Icahn Enterprises LP (IEP) 2007 Q3 法說會逐字稿

Good day, and welcome to today's Icahn Enterprises L.P. earnings call. This call is being recorded.

I would now like to turn the call over to Ms. Felicia Buebel. Please go ahead, ma'am.

Good morning. 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 measures. 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 the copy of this presentation at www.icahnenterprises.com\investor.shtml.

Now I'd like to turn the program over to Keith Meister, our Vice Chairman of the Board and Principal Executive Officer.

Thank you, Felicia. Good morning and welcome to the third quarter 2007 Icahn Enterprises earnings conference call. Joining me on today's call are Andy Skobe, interim Chief Financial Officer and Chief Accounting Officer, and Peter Shea, our President.

I am going to begin by providing an overview of performance for the third quarter and a brief discussion of our new investment management segment, and then turn it over to Andy Skobe to review our financial performance. After which, Andy, Peter and I will be available to answer your questions.

Moving to third quarter highlights. Year-to-date net income was $282.4 million or $1.65 per depository unit. For the three months, net income was $13.9 million or $0.53 per depository unit. The key event in the quarter was the acquisition of the interest in the general partners and the management company of the Icahn Funds, which I will discuss later in more detail. In conjunction with the acquisition, Icahn Enterprises has invested $700 million in non-fee paying LP interest in the Icahn Funds. Finally, subsequent to quarter end, Icahn Enterprises acquired PSC Metals for $335 million in cash.

PSC Metals is one of the largest and most experienced metals processors in North America. The primary businesses include processing scrap metal, mill services, and recycling metals. Over the last 12 months, the business has achieved revenues of approximately $776 million and net income of approximately $45 million. PSC was purchased from an affiliate of Carl Icahn, and as such, the Icahn organization knows this enterprise and has worked well with this management team in the past and has confidence in the experience of this management team and the potential for this business. PSC Metals can be an operating platform for us to provide capital to grow in the years to come, either through organic investment to grow their business or through bolt-on acquisitions.

Today, Icahn Enterprises has four major business segments -- Investment Management, Metals, Real Estate, and Home Fashion. Our gaming segment, which is currently under contract for sale and is expected to close in the first quarter of 2008, is included in discontinued operations. Let me provide an update on our holding company operations.

We maintain strong liquidity. Andy Skobe will walk you through a schedule that shows Icahn Enterprises parent-only liquidity in excess of $4 billion. We continue to enhance the value of the businesses we own, investing in them for growth, looking to add new platforms as we did with PSC Metals, and then enhancing the returns on our through enhancing the returns on our investments. An example is adding $700 million of capital into the Icahn Funds as an LP investor.

During the third quarter, American Real Estate Partners transformed itself into Icahn Enterprises. We entered the investment management business and we further grew our portfolio of operating businesses through the acquisition of PSC Metals. We remain committed to the same strategy that we've been implementing over the last several quarters.

Let me provide a brief overview of our Investment Management segment. Our entities provide investment advisory and certain management services to the Icahn Funds, but do not provide investment management services to any other entities, individuals, or accounts. Interests in the Icahn Funds are available only to certain sophisticated accredited investors and are not available to the public, generally.

The third quarter 2007 represents the first quarter of consolidated ownership of the general partners of the Icahn Funds and of Icahn management. As you know, we filed an 8-K on October 23 to file financial information for the acquired investment management business. Using pooling of interest accounting, we restate our financials going back as if we owned the investment management business in the past, so you can see performance in past periods.

Our investment management business manages approximately $7.1 billion of capital as of September 30, which represents growth of approximately 109% as opposed to the $3.4 billion of assets managed at the end of the third quarter of 2006. As AUM (has grown, so has fee-paying assets, which are now $5.1 billion as of the end of the third quarter as opposed to $2.8 billion at the end of the third quarter of 2006. The difference between fee-paying assets and total assets under management is primarily attributable to the fact that capital invested by Icahn Enterprises, Carl Icahn, and other members of the fund management team is non-fee paying.

On this slide we also show revenue highlights for our Investment Management segment on a deconsolidated basis, i.e., the actual economics aside from the accounting effects of our ownership of the management company and the GP interest. In total in the third quarter, we achieved $29.7 million of management fees, up from $20.5 million in the comparable quarter last year as a result of increases in assets under management. For the nine months ended September 30, management fees were $95.5 million as opposed to $54.4 million during the comparable period in the prior year. These fees are growing and this is a very stable revenue stream to us, as it is a management fee based on AUM as opposed to an incentive allocation, which is subject to performance.

On the incentive allocation side, year-to-date for the nine months ended September 30, we have achieved $94.7 million of accrued incentive income, which represents effectively our roughly 25% interest in the profits generated from fee-paying investments. This number compares to $104.6 million accrued in the comparable period of 2006. In the third quarter of 2007, incentive allocations were negative $25.8 million as opposed to $38.9 million in the third quarter of 2006.

In summary, we launched the Icahn Funds in November, 2004. The funds have grown and we continue to follow a value-oriented activist strategy. We believe it is a strategy that resonates well with investors and as such, we believe the outlook for our funds is strong going forward. We also believe we have the right team to continue to grow the business. As the business grows and the performance continues, as we believe it will continue, we believe our investment management business will provide excellent cash flows and returns for Icahn Enterprises. We look forward to increasing the value of this business with growth in the years to come.

With that, let me now turn it over to Andy Skobe to walk over our financial performance in detail. Thank you.

Thank you, Keith. Let me begin by pointing out that our purchase of Carl Icahn's interest in the management company and the general partners of Icahn Funds involve entities under common control and was accounted for as a pooling basis. As Keith mentioned, our prior financial information has been restated to reflect the operation of our Investment Management segment as if we owned the segment since its inception in November, 2004.

Also, in accordance with GAAP, we consolidate most of the Icahn Funds and the related feeder funds despite the fact that we only own a minority interest in the equity and income of these funds. As a result, there are two important facts to keep in mind. First, our consolidated financial statements reflect these funds on a gross basis, rather than reflecting only the value of our investment in such funds. The portion that is attributable to the limited partners and shareholders in the funds is reflected as non-controlling interest in consolidated entities on our financial statements.

Second, substantially all of the management fees and all of the incentive allocations earned by us and from these funds have been eliminated in consolidation and are reflected in our financial statements as an increase in our allocated share of net income from these funds.

For the nine months ended September 30, 2007, our income from continuing operations increased by approximately 27% from the same period in the prior year to $205.9 million, despite the loss from continuing operations in the third quarter of 2007 of $3.5 million. This was mostly due to strong performance in our Investment Management segment in the first two quarters of 2007 and cost reduction measures at our Home Fashion segment. This was offset by adverse market conditions affecting the third quarter performance of the Investment Management segment that Keith previously cited, slowdown of the real estate development market throughout 2007, and continuing restructuring efforts in the difficult retail environment of our Home Fashion segment throughout 2006 and into 2007.

In total, net income in 2007 was $282.5 million for the nine months ended September 30 as compared to $381.3 million for the 2006 period. Net income was $13.9 million for the third quarter of 2007 versus $160.6 million in 2006. These results were after non-controlling interest and income from discontinued operations. Please note that income from discontinued operations was substantially higher in 2006, as we owned our former Oil and Gas segment and our Atlantic City casino operations until their sale in November of 2006.

I will now review some highlights of our Real Estate and Home Fashion segments and give you an update on discontinued operations. Keith has already reviewed the Investment Management segment and I will go more into the detail of the holding company in the next couple of slides.

Our Real Estate segment sales and net income reflects soft residential and vacation real estate markets that had a negative effect on our property development business. Our property development business sold 12 units during the third quarter of 2007 for $17.3 million, reflecting greater sales mix of higher price units as opposed to 39 units in 2006 for $19.9 million. During the nine months ending September 30, 2007, 5 net leased properties were reclassified as discontinued operations held for sale, as they were subject to contract or a letter of intent as we continued to sell rental properties on an opportunistic basis. Based on current residential sales condition, we expect the sales in our Real Estate segment to continue to trend downward in the fourth quarter and into 2008.

Our Home Fashion segment is continuing its restructuring efforts as WestPoint implement its strategy to ship manufacturing capacity from the U.S. to lower cost countries. Revenue and income have been adversely affected by the weakness in the home textile retail environment, lower manufacturing plant utilizations at some of our U.S. bedding and towel plants that are scheduled to close as part of our restructuring program, and continued efforts to reduce revenue from unprofitable product lines.

Several highlights of our Home Fashion segment in the third quarter include announced closure of certain U.S. towel operations, with productions of these facilities ending over the next three months and moving to WestPoint's facility in Pakistan. The closure of the U.S. bedding operations is complete with production transferred to overseas locations such as WestPoint's Bahrain-based facility. WestPoint is continuing to lower its expenses by consolidating its locations, reducing headcount, and applying more stringent oversight to expense areas where potential savings may be realized.

SG&A costs of $28.2 million for the third quarter were $3.5 million below third quarter of 2006. Year-to-date, 2007 SG&A expenses were $12.9 million below the 2006 spend for the comparable period. We are currently reviewing strategic options to consolidate WestPoint's warehouse infrastructure, which will result in further cost savings.

WestPoint's liquidity remains strong even after our approximately $3 million investment in the Bahrain facility. WestPoint ended third quarter of 2007 with $75.7 million of unrestricted cash and it has a $250 million working capital facility, which is subject to monthly borrowing-based calculations.

Also, on October 18, WestPoint completed an agreement to sell the inventory at substantially all of its retail outlet stores. This decision was based on the stores no longer being a critical distribution outlet for off-quality goods given the reduction of WestPoint's U.S.-based manufacturing footprint.

Home Fashion restructuring program will continue through the fourth quarter and into 2008. However, we remain confident that the segment's manufacturing shift to low cost countries, its continuing focus on driving profitable sales, and tight management of overhead costs that WestPoint will become a stronger company.

Income from discontinued operations was $17.4 million for the third quarter of 2007 compared to $105.5 million for the third quarter of 2006. As I had mentioned before, discontinued operations for both periods include our remaining Nevada gaming operations due to the pending sale. However, the overall decrease relates to the inclusion of the operating results from the former oil and gas and Atlantic City gaming operations in most of 2006.

In our holding company, investment returns for this quarter were down from the prior period due primarily to games and securities sold short in 2006. Interest income was much higher this year due to a large cash position from the sale of our oil and gas and Atlantic City gaming operations, and the issuance of approximately $1.1 billion of debt in 2007. This increase in debt caused interest expense to increase as well.

We maintain a strong balance sheet with ample liquidity. As of September 30, 2007, we had cash and cash equivalents and liquid investments of $3.6 billion, not including the cash and cash equivalents at our Investment Management segment. Liquid investments include holding company's Level 1 and Level 2 investments and the holding company's investment in our funds. These investments have a ready market and could be liquidated quickly. If you deduct our total debt of approximately $2.3 billion, we had $1.3 billion in cash, cash equivalents and liquid investments net of debt at the end of the quarter. If you adjust our liquidity for the subsequent purchase of PSC Metals and the close of the pending casino sale, then we would have cash, cash equivalents and liquid investments of approximately $4 billion and net of debt, $2 billion.

In summary, we have a strong balance sheet that gives us the flexibility to execute our strategy, capitalize on market opportunities, and enhance unitholder value. We will now take any questions that you may have. Operator, could you please open up the phones for questions?

(OPERATOR INSTRUCTIONS). It appears we have no questions.

Well, I want to thank everyone for joining us. We look forward to speaking with you in the early part of 2008 as we update our full year 2007 results. And just one comment I'd like to make is during the liquidity section, Andy Skobe speaking about the investment in Bahrain mentioned it was a $3 million investment, I'd just like to correct that and make sure everyone is aware it's a $30 million investment.

So once again, thank you for taking time and we look forward to visiting with you in the future.

That does conclude today's conference. Thank you for your participation. Have a great day.