Icahn Enterprises LP (IEP) 2007 Q2 法說會逐字稿

Good day everyone and welcome to today's American Real Estate Partners Q2 2007 earnings conference call and webcast. At this time a I'd like to turn things over to Ms. Felicia Buebel, Vice President and Counsel.

Good afternoon. I am going to read a forward-looking statement first. The Private Securities Litigation Reform Act of 1995 provides a Safe Harbor for forward-looking statements we make in this presentation including statements regarding our future performance and plans for our businesses and potential acquisitions. These forward-looking statements involve risks and uncertainties that are discussed in our filings with the Securities and Exchange Commission including economic, competitive, legal, and other factors. Accordingly there is no assurance that our expectations will be realized. We assume no obligation to update or revise any forward-looking statements should circumstances change except as otherwise required by law.

This presentation also includes non-GAAP financial statements. Please note that qualitative 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 a copy of this presentation at www.AREP.com\investor.html. Now, I would like to turn the call over to our Chairman of the Board, Mr. Carl Icahn.

Thank you, Felicia. I would just like to say that as many of you know today is a red letter day for AREP in that we are entering into the money management business, a business that I have obviously been familiar with for many years. I believe the business is a growth businesses especially in light of today's environment. There are going to be many opportunities in the money management businesses especially in light of our expertise which is, as many of you know activism.

I think there are going to be opportunities in the next few months maybe a little bit longer in distress securities as well as the activist opportunities. We look forward to that. I'm very excited about it. AREP of course will try to grow the money management business but we will also be in operational businesses which as you know we've done fairly well with and quite well with. We've just sold our casino business for a large profit and also our energy business but we intend to look to buy other businesses in the distressed area.

I am now for the details going to give you Keith Meister, our Principal Executive Officer who will go through the details. I will be available for some questions later. So let me give you Keith Meister.

Thank you, Carl, and good afternoon and welcome to the American Real Estate Partners second quarter 2007 earnings conference call. In addition to Felicia and Carl I am joined today by Andy Skobe our interim CFO; and Peter Shea, our President.

I will provide a brief overview of the important transactions be announced this morning as well as some key highlights from our second quarter results. After that I will turn it over to Peter and Andrew for a more detailed walk through of our business segments and finance and we will be available to address your question.

This morning American Real Estate Partners announced that we acquired effective immediately Carl Icahn's interest in the management company and general partners of the Icahn funds. I will refer to the interest purchase today by AREP as the Icahn management entities. The consideration for this transaction consists of 810 million to be paid in AREP depository units as well as a contingent five-year earnout based on the after tax cash flows generated from the Icahn Management entities over the next five years.

Based on the earnout Carl Icahn can achieve additional purchase price also to be paid in AREP depository units for the interests sold based on their achieving various levels of profits above a hurdle level in each year. In total if the Icahn Management entities generate the highest ends of the earnout targets there is the potential for the earnout to reach 1.1 billion over five years. However, in order for that to be achieved the Icahn Management entities need to achieve after tax income to AREP of over 3.9 billion in the next five years. To the extent this occurs and the maximum earnout is paid in AREP goods this transaction will truly proof to have been a fantastic deal for AREP. In connection with the connection announced today Carl Icahn has entered into a five-year employment agreement to serve as Chairman of AREP and CEO of the Icahn Management entities and their general partners.

Let me now provide a brief background on the Icahn Funds. The Funds have committed capital of over 7 billion as of June 30. Of the 7 billion in committed capital 1.8 billion represents committed capital that Carl Icahn has invested in the funds and continues to have invested in the funds today. As such we are managing approximately 5 billion of third party fee paying capital. As the press release stated this morning our management company charges the typical investor management fees of 2.5% of assets under management as well as an incentive fee equal to 25% of profits. The funds were formed in November of 2004 and have experienced strong growth. At inception the funds have 1 billion of assets of which 300 was invested by Carl Icahn. So in less than three years these funds have grown dramatically from 1 billion in assets to approximately 7 billion today.

The funds follow a value oriented Activist investment strategy. What does this mean? Simply stated they acquire stock or distressed debt in businesses that tend to be in asset intensive industries that the manager believes they are trading at a discount to inherent value as measured by numerous metrics including replacement cost, earnings power or liquidation value to name a few key metrics. After establishing a position the funds attempt to narrow the gap between the trading value of a security and the underlying companies asset value by actively working to effect change in the Company's in which they own securities. Changes may include but are not limited to changes in management, capital structure, or corporate capital allocation.

The Icahn Management entities employ a team of 25 professionals that work with Carl Icahn in helping to manage the funds. During the twelve-month period ended June 30, 2007, the average fee paying assets under management managed by the Icahn management entities were approximately 3.5 billion as opposed to 5 billion today. Nonetheless, based on that smaller average fee paying asset balance of 3.5 billion the Icahn Management entities generated approximately 320 million of revenues over the last 12 months. That revenue was comprised of approximately 80 million of management fees and 240 million of incentive income, a portion of which was accrued but not yet earned. Subject to future investment performance and based on our increased asset base we believe this revenue stream will grow rapidly in the years to come; furthermore AREP intends to purchase LP interest in the Icahn funds of $700 million. On this interest management and performance fees will not be charged. We believe this interest will be accretive as this money is currently sitting in cash.

We believe the purchase of the Icahn Management entities provides a unique opportunity for AREP and a value creating event for our various stakeholders. American Real Estate Partners also announced today that it intends to change its name to Icahn enterprises. The name change to Icahn enterprises reflects the continued evolution of our business. Over the last several years AREP has transitioned from a company primarily in the business of owning triple net leased real estate into a much more diverse and larger entity with ownership interests in a variety of businesses including as of today a large hedge fund asset management company. As a result of our evolution we believe it is now appropriate to rename our company to reflects its increased prominence within Carl Icahns portfolio of holdings today and on a going forward basis.

Before I turn it over to Andy and Peter to discuss second quarter results in detail let me change gears for a moment and provide highlights from some key AREP events during the quarter. Net income in the quarter represented a net loss of 25.5 million, this was primarily driven by continued pressures at WestPoint, our home fashion segment, as well as weaker performance driven by market conditions within our residential real estate development business which we will discuss later in detail.

AREPs liquidity remains strong with over 3.6 billion of cash, liquid investments, and securities. Our liquidity should increase to approximately 4.5 billion as a result of the our pending sale of our gaming segment. That transaction is proceeding on plan and is still expected to close at or around year end for a purchase price of $1.3 billion before debt, working capital adjustments and taxes. Also during the quarter AREP issued 600 million of variable interest rate convertible debt with a coupon of LIBOR minus 125 and a conversion price of approximately $132 per unit subject to reset mechanisms. Finally during the quarter we sold our remaining stake in Sand Ridge Energy. As you may remember Sand Ridge Energy acquired our oil and gas assets last year for approximately $1.5 billion which included approximately 243 million in purchasers common stock. When the opportunity was presented to monetize our remaining stake we moved quickly to do so.

A deal we tried to complete unsuccessfully during the quarter was the acquisition of Lear Corporation. We believe that we offered a fear and full price for Lear. While we believe Lear presented a compelling opportunity for AREP to acquire an industry leader in the then out of favor automotive parts industry ultimately Lear shareholders believed that our best price did not represent sufficient consideration for the transaction and voted against it. As such our merger agreement was terminated and we received a $25 million fee, half in cash and half in Lear shares. While we were disappointed at this result we maintained our disciplined acquisition philosophy and did not try to stretch and overpay for assets. Finally, as Carl alluded to, we continue to look at other M&A opportunities in our existing lines of business as well as other industries that may or may not be in our existing lines and we believe the current volatile credit markets provide a great opportunity set for us to go looking in.

In conclusion AREP has undergone an exciting transformation over the last several years. Today AREP becomes Icahn Enterprises. We are very excited about the opportunity for value creation for all of our stakeholders as the result of the Icahn Management entities we acquired today. Furthermore we are well-positioned to capitalize on volatile market conditions with our strong balance sheet. AREP has over 3.6 billion in liquidity at its parents -- at its parent and the funds it manages have over 7 billion in capital. The Icahn Management entities intend to manage the funds to generate high risk adjusted returns through activist investing and we intend to acquire and grow our operating businesses. With that let me turn the call over to Andy Skobe.

Thank you, Keith. I will now review our consolidated financial performance focusing on our consolidated results, investment gains and losses, interest income and expense, the balance sheet, debt and liquidity and, to close, a few performance metrics.

As Keith mentioned before we entered into an agreement to sell all of our remaining gaming operations on April 22, 2007. And therefore we have reclassified their results to discontinued operations. Peter will review gaming results in greater detail later during this call. For the three months ended June 30, 2007, we had a net loss of 25.5 million, compared to net earning of 79.1 million for the three months ended June 30, 2006. Revenues for the second quarter of fiscal 2007 decreased by 94 million, or 33%, as compared to the second quarter of fiscal 2006. The decrease was due to reduced revenues from our home fashion business of 71.4 million and reduced real estate revenues of 22.7 million. Home fashion revenues decreased due to its continuing effort to reduce less profitable programs and a weaker retail sales environment. Retail -- excuse me, real estate revenues decreased as a result of slow down of residential property development sales.

AREP reported an operating loss of 55.9 million for the second quarter of 2007 compared to an operating loss of 37.9 million in the second quarter of 2006. The increase in operating loss was primarily the result of a decrease in operating income of our real estate business principally in the property development segment. Net interest income was 5.7 million in the second quarter of 2007 compared to a net interest expense of 9.1 million for the same period last year. This improvement was due to the large positive cash position created by the sales of our oil and gas segment and Atlantic City gaming operations in November of 2006. Other income and expense for the second quarter of 2007 was a net expense of 16.7 million compared to a net income of 52.8 million in the same period in 2006. This fluctuation of other income and expense is primarily attributed to changes in the unrealized gains and losses of the holding companies investment portfolio.

Income from discontinued operations was 21.9 million for the second quarter of 2007 compared to 47.6 him for the second quarter of 2006. As I mentioned before discontinued operations for both periods included our remaining Nevada gaming operations due to the pending sale. However, the overall decrease relates to the inclusion of the operating results of our former oil and gas and Atlantic City gaming operations in the second quarter of 2006.

Investment returns for this quarter were down from the prior year period due primarily to unrealized losses in the holding companies securities portfolio as well as decreasing gains in securities sold short. Securities in our investment portfolio are mark-to-market quarterly which results in gains and losses and other income and expense that are non-recurring in nature. Interest income as you can see was up significantly in the quarter due to our large cash position. Interest expense was also up due to debt issuances at the holding company level. I will go into further detail on this subject in our debt and liquidity overview.

Next as you can see on our June 30, 2007, balance sheet, we have over 5.2 billion in assets and a very strong liquid position as evidenced by having 3.1 billion in cash and cash equivalents and working capital of 4 billion. Current investments are composed of highly liquid securities and include approximately 177 million of short term mostly fixed income, short duration securities, managed by an unaffiliated third party investment manager. It should be noted that a majority of our long-term investment balances composed of our position in ImClone. To give you a better sense of our liquidity position we had cash, cash equivalents, and liquid investments of 3.6 billion as of June 30, 2007. Liquid investments include our short term investments and our position in ImClone. These investments have a ready marketed and could be liquidated quickly. If you deduct our total debt of approximately 2.3 billion we had 1.3 billion in cash and liquid investments net of debt at the end of the quarter.

During fiscal 2007 we completed the following transactions that provided an additional 1.3 billion of liquidity. In January we issued 500 million of additional 7 1/8 Senior Notes. In April we issued 600 million of variable rate senior convertible notes. Also in April we sold our entire position in the common stock of Sand Ridge for 243 million. We also entered into an agreement in the second quarter 2007 to sell the remaining remainder of AREPs gaming operations for 1.3 billion before repayment of debt, taxes, working capital adjustment, and related expenses.

As you can see we have strengthened our liquidity position over the past year. Our cash net of debt has increased from a negative 1.1 billion for the second quarter of 2006 to a positive 837 million in the second quarter of 2007. That is an improvement of 1.9 billion. The net cash used in continuing operating activities for the six months ended June 30, 2007 and 2006 primarily relates for both periods to operating losses incurred by with WPI as they continue with their restructuring efforts. Peter will speak more about this later in this call.

As discussed earlier we had a second quarter 2007 net loss of 25.5 million or a negative $0.40 per depository unit compared to a second quarter 2006 net earning of 79.1 million or $1.28 per depository share. In summary, we believe that our strong balance sheet will allow us to continue to execute our strategy, capitalize on market opportunities and enhance shareholder value. Now our President, Peter Shea, will review each of our operating segments in more detail.

Thank you, Andy. Going to our real estate business slide, results declined in the second quarter as a general slowdown in residential real estate had a negative effect on property development activities. Compared to the second quarter of 2006 total revenues decreased to 25.6 million or by 47% and operating income decreased to 1 million from 14.2 million. Our property development revenue of 14.7 million for the quarter compares to 37.9 million last year; reflecting soft residential and vacation real estate markets. Segment operating loss of 300,000 was 12.1 million unfavorable to a year ago.

In New Seabury, Massachusetts, we sold five units during the quarter, compared to 20 units a year ago which was especially strong because of unit closings from its grand opening in 2005. Revenue of 5.3 million was 16 million less than last year. We have 370 lots available for future development and 38 units in the process of being constructed with ten units in contract.

At Vero Beach, Florida, six units were sold during the quarter equal to last year while revenue increased $800,000 to 4.9 million. An impairment charge of 1.8 million was recorded on condominium land in our Oak Harbor subdivision reflecting current market conditions. We have an inventory 291 improved lots and 33 homes in various stages of completion of which three units are in contract. In Westchester, New York, we sold two properties for 2.8 million compared to six a year ago totaling 10.1 million. There are 17 units remaining which have 13 are in contract.

Our Flowing Waters, Florida, development sold six units for 1.7 million in revenue versus nine units for 2.3 million last year. We have 23 units remaining for sale. Based on current residential sales conditions and the pending completion of our Westchester and Naples properties we expect our sales to continue to trend downward for the balance of 2007 and into 2008.

Rental real estate revenue decreased to 3.4 million or by 2% while operating income from continuing operations was 1.9 million. A decline of $700,000 due to increased rental and administrative expenses. Included in the discontinued operations was rental revenue of 1.2 million from properties sold or in the process of being sold. At June 30, 2007, we owned 36 rental real estate properties.

Our resorts revenue increased to $7.5 million or by 7%. However, this was more than offset by increased insurance and beach erosion expenses at New Seabury resulting in an operating deficit of $600,000 compared to a deficit of $200,000 a year ago. We sold one of our two Falling Waters recreational facilities in the second quarter of 2007 for 2.1 million recognized a gain on this sale of $800,000 in discontinued operations.

Moving to home fashion, in our home fashion segment second quarter net revenues were 165.8 million as compared to 237.1 million for the comparable quarter in 2006. This shortfall affected all business lines and reflects continuing efforts to reduce less profitable programs and weakness in the home textile sector at the retail level. Our operating losses were 53 million in the second quarter of 2007 as compared to an operating loss of 48.3 million in the second quarter last year. The operating loss for the quarter includes $20.4 million of restructuring costs for closed manufacturing facilities and non-cash fixed asset impairment charges related to manufacturing facilities to be closed as compared to 20.5 million last year.

During the second quarter WestPoint continued to implement its strategy to shift manufacturing capacity from the U.S. to lower cost countries. The Company announced during the quarter the closure of betting operations in Abbeville, Alabama; Opelika, Alabama; and Marianna, Florida. The Company will have ceased production at these facilities within the coming most -- I'm sorry, within the coming weeks. Operating losses for the quarter were affected by lower utilization at the plants earmarked foreclosure. These charges will diminish in the second half of the year with bedding production shifted overseas including to WestPoints manufacturing operation in [Baring]. As previously mentioned the comparative production costs of Baring have proven to be in line with the Company's preacquisition estimates.

Additionally WestPoint has recently announced the closure effective at the end of September of its Lanier town weaving operations in Valley, Alabama, moving operations to the Company's facility in Pakistan. This facility is producing according to schedule and will be fully operational in the fourth quarter.

The Company continues to take definitive action in reducing SG&A expenses. Cash SG&A costs for the quarter were 33.3 million versus 38.9 million in the second quarter of 2006. During the second quarter WestPoint closed its administrative offices in Georgia, relocating certain functions to other existing offices. Additionally during the quarter the Company reduced selling, general, and administrative headcount by 100 employs resulting in an estimated annualized savings of 9.1 million. WestPoint is continuing to lower its SG&A expenses by consolidating its locations, reducing headcount and applying more stringent oversight to expense areas for potential savings can be realized.

WestPoints liquidity remains strong, ending the quarter with over $115 million of cash and access to a $250 million working capital facility. For the year to date, capital expenditures were 21.6 million, as compared to 3 million for the same period in 2006. This quarters spending includes 9.8 million of additional investment in Baring and 7.2 million of non-recurring expenditures for a termination of long-term equipment leases in closed facilities. In total the Company's current liquidity position will provide the foreseeable resources for the Company to manage through its operational plans.

The balance of 2007 will continue to be a year of transition for WestPoint. However, we remain confident that with the company's manufacturing shift to lower cost countries, its continuous focus on driving profitable sales and tight management of overhead costs that WestPoint will end 2007 as a stronger company.

Next let's turn to discontinued operations; which includes our gaming segment that is in the process of being sold. Overall net revenue for the quarter increased 23% to 114.1 million from 2006 due to the acquisition of the Aquarius Casino and Resort in Laughlin, Nevada, in May of 2006. Operating income increased to 31.5 million from 14.7 million as a direct result of the Aquarius acquisition and also reflects improved results at our Las Vegas properties. As a discontinued operation operating income for the quarter excludes depreciation and amortization of $8.7 million.

On a same store basis the Las Vegas properties delivered increased revenue for the quarter from 81.8 million to 85.3 million, while operating income increased 17% to 17.4 million primarily due to increased casino, hotel, and food and beverage revenue partially offset by increased promotional allowances. Also on a comparable location basis excluding Aquarius net casino revenue increased 7% to 46.9 million due to higher slot coin in and table handle as well as in table and slot hold. We believe the increases are a result of new machines at all the properties, the casino expansion at Arizona Charlie's Boulder and the addition of a nightclub at the Stratosphere. Same store hotel and food and beverage revenue grew 8% and 3% respectively. As a result of increased occupancy and average daily rates primarily at The Stratosphere and an increase in the average check amount. That concludes our presentation. Operator, can you please open it up for questions?

(OPERATOR INSTRUCTIONS) We'll go first to Andrew Berg, Post Advisory Group.

Just to confirm, on the acquisition of the Icahn funds, the earnout you said that was also in depository units, correct?

Correct.

With respect to the numbers you had on slide, on page five where you talked about the management fees and the promote there, the 320, what did you guys actually end up generating in terms -- or what did those funds end up generating in terms of for lack of a better phrase, EBITDA, that would be attributable now to AREP? Obviously a lot gets paid out in comp, I know.

We will be filing an 8-K with the SEC within 75 days of this which will provide detailed financial.

So we will wait.

Numbers but the nature of the asset management business is that it's a very high margin cash flow stream. I will let you think about it from that perspective as you wait and see the exact numbers.

As we are in that business I think we understand that. Carl, what other entities are left now that you have outside of AREP? There's American Rail. Is there anything else or with these funds coming in does this include all of your other management and fund managing--?

Outside of AREP I still have, as you just mentioned ARI, 50%. I also have private capital that actually invests along with the fund. So aside from having the money in the funds which is I am going to keep in it which is 1.7 billion I've been buying pretty consistently 20% of everything the Fund buys, so you can just figure that out, it comes to I'm not even sure.

$2.2 billion.

Another 2.2 billion alongside. As far as operational companies, we still have Philip services outside and a company called XO Telecommunications that's not in AREP. But aside from that in a sense it's really the 20% the money in the fund, obviously is now, now AREP very involved with AREP.

As I'm viewing this in all of your activities in the past where you had this as one entity and then the other, I guess the hedge fund and management company that's been a little bit more of the aggressive investor or active investor I should say that's all now in AREP?

The hedge fund management company, is AREP now, meaning that AREP is now in another business which is my management, which I think is going to be a growth business ironically because of the environment where you see some of these financial institutions problems. Also because I think that there will be opportunity in money management for the activist. Meaning that I think more than ever there's going to be room for activism, and, this is just my own prediction that there could be a lot more distress around in the next year or two. And distress really lends itself to activism in a big way because a lot of funds who do distress aren't going to be quite as active as we can in the bankruptcy scenario. We've been very active in it as you know in the 90s and it turned out to be very lucrative that we bought Western Union, and Culligan Water and Samsonite just to mention a few, Leaseway. So I think this is going to be an area where the money management will grow and I think it's going to be a very interesting one.

Carl, just add one point, Andrew here, if you can think about how things happen going forward and this will be in our Q that we file later today. All new public security investments that are done will be done by the Funds. So whether it is that Carl Icahn is making new investments in public securities, whether it be debt or equity that will be done through the Funds and American Real Estate will have its participation through its interest in the funds as well as its ownership of the management company.

I guess the rationale for putting the two together as opposed to keeping them separate?

I would just say that as an AREP shareholder you should welcome that, meaning that the money management business I think is a great growth business. I think it lends itself to this public format and that's really a rationale for it.

Okay.

As Keith said the hedge fund itself is a growth area in itself. I mean the hedge fund itself has opportunities because of its investment. Let's assume in the future these distressed securities. So the hedge fund investor will do well but also the management company will do well. And as we mentioned 700 million of AREP money will now go into the hedge fund which is a good use of capital for AREP. So I think you can understand the rationale to some extent there. So that's a rationale. And also the fact that this money management business in itself is a growth business and lends itself I believe to a format that AREP has, a limited partnership that is a public entity.

We look forward to moving forward with this. Thank you.

Thank you.

(OPERATOR INSTRUCTIONS) There appear to be no further questions at this time.

Well, we just want to thank everyone for taking the time to join us for this important transaction. We appreciate Carl joining us and we look forward to chatting with you more about the continued evolution of AREP in the future. Thank you.

That concludes today's conference call. Have a pleasant day.