Icahn Enterprises LP (IEP) 2006 Q3 法說會逐字稿

Good day and welcome to the American Real Estate Partners third quarter 2006 earnings and web cast. I would now like to turn the call over to Felicia Buebel, Executive Vice President and Counsel. 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 10K and our quarterly reports on Form 10Q, 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, www.arep.com/investor.shtml.

I'd now like to turn it over to Keith Meister for an overview.

Thank you Felicia. Good morning and welcome to the third quarter 2006 American Real Estate Partners earnings conference call. I am the Principal Executive Officer and Vice Chairman of American Real Estate Partners. Joining me today on the call are Hillel Moerman, our Chief Financial Officer; Andrew Skobe, our Treasurer; and Rich Brown, the Head of our Gaming Operations.

I am going to provide a few introductory remarks, and then turn it over to Hillel to walk through our third quarter performance in more detail. Finally I will provide some concluding comments, and then the team will be available to address your questions.

Let me provide a brief overview of the third quarter. The third quarter was a quarter of continued change and progress at American Real Estate Partners. We entered into a letter of intent to divest our oil and gas business as well as a definitive purchase and sale agreement for our Atlantic City gaming interests, the Sands Hotel and the adjacent Traymore site.

Also during the quarter we continued to invest to accelerate the restructuring of our home fashion business, WestPoint Stevens, and to rebrand and integrate our newest gaming acquisition, Aquarius, the former Flamingo in Laughlin, Nevada.

Finally we have taken steps to further enhance our strong balance sheet and liquidity position by entering into a $150 million revolving credit facility at the American Real Estate Partners level. This facility is not drawn and we have no current intentions on drawing on the facility. Nonetheless, we believe it is appropriate for a company with a balance sheet the size of AREP's and operations as diverse as ours, to have access to such an efficient source of capital, when and if desired.

Let me spend a minute reviewing the terms of our proposed oil and gas divestiture. We intend to sell 100% of the interests in NEG Oil and Gas to Riata Energy for approximately $1 billion of cash and 12.8 million Riata shares. These figures are after the repayment of $300 million of third party indebtedness at NEG.

While we are optimistic that this transaction will close, and anticipate it to occur within the next 30 days, there obviously can be no assurances. To the extent the transaction does not close, our oil and gas business continues to be well positioned for success in the future as an independent concern.

Moving to the divestiture of our Atlantic City interests, through the acquisition earlier this year of the Traymore site, which is adjacent to the Sands, we were able to facilitate the sale of both assets for over $250 million of proceeds, representing what we feel is a very attractive price.

AREP has expertise in acquiring, managing, and investing to grow underperforming gaming assets. This is exactly what we accomplished with the Sands. Ultimately we packaged the overall property for sale to a casino operator who had interest and expertise in building a billion dollar plus casino project on this site. We were able to create value by focusing on our core competencies, and allowing someone else with different core competencies to focus on theirs.

Assuming both the Atlantic City transactions and the oil and gas transactions close as structured, AREP anticipates realizing a gain of over $600 million from these transactions. Clearly the third quarter was one of change and progress.

A final highlight from our third quarter results stems from our investment portfolio. The third quarter 2006 represented approximately a $45 million year-over-year gain from our investments versus the comparable quarter in 2005.

We continue to have a strong cash position and seek to achieve solid, risk adjusted returns from our liquidity. With that, let me turn it over to Hillel to walk through the detail of our third quarter results.

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 third quarter of 2006.

As Keith mentioned, the sale of our oil and gas and Atlantic City gaming businesses are both pending. Therefore the results of these businesses have been classified as discontinued operations in our financial statements.

For the third quarter overall revenue increased $84 million year-over-year, primarily due to the acquisitions of WestPoint Stevens in August 2005, and the Flamingo Laughlin casino, now renamed the Aquarius casino, in May 2006.

Operating income decreased $24 million 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.

Other income and expense increased to income of $22.4 million in 2006, from a loss of $22.8 million in 2005, primarily due to realized and unrealized gains on securities sold short of $17.5 million, as compared to losses in the prior year.

Income from discontinued operations increased from a loss of $99.2 million in 2005 to income of $103.1 million in 2006, primarily due to an unrealized oil and gas hedging gain of $58.3 million in 2006, as compared to a loss of $79.8 million in 2005.

Later in the presentation we will discuss each segment in more detail.

Our net current position, excluding discontinued operations at the end of the third quarter of 2006 was approximately $1.5 billion. Our cash and cash equivalents, plus short term investments, were about $1.3 billion, slightly less than our total debt outstanding of $1.5 billion on a consolidated basis.

Our investment portfolio consists of over $500 million invested in short term, mostly fixed income, short duration securities, managed by an unaffiliated third party investment manager. Our remaining investments consist of exposure to long and short term 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.

At quarter end our total debt stands at just over $1.5 billion, while our cash and short term investments were $1.3 billion for a net debt position of $187 million. On a pro forma basis, assuming both our oil and gas and gaming transactions close, our total cash and short term investments would be approximately $2.6 billion and our total debt would be $1.2 billion, for a net cash position of approximately $1.4 billion. In addition we will also hold approximately 225 million of stock of the acquirer of our oil and gas business.

With the pending sale of our oil and gas and Atlantic City casino businesses, we prepared this slide to show what our revenue mix would look like for our continuing operations only. As you can see, home fashion would account for over 60% of revenue, followed by 25% for gaming, and 9% for real estate.

It's important to note that this slide reflects the revenue composition of AREP, and does reflect our views of the values of each business. So although over 60% of our revenue comes from home fashion, the home fashion business margins are very different from the margins of our gaming and real estate businesses, and are not indicative of the values of these businesses.

I'll now turn to the highlights for our gaming segment. Overall revenue increased 26.8% from the third quarter of 2005 to $99.7 million, primarily due to our acquisition of the Flamingo Laughlin, now known as Aquarius casino resort, in May of this year. On a same store basis, our overall gaming business delivered lower results.

Revenue decreased slightly to $78.7 million, while operating income fell 25.7% to $10.6 million, primarily due to anticipated disruptions resulting from renovation to the casino floor, and adding a new center bar at the Stratosphere, which we anticipate to be completed in mid-December.

Also affecting the results was the entrance of a new competitor in the local markets served by our Arizona Charlie's Properties, as well as increased labor and marketing expenses.

Though overall revenues increased $18 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 handle. Hotel and food and beverage revenue grew 2.7% and 2.3% respectively, from increased occupancy and rates, and an increase in the average check amount. It was offset by lower tower revenue.

We have substantially completed the first phase of improvements at the Aquarius, including renovation of our casino floor, upgrading of our slot machines, new signage and the renovation of the front entrance. We have started our grand reopening celebration, which is taking place very weekend in November, and 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 38% increase in revenue to $33.1 million, and a 27% increase in operating income to $5.7 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 eight rental properties during this quarter for gross proceeds of $9.2 million, and are exploring the sale of certain of the remaining 39 properties on an opportunistic basis.

Our property development business generated $8.4 million in incremental revenue, mostly from the continued sell down of our Falling Waters development, as well as sales at New Seabury.

Although we expect property development revenues and operating income to increase in the fourth quarter as compared to the third quarter, continued weakness in the macro economic environment for the residential and vacation real estate will produce a strong head wind for us in 2007 and sales and profits are expected to decline in 2007 versus 2006.

In our home fashion segment we recorded $240.5 million in revenue in the third quarter, and an operating loss of $24.3 million, which includes $6.3 million in depreciation and amortization, and $3.3 million of restructuring and impairment charges relating to the continuing cost of closed manufacturing facilities and severance.

Also note that minority interest of $8.8 million represents principally the share of losses relating to the approximately 32% of WestPoint International, owned by non-AREP investors.

WestPoint's management team took further significant steps this quarter with respect to its overall strategic plans to reposition its manufacturing capacity from the U.S. to lower cost countries.

At the same time, the company has experienced positive market reception with respect to new products introduced during the August Home Textiles Market Week. As mentioned during last quarter's highlights, the operational transition and associated costs are expected to continue throughout 2006 and 2007.

In September, WestPoint's new Pakistan operation, Indus Home Limited, completed a $35 million non-recourse financing package, purchased a newly constructed towel manufacturing operation, and is in the process of expanding the facility's operating capacity. Management expects this operation to be at full capacity in mid-2007, replacing roughly 35% to 40% of its existing domestic U.S. towel production at a highly competitive cost.

Also during the third quarter, WestPoint announced 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 a free trade agreement with the United States.

Progress continues to be made on this transaction, and WestPoint currently anticipates that the transaction will close during the fourth quarter of 2006. Once completed, this operation will represent approximately 20% of WestPoint's bedding needs for its existing customer base.

WestPoint continues to be a leader in product innovation as it introduced its stay bright technology in bath products. This process permits products to be laundered with bleach, yet to maintain their original vibrant colors. These products will be on the retailers' floors in the beginning of 2007.

The company has placed new bed and bath programs at Wal-Mart, Target, and J.C. Penney that will ship during the fourth quarter of 2006, and the first quarter of 2007. Additionally, WestPoint has expanded its Martex brand into the marketplace with a national bed and bath retailer, for shipment in the first quarter of 2007.

The new WestPoint management team continues to make progress working with major customers, new product introductions, restructuring manufacturing operations, and ensuring the availability of sufficient capital resources. As we said on prior calls, similar to other challenging situations in which we've been involved, patience will be required to realize the full potential of our investment in WestPoint.

Now I'd like to turn to some investing and financing highlights. Investment income, both realized and unrealized, increased $46 million year-over-year, as we experienced gains in both realized and unrealized short positions as compared to losses in 2005.

Interest income increased 8% year-over-year to $11.5 million, due to higher interest earned on cash balances, while interest expense increased 12% year-over-year to $27.8 million, primarily due to margin interest expense incurred in the holding company's brokerage account, and additional borrowings in our gaming segment.

In our oil and gas segment, production remains strong, increasing 10% year-over-year to 11.2 bcfe. Year-over-year our average oil price increased 14% to $58.27 while our average gas price, after realized hedging losses, decreased 21% to $5.79. As a result, after adjusting for unrealized gains and losses on hedges, revenue and operating income were approximately $77 million and $31 million, respectively.

Now, I'd like to turn the presentation back over to Keith Meister, for a final summary.

Thank you, Hillel. Let me conclude with a few final thoughts.

In summary, AREP continues to focus on enhancing the value of our existing businesses through operations as well as investing additional capital into our existing businesses for growth. To the extent opportunities present themselves to add a new business line, or to divest of assets at attractive valuations, we continue to review as appropriate. Let me spend a brief second on examples of each of these.

In terms of enhancing the value of our existing business, we continue to invest time and capital in restructuring WestPoint, to move its manufacturing footprint from its high-cost, legacy U.S. base, to low cost countries, where we can provide premium products at competitive prices. The success of these investments will ultimately drive the success of our investment in WestPoint.

We continue to invest capital in our gaming activities. While these capital investments caused some short-term disruptions during the third quarter and negatively affected year-over-year results, we believe these investments will pay dividends in the long-term.

With regard to investing capital to grow our operations through acquisitions, our oil and gas business is a great example. After we acquired our interest in NEG Oil and Gas, we invested substantial capital to grow our ownership in Longfellow Ranch as well as to acquire the Minden field.

It was through these acquisitions, as well as continued organic capital investment, that we were able to assemble an oil and gas portfolio with repeatable, low-risk drilling opportunities and healthy production growth that made NEG such an attractive acquisition candidate for Riata.

Additionally, we invested capital in the Atlantic City market to position the Sands more effectively, through the acquisition of the Traymore site, which ultimately led us to a successful pending disposition. And, we also have invested capital to acquire Aquarius.

This asset, which we acquired from Harrah's, will be much more important and meaningful to us than it was to them; and, hopefully, through attention to detail, appropriate capital investment, much of which had been deferred, and hard work, Aquarius can become a future growth driver for our gaming business.

Moving forward, our strategy remains the same. We seek to continue to create value for shareholders through investing in our businesses, from an organic level as well as through acquisitions in areas in which we have core competencies and potentially select new opportunities.

Furthermore, we have an enviable position of over $1.3 billion of cash and investments, a number that will increase dramatically, if the pending divestitures are completed. This capital is available to help grow our businesses as well as to look for new opportunities.

So, with that, let me turn it over to your questions. Operator?

[OPERATOR INSTRUCTIONS]

We have our first question from Andrew Berg, with Post Advisory. Please go ahead.

Can you guys flesh out a little bit more of what's going on with WestPoint in the restructuring? It sounds like you're making all the right moves, moving to lower cost countries. But, can you just help put some numbers behind that, in terms of what you think this can generate in terms of savings for you, given that, while it's a small contributor to operating income, it obviously is big to revenues and could be a very significant part of the cash flow story going forward?

Sure. This is Keith; let me try to address that question sort of from a big picture perspective, without getting into the specifics of the numbers.

I think we've commented in the past that there could be as much as 20% of cost savings associated with moving the manufacturing of specific textile items from the U.S. to other low-cost jurisdictions. So, if you think of that savings across a roughly $1 billion revenue base, to the extent we're able to successfully do that across our portfolio, it can be quite meaningful.

We've talked about '06 as a year in which we lay the foundation for this; '07, as a transition year and then hopefully '08 as a year in which we see the benefits of this investment.

So far, we're on progress. We've begun to make these investments and the management team at WestPoint is quite optimistic that '08 will show the fruits of these investments and the business can earn a healthy margin. But we're not going to get into the specific levels at this point.

Okay, and, obviously on the gaming side, you had some disruptions, some of which was self-inflicted, some of which was external. As you start looking at this quarter, going forward, when do you expect to see some of that abate?

Let me ask Rich Brown, who joined us to address that question.

Yes, thank you, Andrew. To your point, I think this whole year has been somewhat of an anomaly for us. For instance, on the Las Vegas Strip, as you're probably well aware, there has been some market softness, particularly in the low end segment of our - of the business here on the Strip. And to your point, we have had major disruption that, actually, we've talked about primarily The Stratosphere and the Boulder property and, actually, Laughlin as said, though, had the most disruption.

But we've also had some external disruption over at the Decatur side of town with the state, you know, ripping up I-95, which is the major thoroughfare for the exit, for the Decatur exit that provides access to the property.

To get to your question directly, regarding the construction at the Stratosphere, we would hope to have almost all of it completed in early December so that we're ready for New Year's Eve. So, I would think that, as we start to get into Christmas week, things will start to look a heck of a lot better. And, we have completed the construction over at the Boulder property. That was completed in July. It's taken us a little bit longer to get some traction, to get some of the customers back that were alienated by the construction disruption.

But, I would say that, if you take a look at both local properties here, the Decatur property, as well as the Boulder property, they both had very, very significant Octobers and will beat last year's EBITDA pretty solidly. So, I'm seeing some improvement now in the local properties. And I think the Stratosphere improvement will come in December.

Okay, and obviously, it's pretty early to tell at this point, but with Stardust closed - [two people talking].

Yes, we're expecting to benefit from that.

...benefits of, or anything, or too early to tell?

No, we're expecting to benefit from that. In fact, I've got the marketing team working on some programs that will allow us to capitalize on those closings, that closing, I should say.

Okay, and I know there had been some softness early in the summer and maybe it's not the fairest comp. The guys at Riv were saying that they weren't seeing much of an impact from softer drive-in traffic. It sounds like you guys were?

Well, it hasn't impacted us on the occupancy side. We're still running occupancies that are higher than last year by a point or so and they're in the mid-to-low 90s. And, in fact, our ADR is up also.

Where we're seeing, you know, some softness in our business right now in this quarter has been in the gaming arena. And, I think a lot of that, again, is driven by construction on the casino floor. Hillel didn't expand on this, and rightly so, but not only are we putting in a center bar, but we're doing a casino refurbishment that's everything from the rug to painting in the casino. We have some construction disruption, which is visible, for a nightclub that we're putting in, which will be completed by mid-January.

We've made a number of slot floor moves. We've reduced the size in the race and sports book and added slots. And all of this has happened during the third quarter. And, we've got some of it also bleeding into the fourth quarter at the Stratosphere. So, when I talk about overall softness, yes, I think with what gas prices were, you know, in the summer months, I think there was some softness on the low end.

I mean, I don't think that places like the mid-level and above places, and places like Belagio are really hurt by some of the things that have happened in the marketplace here. But I think the lower-end properties have had to struggle a little bit more to maintain their share.

Okay, thank you, guys.

Thanks, Rich.

Yes.

[OPERATOR INSTRUCTIONS]

At the moment, we don't have any further questions over the phone.

Great. There's one online question, which is, what is the gain per unit for the oil and gas asset sale?

We provided some preliminary estimates, on a book basis, as to what we think the book gain will be from the sale. And a majority of that, $600 million of gain, I think, is fair to say comes from the oil and gas divestiture. That is a book number; it is not a tax number and we'll be providing some more detail on that when the transaction is finalized.

So, with that, if there are no other questions, I'd like to thank everyone for joining us and look forward to chatting with everyone as we report our full-year 2006 results early in 2007. Thank you.

Ladies and gentlemen, this will conclude today's conference call. Thank you for your participation. You may now disconnect.