Icahn Enterprises LP (IEP) 2007 Q1 法說會逐字稿

Good day, and welcome to today's American Real Estate Partners Q1 2007 Earnings Call and Webcast. I would like to turn the call over to Ms. Felicia Buebel, Counsel. Please go ahead, ma'am.

Good morning. 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 and Exchange Act of 1934, particularly statements regarding our future financial and operating results in 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 SEC. 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 Web site by viewing a copy of the presentation.

I would like to turn it over now to Keith Meister, our Principal Executive Officer.

Thank you, Felicia. Good morning and welcome to the Q1 2007 American Real Estate earnings conference call. I will begin by providing a brief overview of first quarter highlights and then review some significant events at the conclusion of the quarter. Following my remarks, Andy Skobe, our Interim CFO and CAO, will provide a more detailed review of our financial performance. After Andy's comments, Peter Shea, our President, will provide a more detailed business segment review. As always, we will be available to address your questions after our remarks.

Key highlights in the first quarter of 2007 include net income of $96.6 million. A significant contributor to net income was a mark-to-market gain of approximately $63.9 million from our investment in ImClone. In addition, during the quarter, we significantly increased our liquidity. At quarter-end, cash and short-term investments totaled approximately $2.9 billion. This figure excludes our $4.56 million share investment in ImClone, which, as of yesterday, had a market value of $207 million. Subsequent to the quarter, we've completed other actions, which have further enhanced our liquidity, which I'll discuss in a moment.

Moving to our operating businesses. Our Gaming and Real Estate businesses continue to perform as expected. In Home Fashion, as we have stated in the past, 2007 will be a transitional year as we attempt to move our manufacturing base from high-cost areas in the southern portion of the United Sates to low-cost countries, such Pakistan and Bahrain. While we are making progress on this transition, results year-to-date are slower than we would hope and we have plans in place to try and increase the speed of this transition. Peter Shea will provide further detail on WestPoint during his remarks.

During the quarter, we raised an additional $500 million of 7 1/8th notes that come due in February 2013 as an add-on financing under existing indentures. Furthermore, during the quarter, we also settled the last of the outstanding GB Holdings litigation. As some of you may remember, GB Holdings is an entity through which we owned our interest in the Sands Casino & Hotel in Atlantic City. We sold that asset to Pinnacle for approximately $275 million and now we've settled the last remaining litigation related to this asset.

Moving to subsequent events. In April, American Real Estate Partners completed a convertible debt issuance of $600 million of debentures with a variable interest rate of LIBOR minus 125 and a conversion price of approximately $132 per unit. This transaction presented AREP with the opportunity to issue a hybrid security that had a reduced interest expense and an equity-like conversion feature.

As a result of the success we have had in the traditional high-yield markets and our strong equity performance over the last few years, we believe this was a prudent time to bring in a new set of investors and broaden the base of potential equity investors in AREP and offer a convertible security. This security allows us to have minimum dilution while maintaining a low cost source of capital and additional liquidity to continue to grow our businesses. We believe the execution of this transaction was very favorable to American Real Estate Partners, as well as to our new stakeholders, who we look forward to having as investors in our Company for many years to come.

In addition to the convertible debt issuance, we also completed the sale of our remaining stake in SandRidge Energy for $243 million. As you will recall, we sold National Energy Group to SandRidge for approximately $1.5 billion. And while a majority of this consideration, approximately $1.3 billion, was in the form of cash, we also received 12.8 million shares of SandRidge common stock. As it has not been AREP's model in the past to hold passive investments, we are pleased with our ability to successfully monetize our remaining investments in SandRidge and bring total cash proceeds received from our divestiture of NEG to approximately $1.5 billion. We wish SandRidge well and believe they will do great things with NEG's assets. However, we are now positioned to redeploy this money into businesses in which we will have a controlling ownership interest.

Finally, and perhaps most importantly, subsequent to the quarter-end, we entered into an agreement to divest all of our remaining Gaming assets. The Whitehall funds, the real estate private equity arm of Goldman Sachs, have agreed to purchase our interests in all of our Nevada gaming properties - the Stratosphere, the Arizona Charlie's Decatur and Boulder, and the Aquarius, formerly the Flamingo Laughlin Hotel, for approximately $1.3 billion before debt, working capital adjustments, and taxes. This transaction is expected to close within 8 months of its execution of date, with the ability for the buyer to extend, subject to licensing requirements, for a maximum of 4 months.

We believe that our investment in gaming is an example of what American Real Estate Partners does best. We acquired assets that were out of favor and at discounts to replacement costs at a time in the cycle when most investors did not want to invest in gaming. We brought in the management team, we empowered them to execute, we allocated capital to grow the business, we watched our costs, and we grew our EBITDA consistently and substantially. With the assets having been successfully repositioned and the current market environment robust for gaming M&A, especially for Nevada-based assets, we were presented with an opportune time to realize the value we had created on this long-term investment for American Real Estate Partners. We look forward to closing this transaction and believe that the new buyers will continue to invest in and grow these assets.

Driven by our enhanced liquidity and continued financial strength, the board recently adopted a 50% increase in our distribution policy. As such, our quarterly dividend will be increased from $0.10 per unit to $0.15 per unit per quarter. This policy enables us to maintain a strong base to invest for growth while increasing our capital returns to our unit holders, in part reflecting the large proceeds realized or expected to be realized from our recent oil and gas divestiture and our pending gaming sale. Future distributions will be approved or amended by our board on a quarterly basis.

Having discussed some of the key financing and asset dispositions subsequent to quarter-end, it's now important for us to look forward and spend a moment on our acquisition pipeline. In February, we entered into an agreement to acquire Lear Corporation for approximately $36 per share in an all-cash transaction. The total transaction value will be in excess of $5 billion, with AREP anticipating making an equity investment of approximately $1.3 billion and the balance funded by non-recourse indebtedness. We continue to look forward to closing the transaction and are shooting for a shareholder vote on June 27th with a closing immediately thereafter. We look forward to welcoming the Lear team to AREP and providing capital to continue to grow Lear.

In addition to the Lear transaction, we've previously disclosed that we're working to complete the acquisition of interests in American Railcar and Phillips Services Corporation, two entities that are currently majority owned by affiliates of Carl Icahn. American Railcar is the leading manufacturer of railcars in the southern portion of the United States and Phillips Services Corporation provides industrial services and scrap metal recycling. We believe these businesses will be strong additions to AREP's portfolio and also provide opportunities for AREP to provide capital for further growth through organic investment and both on acquisitions. These related party acquisitions are currently being reviewed by our independent directors.

In addition to Lear, American Railcar, and Phillip Services, we've been looking at other third-party acquisition opportunities. As we have stated earlier in the presentation, we ended the quarter with over $2.9 billion of cash and short-term investments and since quarter-end completed a $600 million hybrid financing and entered into an agreement to sell our interests in our gaming assets for $1.3 billion, which will generate significant additional liquidity.

So we've developed a large war chest of approximately $4.5 billion pro forma for the sale of our gaming assets. We will use this for future investments and have been working hard to find the right opportunities to redeploy that capital and believe we should have some transactions to discuss with you in the near future in industries in which we have tremendous familiarity and experience.

So, in summary, we continue to execute on our business strategy. First, we focus on enhancing the value of our existing businesses. I think we've proved how we can do that through our recent strategic investments in and the successful sales of our oil and gas and our Atlantic City and Nevada gaming businesses.

We continue to make progress on our real estate developments, despite a difficult residential real estate market. At WestPoint, there remains a lot of work to be done. And while we are slightly behind schedule, we have a plan and the WestPoint management team is focused on executing on that plan.

Additionally, we have recently and will continue to look to invest capital to grow these businesses and to acquire new operating platforms. At WestPoint, you'll see this as we continue to invest to move our manufacturing base offshore. We are hopeful that with Lear, ARI, Phillips Services, and other opportunities we're looking at, new platforms will come into the AREP family. And we look forward to provide capital to commit to grow these businesses.

For the present, we are focusing on managing our cash conservatively. We try to enhance the returns on its liquidity while we await the appropriate risk-adjusted investment opportunities that can achieve our long-term investment targets.

In conclusion, with our strong balance sheet, ample liquidity, and expertise in acquiring distressed assets in out of favor industries, we believe we are well positioned to take advantage of any potential market dislocations and in the interim continue to benefit, as we have in the past, from the operations of our existing businesses.

Let me now turn it over to Andy Skobe, who will walk through our Q1 2007 financial results.

Thanks, Keith. I will now give a short overview of our consolidated financial performance, reviewing our consolidated results, our balance sheet, our liquidity position at the end of the first quarter, as well as our current liquidity position, taking into account some of the subsequent events that Keith mentioned earlier, and finally, I will review a few performance metrics.

Overall, revenue for the first quarter remained relatively flat, as compared to the same period last year. The slight increase in revenue is primarily attributable to increased gaming revenue, resulting from the inclusion of the results of the Aquarius Casino Resort, which was acquired on May 19, 2006, and increased real estate property development revenue, substantially offset by reduced revenues from our Home Fashion business. Decline in Home Fashion revenue was primarily due to a weak retail sales environment and WestPoint's continuing restructuring efforts. Peter will review Home Fashion results in greater detail later during this call.

AREP reported an operating loss of $19.2 million, primarily driven by the ongoing restructuring efforts of our Home Fashion segment. As compared to the first quarter of 2006, operating losses decreased by $7.8 million from $27 million because of the inclusion of operating results of Aquarius Casino Resorts and a $3.5 million decrease in Holding Company expenses, primarily due to a one-time compensation charge in the first quarter of 2006.

Net interest expense decreased by $12.1 million, due to increased interest income as a result of higher cash balances, mostly from divestitures, offset by higher interest expense due to additional debt. Other income increased by $63.5 million, predominantly due to an unrealized gain on our investment in ImClone.

Income from discontinued operations decreased from $59.1 million in the first quarter of 2006 to $27.9 million in the first quarter of 2007, as we sold our Atlantic City gaming and oil and gas operations in the fourth quarter of 2006.

In total, net income increased by $46.9 million from the first quarter of 2006 to $96.6 million for the first quarter of 2007.

Next, as you can see on our March 31, 2007 balance sheet, we had over $4.6 billion in assets and a very strong liquidity position, as evidenced by $2.3 billion in cash and cash equivalents and working capital of $3.2 billion. Within our short-term investment portfolio, $243.2 million was invested in SandRidge stock, which, as Keith stated, we liquidated in early April. And approximately $162 million was invested in short-term, mostly fixed income, short-duration securities managed by an unaffiliated third-party investment manager. The remaining investments consist of exposures to long and short securities and equivalents of specific issuers with liquid markets.

It should be noted that most of our long-term investments consisted of our position in ImClone. To give you a better sense of our liquidity position, we had cash, cash equivalents, and liquid investments of $3.1 billion as of March 31, 2007. Liquid investments include our short-term investments and our position in ImClone. These investments have a ready market and can be liquidated quickly. If you deduct our total debt of approximately $1.7 billion, we had $1.4 billion in cash and liquid investments, net of debt, at the end of the quarter.

Subsequent to the first quarter, our cash, cash equivalents, and liquid investments increased to $3.7 billion due to a $600 million issuance of convertible debt. After netting our current debt balance of approximately $2.3 billion, our cash and liquid investments, net of debt, remains the same at $1.4 billion. As discussed before, our position in SandRidge was liquidated subsequent to the first quarter, decreasing our short-term investments and increasing our cash by approximately $243.2 million.

As you can see, we have come a long way in one year. Our cash, net of debt, has increased from a negative $971 million for the first quarter of 2006 to a positive $632 million in the first quarter of 2007. That is an improvement of $1.6 billion. We are also using less cash in operating activities. As discussed earlier, our net earnings have increased from $49.7 million, or $0.79 per depository unit, during the first quarter of 2006 to $96.6 million, or $1.53 per depository unit, in the first quarter of 2007.

In summary, we believe that our strong liquidity position will allow us to continue to execute our strategy and to take advantage of potential market dislocations as opportunities arise. Now, our President Peter Shea will review each of our operating segments in more detail.

Thank you, Andy, and good morning.

The revenue by segment slide illustrates our revenue mix changes for our operations from year to year. Q1 2006 includes the revenue from discontinued operations, the Atlantic City Casino, and the oil and gas businesses that were sold during the year. Q1 2007 includes the revenue from our Aquarius Casino in Laughlin, Nevada that was acquired in May 2006. As you can see in Q1 '07, Home Fashion accounted for 60% of revenue, as compared to 48% last year, followed this year by 32% for Gaming and 8% for Real Estate. Should the potential acquisitions mentioned earlier by Keith be consummated, this mix could materially change going forward.

It's important to note that this slide represents the revenue and composition of AREP only and does not reflect our views on the values of each business, as margins and profitability of each segment can different materially from one to another.

Next, let's turn to our Gaming segment. Overall, net revenue increased 31.4% from 2006 to a record $112.9 million, primarily due to our acquisition of the Flamingo Laughlin in May 2006, now known as the Aquarius Casino Resort. Operating income increased 24.7% to $23.2 million, also as a direct result of the Aquarius acquisition, which is performing ahead of our expectations.

On a same-store basis, excluding the Aquarius, our overall Gaming business delivered lower results. For Q1 '07, Las Vegas net revenue decreased slightly from $85.9 million to $84.1 million, while operating income fell 4.4% to $17.8 million, primarily due to decreased casino revenue and increased promotional allowances, partially offset by increased hotel and food and beverage revenue.

Also, on a comparable location basis, net casino revenue declined 3.9% to $46.1 million, due to lower slot coin-in, table handle, and table hold, which was partially offset by higher slot hold. This decline we believe is attributable, in part, to Arizona Charlie's Decatur area road construction, which has held back customer traffic, offset in part by increased revenue at Arizona Charlie's Boulder, resulting from our casino expansion. Also affecting the market in general was the high cost of gasoline, which decreased automobile traffic to Las Vegas.

Same-store hotel and food and beverage revenue grew 3.7% and 1.1%, respectively, resulting from increased occupancy and average daily rates, primarily at the Stratosphere, and an increase in the average check amount.

We also spent $3.8 million of our $31.1 million capital plan for '07, primarily on new slot machines, Polyester's nightclub construction at the Stratosphere, and the continuing renovation of Aquarius. Our large portion of -- a large portion of the remaining spend will be to refresh our slot floors and the Aquarius phase one hotel refurbishment.

Now, let's move to our Real Estate business. Results were up in the first quarter, reflecting increased property development activity, which drove a 34.8% increase in revenue to $27.9 million, and a 22.9% increase in operating income to $4.3 million, as compared to the same period in '06.

Our property development business revenue increased $6.8 million to $18.1 million, mostly from our Florida properties, despite a weak vacation real estate market. Our Falling Waters, Florida development had $5.5 million in revenue in Q1, selling 23 units. We now have 29 units in inventory, of which 7 units are under contract. At Vero Beach, 5 units were sold during the quarter for $4.3 million. Here, we have in inventory 312 improved lots and 38 homes in various stages of completion, of which 6 units are in contract.

In Tampa Bay, Florida, we sold the remaining commercial land parcel for $1.5 million. We sold 6 units during the quarter in New Seabury, Massachusetts for $3.6 million and we have 33 units in various stages of completion, and 380 lots available for future development. 6 new units and 2 lots are under contract. In Westchester, New York, we sold 2 properties for $3.2 million and have 19 units remaining in various stages of completion, of which 13 units and 2 lots are under contract.

While our development segment increased over the first quarter of '06, we anticipate general softness for residential and vacation real estate throughout the balance of 2007, with sales and profits expected to decline compared to 2006.

Rental real estate revenue increased 8.3% to $3.5 million from continuing operations, primarily due to the leasing of previously vacant space. Included in discontinued operations was rental revenue of $1.2 million from properties sold or are in the process of being sold. We sold one rental property during the quarter for gross proceeds of $4.4 million and recorded a gain on this sale of $3.9 million in discontinued operations. We are exploring the sale of certain of our remaining 36 properties on an opportunistic basis.

Our resorts revenue increased 2.4% to $6.2 million, however, operating expenses also increased, resulting in an operating deficit of $300,000, versus $200,000 last year.

Turning to our Home Fashion segment, first quarter net revenues of $210.6 million were 13.5% lower than the comparable period in 2006 of $243.5 million. Operating losses increased from $38 million to $39 million in the first quarter of '07. This loss includes $4.3 million of restructuring and impairment charges in the quarter, primarily related to the cost of closing high cost manufacturing facilities.

During the quarter, WestPoint continued to implement its strategic plan to shift manufacturing capacity from the U.S. to lower-cost countries. WestPoint's newly acquired bedding operation in Bahrain is now producing its products. The comparative production costs have proven to be on track or better than pre-acquisition estimates. We expect that production volumes for Bahrain will reach full capacity during this current quarter.

In addition to WestPoint's new overseas bedding operation, the expansion of a new towel operation in Pakistan is also on schedule, with production already reaching WestPoint's U.S. customers. We expect the ramp-up of this facility to be completed and fully operational in the fourth quarter of this year.

Although revenues and margins were negatively impacted by strong competitive pricing and a soft retail environment, WestPoint did launch key bed and bath programs at Linens & Things, Wal-Mart, Target, and Kohl's during the first quarter that will drive sales in the balance of 2007. During the quarter, WestPoint also continued to manage down revenue from less profitable programs. WestPoint has been making steady progress in reducing its SG&A expenses. Cash SG&A expenses for the quarter were $38.3 million, versus $41.5 million in the first quarter of '06.

On an annualized basis, management anticipates that total SG&A expenses in '07 will be approximately $15 to $20 million less than they were in '06. WestPoint's liquidity remains strong, ending the quarter with over $148.9 million of cash and access to a $250 million working capital facility, subject to monthly borrowing base calculations. WestPoint actively manages its cash through constant monitoring and proactive working capital reduction activities. This liquidity will provide the foreseeable resources for WestPoint to manage through its operational changes.

While transition plans in the first quarter proceeded slower than expected, as we incurred implementation challenges, we again mention that 2007 will require patience, as strategic initiatives progress throughout the year. We remain confident that with WestPoint's manufacturing shift to lower-cost countries and its continued focus on driving profitable sales and realizing overhead savings, WestPoint will end 2007 stronger and enter '08 well poised to achieve its strategic and business goals.

I will now turn to some investments and financing highlights. Investment income of $79.4 million in Q1 of '07 compared to gains of $18.3 million last year and reflects predominantly a $63.9 million unrealized gain on our ImClone position. Interest income increased $19.9 million to $31.5 million, due to our large cash position after divestitures and financing activities. Interest expense increased $33 million due to the additional 7 1/8th bonds.

Thank you. This concludes our presentation, and, Operator, can you now please open it up for questions?

[Operator Instructions] [Anthony Gordan]

I'm Anthony Gordan. I've been a shareholder for probably over 5 or 6 years. Thanks for great returns, great performance. My question is how closely aligned are the sort of future daily operations that you might be doing with Icahn's hedge fund or hedge fund partners? And how many of the sorts of trades or deals or investments that are going on in either of those two companies sort of have a common goal or common vested interest? And then, secondly, I'd say to what degree are assets available from either of the companies for the other, from one side, the other side, or a commingling of both in order to acquire your investments?

Anthony, this is Keith Meister. Thank you for the question. The Icahn hedge funds or other pools of assets that you refer to are run separately and distinct from American Real Estate Partners. They have -- each has their own investment strategy and their own investment mandates with fiduciary duties to their various investors and stakeholders. As such, there tends not to be a significant overlap between the investments of the fund and the investments of American Real Estate Partners.

To the extent we ever find our situation -- ourselves in a situation where there is an overlap, we have policies and procedures in place to make sure that any overlap is reviewed by independent committees of the board and independent members of the fund. However, the investment model of American Real Estate Partners, which is to buy, to own, and to invest in businesses to grow them is different than the model of the funds which tends to take more of an activist bent to securities positions that tend to not be controlling positions in public companies. So, hopefully, that clarifies a part of your question.

Yes it does. Thank you.

Operator, why don't we move to the next question.

[Andrew Berg]

Just a couple of questions for clarification. As I look at the real estate portion, look at the revenues and units sold, the revenue per unit is down pretty significantly. Is that just a mix shift in terms of the size of the units that you're selling?

Yes. It's predominantly driven by the sellout of Falling Waters. The average unit price of Falling Waters will be closer to $200,000. It's a lower-end product with a lot of units and that is near the end of its sell-out. The price points for New Seabury obviously will vary based on the specific community inside of New Seabury. But depending on the community, those price points are north of $750,000 on average.

Yes, I figured it was mix. I just wanted to confirm that. And then with respect to Home Fashion, they're taking a little bit longer I think were your comments. At what point do you hope we can get this to, let's just be conservative and say breakeven at an EBITDA level?

On an EBITDA level, this is Peter Shea, we're looking to get close to that by the end of the year. Some of the -- the implementation challenges that I've mentioned have been in regard to the ramp-down, the ramp-up, the startup, getting manufacturing quality up to specs, and some of that has been a larger challenge. Our expectations are still the same. By the end of the year, a lot of what we have underway will be coming to fruition and so we -- our expectations are fully that we'll be close to an EBITDA breakeven by the end of the year.

Got you. So full year this year. It will be -- actual, it will be an EBITDA loss, but by the end of the year we're going to be breakeven, so hopefully next year it will be even moving into a positive category.

That's correct.

Okay. That sounds good. Best of luck to your guys with that. Thank you.

Operator, we'll take our next question.

Thank you. [Operator Instructions] It doesn't look like there are any further questions at this time, sir.

Great. Well, we thank everyone for joining and we look forward to chatting with you later in the year as we report our second quarter results. Thank you for your time.