially augmented our reserve base. Note that as of year end 2005, we had proven reserves of about 500 Bcfe, a 152 Bcfe increase over 2004.

Our results were also helped by 9% increase in average natural gas prices to $6.05 per Mcf, including the dampening effects of realized hedging losses. Average market natural gas prices, without taking into effect the effect of our hedges increased by 24% to $7.34 per Mcf. We also owe our continued strong performance to the expense discipline exercised by our management team at NEG. Despite significantly higher prices for drilling rigs, manpower and other resources in the oil patch, Bob Alexander and his team have done a commendable job of continuing to reign in expenses and control operating costs.

I'll now turn to the highlights for gaming segment. Our gaming business delivered modest growth as we continued to control cost and boost revenue through incremental lodging activity. Revenues were up 3% for the first quarter 2005 to $126.7 million. Operating income was up 4% to $19.4 million, helped by Atlantic City which returned to profitability, offset by a slight decline in Las Vegas operating income. Overall, casino revenues increased slightly by 0.4%, primarily due to an increase in table game handle and hold, offset by a decrease in slot revenues in Atlantic City.

First quarter hotel revenues increased by 12% to $20.3 million. The increase is primarily due to 11% higher hotel occupancy rates from increased mid-week room sales. Other operating expenses were 16% higher year-over-year due to pre-operating expenses relating to the acquisition of the Flamingo Laughlin Hotel and Casino, as well as increased labor costs elsewhere.

We continue to focus on increasing the attractiveness of our properties as we prepare to close on the acquisition of the Flamingo in Laughlin, and the Traymore site in Atlantic City in the very near future.

I'll now turn to our real estate business, where stronger development results more than offset expected declines in rental real estate activity. Combined real estate revenues were up 19%, to $21.5 million and total operating income was up 82% to $4 million. As expected, rental real estate income decreased slightly due to the continued sell-off of our net lease portfolio properties. We sold 14 net lease properties since the first quarter of 2005 and yet continued to derive $2.8 million in operating income from the remaining properties. We are exploring the sale of the remaining 51 properties on an opportunistic basis.

Our property development business generated $1.3 million in incremental operating income, mostly from sales at New Seabury, our premier 36-hole ocean front development in Cape Cod where we closed 10 units in the first quarter for a gain of more than $3 million, and have 26 additional units under contract. Improvement at New Seabury more than compensated for a recent slow down in sales at our Grand Harbor development.

Our resort operations at our developments have also improved, but continue to operate at a modest loss. Over time, we expect these operations to become profitable as we continue to sell memberships to new home buyers. In home fashion, which consists of the operations of the former WestPoint Stevens, acquired on August 8 of last year, we recorded $243.5 million in revenues for the three months ended March 31, 2006. The operating loss for home fashion was $38 million, which includes $10.4 million in depreciation and amortization, and $9.8 million of non-cash restructuring and impairment charges, predominantly related to the closing of a plant.

Though painful, the incurrence of these impairment charges is a sign that we are beginning to execute on our plan to move production offshore. Also note that minority interests of $15.1 million, below the operating line, represent principally the share of of losses relating to approximately 32% of WestPoint International owned by non-AREP investors.

As we mentioned on prior calls, WestPoint is an ongoing restructuring story where we expect to see significant operating losses throughout 2006 and 2007. Joe [Pinacchio] and his team are working hard to address the key issues affecting the business by taking steps to lower WestPoint's cost of sales and improve its long-term profitability by lessening dependence upon high cost U.S. sources of manufactured product.

Further to that strategy, WestPoint recently entered into an announced new joint venture with Indus Dyeing & Manufacturing, one of Pakistan's largest and premier yarn and gray goods manufacturers in bath products. We anticipate that this joint venture will commence operations soon. Indus is a current supplier to WestPoint and will be supplying bath products to us, further finishing of fabrication.

When fully operational, this production will replace approximately 35% to 40% of our existing domestic U.S. towel production at a highly competitive cost. WestPoint is in discussion with other potential joint venture and acquisition candidates and continues to develop third party sourcing arrangements to accelerate the reduction of its cost of goods sold. WestPoint also taking steps to lower its selling, general and administrative expense by consolidating locations, reducing head count, and controlling overhead expense in areas where it can save. We expect to see further reductions throughout 2006 and 2007.

Joe has also continued, importantly, to build his team. He recently hired a CFO with prior turnaround and international experience, a COO with a strong background in textile sourcing and manufacturing, a new head of the Ralph Lauren home business with 20 years of home fashion experience, and a senior vice president of design who is widely respected throughout the home fashion industry.

Again, I want to reiterate, that as has been the case in other challenging situations in which we have been involved we see that patience will be required to realize the full potential of our investment in WestPoint. Also, as noted, there continues to be some question about our ultimate ownership of WestPoint as former creditors have brought legal actions in an attempt to increase their ownership in WestPoint Home. We believe that we will ultimately prevail on appeal and are vigorously contesting efforts to cloud the ownership of WestPoint. Of course, we can't be certain when or how the matter will be resolved in the courts.

I would like to now turn to some investment and financing highlights. Investment income, both realized and unrealized, excluding unrealized gains and losses on securities classified as available for sale, decreased from $21.7 million in the first quarter of 2005 to $18.3 million in the first quarter of 2006. Interest income was consistent with our prior year period and interest expense decreased 32% year-over-year, increased 32% year-over-year to $30.6 million due to the issuance of 480 million of senior notes in February 2005.

As I mentioned earlier, first quarter net income reflects the decline in discontinued operations from fewer sales of net lease properties and the minority interest share of home fashion losses. In addition, our net income was reduced as a result of increased holding company costs of $8.4 million, predominantly due to the effect of a $6.2 million non-cash charge for cancellation of options earlier granted to Keith Meister. When Keith joined the board and became Principal Executive Officer the options that were to vest over a seven-year period were terminated in accordance with their terms. No options were vested and Keith will receive no consideration from, or in respect of these options.

Nonetheless, under recently enacted accounting rules governing employee stock options we are required to expense the options as if he had earned them over their original vesting schedule. Without that charge, without that non-cash charge, our holding company expenses increased only modestly year-over-year primarily due to transactional related legal and professional fees.

Now, on to our balance sheet highlights. Our net current position at the end of the first quarter of 2006 was $1.7 billion. Our cash and cash equivalents, plus short-term investments were about $1.3 billion, slightly less than our long-term debt outstanding of $1.4 billion on a consolidated basis. Our investment portfolio consists of $460 million invested in short-term, mostly fixed income, short-duration securities by an unaffiliated third party investment manager.

Our remaining investments consist of generally liquid securities that may include longs, shorts, or certain derivatives associated with existing long or short positions in our portfolio. 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. Now I would like to open the phones for any questions. Thank you for your interest and your time.

Thank you. The question-and-answer session will be conducted electronically. [OPERATOR INSTRUCTIONS] There are no questions on the phone line at this time. Would you like to take any web questions?

I don't believe there are any at this time, as well. So we thank everyone for joining and look forward to chatting again at the end of next quarter, thank you.

And thank you, that does conclude today's conference. We thank everyone for joining and have a great day.