Icahn Enterprises LP (IEP) 2006 Q2 法說會逐字稿

Good day and welcome to today's American Real Estate Partners second-quarter 2006 earnings call and webcast. Now at this time, I'd like to turn the conference over to Ms. Felicia Buebel, Senior Vice President and Counsel. Ma'am, please go ahead.

Thank you. 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 104-67, 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, included in our most recent annual report on Form 10-K and our quarterly reports on Form 10-Q, 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 comparable GAAP measure are available on our website by viewing Appendix A to this presentation at www.areplp.com./investors.html. Now I'd like to turn the presentation over to Keith Meister, our Principal Executive Officer.

Thank you, Felicia. Good morning and welcome to the second-quarter 2006 American Real Estate Partners earnings conference call. Joining me today are Jon Weber, our President, and Hillel Moerman, our new Chief Financial Officer. I will discuss some quick highlights and then turn it over to Hillel to review the second-quarter results in detail, after which John, Hillel and I will be available to address your questions.

In the second quarter, revenue increased by $286.2 million to $507.6 million. Net earnings were up $62.8 million to $71.1 million. In addition to continued solid performance from our Oil and Gas, Gaming, and Real Estate businesses, the primary driver to growth in earnings were investment gains. Investment gains increased by $65.7 million to $44.4 million for the quarter, and more than offset losses at WestPoint.

Let me spend a minute talking about our recent activity. As you are all aware, we recently closed on the purchase of The Flamingo in Laughlin, Nevada, and the Traymore site in Atlantic City. Results so far show that integration is proceeding according to plan at The Flamingo. and our team led by Rich Brown is very excited about our ability to reposition this asset. It has many characteristics similar to those at the stratosphere and the two Arizona Charlie's at the time of our acquisitions of those assets.

We're very excited about the growth potential for The Flamingo in Laughlin, which we believe can be achieved through attention to detail and operational excellence, which will include providing customers with quality services at reasonable values, appropriate cost-cutting, capital investment, much of which has been deferred over the last several years at appropriate additional marketing activities.

Additionally, during the quarter we began the process of putting in place a revolving line of credit for up to $200 million at the corporate level. We believe it is an appropriate part of AREP's evolution with a $4 billion balance sheet to now have in place a revolving line of credit that provides access to efficiently-priced capital to be used when and if appropriate. Although we have no plans on using this facility today, we believe that having such a facility in place is appropriate for a company such as ours.

During the quarter we also continued to make progress on the IPO of NEG, Inc. We filed various S1s and S4s with the SEC, and continue to believe that we are making progress towards an IPO. Hillel will speak about the operations at our Oil & Gas businesses which had another strong quarter.

A few brief comments on some recent organizational changes. As I alluded to earlier, Hillel Moerman has been promoted to Chief Financial Officer. Previously, Hillel has served in a variety of capacities at AREP over the last year and a half, including Head of Strategic Planning. Hillel has a strong accounting background, having previously worked at each of Ernst & Young and Grant Thornton. With Hillel assuming the Chief Financial Officer role, Jon Weber can now focus his duties exclusively on portfolio company operations. We believe having each of John and Hillel focused on their specific areas of expertise will add value throughout the AREP portfolio of companies.

Before I turn it over to Hillel to discuss in more detail the actual second-quarter results, let me spend a moment talking about the overall health of AREP. Our individual businesses continue to perform as expected. Oil and gas, gaming, and residential real estate each showed healthy returns for the quarter. WestPoint, the newest addition to our portfolio, is undergoing as anticipated a major restructuring that is intended to dramatically reduce the cost structure by moving its manufacturing capabilities from an onshore base to an offshore base, and Hillel will speak to some of the achievements to date, achievements that put us on a path to ultimately achieve our targets.

Additionally and perhaps most importantly at WestPoint, as previously discussed we hired Joe Pennacchio as Chief Executive Officer in October of 2005. During the last six months, Joe has built a new management team and a new culture at WestPoint. In May, Chris Baker joined us as Chief Operating Officer. Chris has significant expertise in the textile industry, having previously held senior executive positions at Springs and Pillowtex. His contributions are already being felt.

In addition, Joe has also hired as previously reported a new Chief Financial Officer, a new General Counsel and a new VP of Sales and Marketing, as well as various other additions.

As we have said in the past, acquiring assets out of bankruptcy and turning around the operations takes patience and attention to detail. We have a plan to turn WestPoint around. To date we have expressed operating losses. However, over time we expect these losses to reverse as we execute on our restructuring plan. On a positive note, WestPoint sales have stabilized and continue to meet our plan, and cost reduction measures are well underway. Hillel will speak about this in much more detail.

Our balance sheet continues to remain strong and we continue to focus on improving the overall value of our operations and look for opportunities to redeploy capital into our existing businesses as a top priority, as well as new opportunities if and when they arise.

With that, let me turn it over to Hillel who will discuss the actual second-quarter results in detail.

Thank you, Keith, and good morning. I will begin with an overview of our results and then discuss the performance of each of our operating segments, as well as other key factors that affected our financial performance during the second quarter of 2006. We had a strong second quarter benefited by year-over-year improvements in our Oil and Gas and Real Estate segments, partially offset by the cost of the ongoing turnaround in our Home Fashion business and flat performance from our Gaming segment.

Overall revenue increased $286 million or 129% year-over-year, and overall operating income decreased $23.6 million or 49% year-over-year, primarily due to the acquisition of WestPoint Stevens and their ongoing restructuring efforts which will be discussed in further detail later in the presentation. Revenues on a same-store basis, which excludes our acquisition of WestPoint and Flamingo Laughlin, grew $37.7 million to $259.2 million or 17% year-over-year, while operating income grew $25.7 million to $73.8 million or 53% year-over-year.

Income from continuing operations on a same-store basis increased $113.4 million to $118.7 million, primarily due to unrealized gains on securities sold short of $44.2 million as compared to a loss in the prior year. We will now discuss each segment in more detail. Our Oil and Gas business continued to do well. Overall gross revenue increased $13.2 million to $86.6 million, and operating income increased $14.1 million to $46.5 million. Excluding the effect of unrealized and realized hedging gains and losses, revenues increased a modest $1.5 million or 2% and operating income increased $2.4 million or 8%. The increase is primarily attributable to higher average oil prices offset by a decrease in product volumes, as well as higher operating expenses offset by lower G&A costs.

Q2 2006 production decreased slightly by 1% to 9.7 Bcfe year-over-year, primarily due to repairs and maintenance on a third-party-owned pipeline which shut down our production facility in South Texas for approximately one month during the quarter. Based on historical performance, we estimate that if not for the one-month shutdown, production would have been 10.2 Bcfe, a 4% increase from prior year. The repairs were completed in July with only a day and half of downtime during the third quarter. As a result, we expect no significant impact to Q3 production volumes. We continued to reinvest additional cash flow throughout 2006 to develop and further realize our reserve potential.

I will now turn to the highlights for our Gaming segment. Overall revenue increased 10% from the second quarter of 2005 to $134.8 million, primarily due to our acquisition of The flamingo Laughlin in May. On a same-store basis, our overall Gaming business delivered flat to slightly lower results as decreases in Las Vegas were partially offset by better results in Atlantic City.

Las Vegas revenue increased slightly to $81.8 million, while operating income fell 12% to $15.7 million, primarily due to anticipated disruptions resulting from renovations to expand the casino floor at Arizona Charlie's in Boulder, which was completed in July, and also due to increased labor and marketing expenses.

Atlantic City revenue also increased slightly to $41.7 million and returned to profitability. This turnaround in Atlantic City was primarily due to lower marketing costs as management redirected marketing spend to more profitable players. Though our actual revenue were up $12.2 million to $134.8 million, on a same-store basis overall casino revenue was flat as increased slot and table hold percentages were offset by lower slot coin-in and table hold. Hotel revenue grew $1.2 million from increased occupancy, but was offset by lower food and beverage revenue.

We are excited about the recent acquisition of our Flamingo Laughlin property and began our extensive capital improvements, including upgrading slot machines and remodeling the casino floor, rooms and other common areas. We expect to see the results of these improvements primarily beginning in early 2007.

I will now turn to our Real Estate business where strong development results drove a 93% increase in revenue to $49.1 million and a 273% increase in operating income to $14.9 million as compared to the same period in 2005. Rental real estate income increased slightly due to the leasing of previously vacant space. We sold four rental properties during this quarter for proceeds of $7.4 million, and we are exploring the sale of certain of the remaining 47 properties on an opportunistic basis.

Our property development business generated $10.7 million in incremental operating income, mostly from sales at New Seabury, the premier three 36-hole oceanfront development in Cape Cod, where we closed the sale of 20 units in Q2 for a gain of more than $8.1 million, and we have currently 12 additional units under contract. Improvements at New Seabury more than compensated for the recent slowdown in sales at our Grand Harbor development and the continued sell-down of our Falling Waters development which is expected to be fully closed in Q1 2007.

Despite strong second-quarter results, continued weakness in the macroeconomic environment for residential and vacation real estate will produce strong headwind for us in New Seabury in Vero Beach for the remainder of this year and potentially into 2007.

Our resort operations at our developments continue to be cash flow positive, and over time we expect these operations to increase their cash flow as we continue to sell memberships to new home buyers.

In Home Fashion, which consists of the operations of the former WestPoint Stevens acquired in 2005, we recorded $237.1 million in revenue in the second quarter. The operating loss for Home Fashion was $48.3 million which includes $9.5 million in depreciation and amortization and $18.8 million of non-cash, restructuring and impairment charges predominantly related to the closing of certain manufacturing facilities. The occurrence of these charges is evidence that the Home Fashion management team is taking the steps to achieve its overall strategic plan to replace higher costs U.S.-based operations with lower-cost production offshore.

Also note that the minority interest of 25.8 million represent principally the share of the losses relating to the approximately 32% of WestPoint International owned by non-AREP investors. As we have mentioned on prior calls, WestPoint is undergoing a transformation from a U.S. mill centric supplier with relatively high costs to becoming a low-cost global supplier with designs and brands that command attention of its home textile retailers and consumers. The transition and associated operating losses are expected to continue throughout 2006 and 2007.

WestPoint's management is working hard to execute on the plan. Last quarter we reported that WestPoint had completed a new joint venture with Indus Dyeing and Manufacturing, one of Pakistan's largest and premier yarn and gray goods manufacturers and bath products. Startup of our joint venture production in Pakistan is on track and a vertically integrated and expanded facility is expected to be in full operation by the first half of 2007. At full capacity, this production will replace roughly 35% to 40% of our existing domestic U.S. towel production at what we expect to be at highly competitive costs.

WestPoint also announced just last week that it had entered into a letter of intent to acquire the home textile assets of Manama Textile Mills located in Bahrain. Manama, which is already a supplier to WestPoint, operates world-class, vertically integrated bedding manufacturing facilities in a country that has just entered into a free trade agreement with the United States. The free trade agreement effective as of August 1, 2006, eliminates most import duties on textile products produced in Bahrain.

WestPoint is also taking steps to lower its selling, general and administrative expenses by restructuring its distribution operations, consolidating administrative locations, moving its headquarters into a more efficient space in New York City, and by further targeting reductions in lower value-added positions. We expect to see further reductions in SG&A throughout 2006 and 2007.

Also during the August 2006 Home Textile Market Week, WestPoint launched product lines for two licenses, the Betsey Johnson Home Collection and the Scooby Doo bed and bath ensembles. As we have said on prior calls, similar to other challenging situations in which we have been involved, patience will be required to realize the full potential of our investment in WestPoint.

I would like to turn to some investment and financing highlights. Investment income, both realized and unrealized, increased from a loss of $21.3 million in 2005 to $44.4 million of income in 2006, as unrealized gains on short positions more than offset an increase in realized losses on short positions. Interest income was consistent with the prior period while interest expense increased 9.7% year-over-year to $31.6 million, primarily due to margin interest expense incurred in the holding company's brokerage accounts and additional borrowings at our Oil and Gas and Gaming segment.

Now on to our balance sheet. Our net current position at the end of the second-quarter 2006 was $1.6 billion. Our cash and cash equivalents plus short-term investments were about $1.4 billion, slightly less than our long-term debt outstanding of $1.5 billion on a consolidated basis. Our investment portfolio consists of $462 million invested in short-term mostly fixed-income short-duration securities by an unaffiliated third-party investment manager. Our remaining investments consist of exposure to long and short securities and equivalents of specific issuers with liquid markets. 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 up the phones for any questions, and thank you for your interest and your time.

(OPERATOR INSTRUCTIONS) [Howard Bloom], UBS Financial.

Good morning, good quarter. I had a question about National Energy. It has been a while since you went into registration, and the price of energy stocks have generally done pretty well and, of course, the price of oil has also gone up. Has your views on the value of that company changed in your discussions with your underwriters?

Unfortunately, as a result of the process we are in and restrictions that puts on us, it would be inappropriate for us to discuss our perspectives on NEG further than what we talked about on the conference call. I think it was, as Hillel alluded to, another good quarter and that's what we hope to keep achieving until we complete an IPO.

And when is that hoped for? What is your timetable on that?

Once again, I can't give you specifics, but we filed several documents with the SEC and think we're making great progress towards that end.

Larry Clark, TCW.

A couple questions. Can you give us an idea of the negative EBITDA from WestPoint year-to-date, X'ing out any kind of onetime restructuring, etc?

I'm going to let Jon Weber address that, Larry.

We have broken out for you in the Q in our segment reporting, both operating income and depreciation on a segment basis. Of course, WestPoint represents the entire Home Fashion segment, and then we sort of separately broke out for you the restructuring and impairment expense. So you can kind of back into, you know, a proxy for the actual cash losses associated with the business from that.

Also, direct your attention to the minority interest which represents the one-third of the equity ownership in WestPoint that is owned by other than AREP, in arriving to what our actual economics and position are.

One other point I think that should be made is WestPoint recently put in place a $250 million ABL facility with Bank of America. That facility should provide the working capital required to fund the current operating losses, as well as the restructuring plan as currently anticipated. Obviously, that could change if we look to do further acquisitions, but we think that facility positions us well to fund the business.

And what is your sense on seasonality? If I remember right, is not the fourth quarter a pretty large quarter for these guys?

I am going to have to get back you on that with a more detailed answer.

Okay. And then New Seabury, you are experiencing a slowdown up there? I didn't realize that the slowdown in real estate had kind of hit the high end in the Northeast.

I think what we've been hearing in the marketplace generally is that for second-home sales across the board, the market is kind of backed up. It remains a premier property without peer, so we're confident about the longer-term prospects. But I think throughout the region, and it has been amply recorded, there has been somewhat of a slowdown in secondary home sales.

So there still are sales going on, but I would say that the leading indicator which is foot traffic in to look at the property has clearly slowed.

Good. And then finally in Las Vegas, if you had not done your renovation project, is your sense that your results would have been the same or a little bit better than last year?

Clearly, we think the results would have been better and at least consistent with last year, but we haven't broken out -- and it's a little difficult to quantify the specific loss associated. And what Larry is referring to is the casino expansion and remodeling at the Arizona Charlie's Boulder property. So clearly, that did cause quite a disruption. I think the team did a very good job of managing through it, and now that is behind us.

Good. And any plans on the Stratosphere expansion?

Something we continue to discuss with the Board and review, but nothing yet to announce.

Andrew Berg, Post Advisory Group.

Can we talk a little bit about Atlantic City? There is some new stories, rumors have popped up recently about a potential sale of that property, of The Sands. Clearly packaging that together with Traymore might be an attractive asset for somebody else to purchase. Can you comment on where you may be in doing something with that property?

As you know, The Sands is an existing operating business today, and as such we don't think it is appropriate to comment on rumors. If and when anything were to be executed, it would be then that we would comment.

Can you just tell me what the LTM EBITDA is at The Sands property?

We will have to get back to you on that. We don't have that information right here.

We segregate for you our East and West operations. We do not break depreciation out -- East and West. So if you want to see operating income, it is broken out in the Q.

Yes. I just didn't see the D&A associated with (indiscernible), so I was curious if I could get to that level, but if it's just my estimate, I will have to use that. And then just following up on the revolver, I guess I always applaud people trying to make sure they are liquid. You guys are very liquid, which is one of the attractions of the Company. So I guess I'm just a little puzzled with the need for a revolver here.

I don't think there's a need for a revolver. I think there is a value to it that we want to try and be able to capitalize on. I will give you some examples. So we intend to raise up to $200 million for that revolver. While we have no presence or to cash uses for that revolver, that facility will allow us to do such things as provide LCs without having to cash collateralize those LCs. So it could be a great value to WestPoint to our oil and gas businesses.

As an example, historically, when we have tried to hedge or do swaps on our exposure to oil or gas, we have had to post actual cash for those hedges. Now with a revolving facility in place, we will mitigate that. We think it is an efficient use of capital and an appropriate thing for a company with a $4 billion balance sheet.

Fair enough. I appreciate it, guys. Thank you.

(OPERATOR INSTRUCTIONS). There are no further questions from the phone lines.

Well, thank everyone for joining us today, and we look forward to chatting with you more when we release our third-quarter results. Thank you.

That does conclude today's teleconference. We would like to thank everyone for their participation and wish everyone a great day.