Icahn Enterprises LP (IEP) 2007 Q4 法說會逐字稿

Good morning. My name is Jackie, and I will be your conference operator today. At this time I would like to welcome everyone to the Icahn Enterprises L.P. 2007 Q4 and full-year performance and fourth-quarter earnings call. (OPERATOR INSTRUCTIONS).

At this time I will turn the call over to Ms. Felicia Buebel who will read the forward-looking statement.

Thank you. 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 business 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 since 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.

And now I would like to turn the meeting over to Keith Meister, our Principal Executive Officer.

Thank you, Felicia, and good morning. Welcome to the full-year and fourth-quarter 2007 Icahn Enterprises conference call. Joining me on today's call are Andy Skobe, our interim CFO and Chief Accounting Officer, and Peter Shea, our President.

I am going to begin by providing a few brief remarks and then turning it over to Andy to review our financial results and then over to Peter who will give operating details on our Metals, Real Estate and Home Fashion segments. We're going to try to keep the prepared remarks brief to allow time to answer questions.

2007 net income was $308.3 million or $1.58 per depository unit as compared to $1.1 billion or $8.22 per depository unit in 2006. 2006 results included a gain of approximately $600 million from the sale of our Oil and Gas interests and approximately $65 million from the sale of our Atlantic City gaming assets.

For the quarter ended December 31, 2007, Icahn Enterprises had a net loss of $1.3 million or a loss of $0.02 per depository unit, as compared to earnings of $689 million or $4.50 per depository unit in the fourth quarter of 2006. Fourth-quarter 2006 results included a gain of approximately $600 million from the sale of our Oil and Gas interests.

During the fourth quarter of 2007, Icahn Enterprises further diversified its portfolio by completing the acquisition of PSC Metals. We look forward to providing PSC Metals with capital to enhance their organic growth through bolt-on acquisitions in the future.

Subsequent to year-end, we completed the divestiture of our remaining gaming assets, Americans Casino & Entertainment Properties, for a total sales price of $1.2 billion, which excludes positive purchase price adjustments for cash and network and capital. We anticipate a first-quarter gain of approximately $700 million before taxes as a result of this transaction. In part driven by the increase in liquidity as a result of the sale of our gaming assets and due to the performance of our other businesses, the Board of Directors of Icahn Enterprises recently approved an increase in our dividend from $0.15 per quarter per depository unit to $0.25 per quarter per depository unit. Future dividends will be reviewed on a quarterly basis by the board.

I would also like to briefly discuss our Investment Management business. For the year ended December 31, 2007, our Investment Management business generated net income of $170.2 million as opposed to $260 million in net income generated in 2006. Earnings were lower as gross investment performance in 2007 was 12.3% as opposed to 37.8% in 2006.

However, the earnings power of our Asset Management segment increased in 2007 as assets under management increased from $4 billion at the end of 2006 to approximately $7.5 billion at the end of 2007.

Ultimately results in our Asset Management segment are a function of assets under management combined with investment performance.

Throughout the first quarter of 2008, global markets have experienced tremendous volatility, and major exchanges are down across the board. Specifically by way of reference, the S&P 500 is down over 13%. However, our funds are well-positioned. Year-to-date we have experienced positive investment performance, despite the challenging market environment.

In addition, the Icahn funds are defensively positioned from a market exposure perspective. Furthermore, our funds have substantial cash reserves and are not levered. Finally, we believe that we are on the verge of a new cycle of distressed investment opportunities. We're confident that we have the experience and team to profit substantially from future distressed investment opportunities.

As many of you are aware, Icahn Enterprises has profited handsomely from past distressed cycles and believe once again we are well-positioned for this cycle with substantial liquidity and know-how.

With that, let me turn it over to Andy to walk you through the consolidated results. Andy?

Thank you, Keith. Our full-year 2007 income from continuing operations was $217.3 million, a decrease of $91.9 million from 2006. For the fourth quarter of 2007, we had a loss of continuing operations of $15.2 million compared with income of continuing operations of $109.9 million in the same period in 2006. The year-over-year and quarter-over-quarter reduction in operating income was primarily due to decreased third and fourth-quarter performance of our Investment Management segment due to decreased gains from investment activities compared to the same periods in 2006, continuing restructuring efforts in the difficult retail environment at our Home Fashion segment, the slowdown of the real estate development market and reduced margins at our Metals segment due to increased competition among scrap processors for limited supply of scrap metal. This was partially offset by the performance of our Investment Management segment in the first two quarters of 2007, continuing cost reduction measures at our Home Fashion segment, and an increase in holding company income primarily due to the breakup fee received from Lear.

In total, net income in 2007 was $308.3 million for the 12 months ended December 31 as compared to $1.1 billion for 2006. For the fourth quarter, we reported a loss of $1.3 million in 2007 compared with net income of $689.4 million in 2006. Included in the full-year and fourth-quarter results for 2006 were gains of approximately $665 million, resulting from the sale of our Oil and Gas and Atlantic City casinos in November of 2006.

Please note that income from discontinued operations was substantially higher in 2006 as we owned our former Oil and Gas segment and Atlantic City casinos operations for most of the year. In 2007 discontinued operations consisted primarily of the operating results of our Las Vegas Casino operations.

Moving to the debt and liquidity slide, we maintain a strong balance sheet with ample liquidity. As of December 31, 2007, we had cash, cash equivalents and liquid investments of approximately $3.3 billion, not including the cash and cash equivalents at our Investment Management segment. Liquid investments include our holding company investments, as well as the cash we invest in our private 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 approximately $1 billion in cash, cash equivalents and liquid investments net of debt at the end of the year.

If you adjust our liquidity for the subsequent sale of our Las Vegas casinos, we would have cash, cash equivalents and liquid investments of approximately $2.3 billion net of $2 billion of remaining debt.

In summary, we have a liquidity and strong balance sheet that gives us the ability to enhance unitholder value by executing a strategy and capitalizing on market opportunities.

And now I will turn it over to Peter who will review the performance of our business segments.

Good morning. Let's turn to our Metals slide. For the quarter net revenue was $211.8 million, 38% over a year ago, due to an increase in ferrous scrap revenue, principally driven by strong steel industry demand. The weak dollar and rapid industry growth in emerging markets are the primary factors contributing to the overall industry demand for scrap metal.

Operating income of $9.9 million increased by 21% over 2006. Net revenues for the full year of $834.1 million compares to $710.1 million in 2006 and also reflects fundamental strength for domestic steel producers and their demand for scrap metals. Operating income of $37.9 million was $5 million lower than last year as ferrous and nonferrous margins were under pressure as processors aggressively sourced limited supplies of scrap metal. Strategically the Company is focused on acquiring assets that will provide additional access to scrap raw materials and can also provide operating efficiencies to metals.

Next is our Real Estate segment. For the quarter and the year, overall performance was down from 2006, principally due to decreased property development activity as a direct result of a very slow residential real estate market. Full-year 2007 total Real Estate net revenue decreased from the prior year by 22.4% to $102.9 million, and operating income declined by 59% to $11 million.

While our Rental and Resort segments remain steady, looking forward we're prepared for the likelihood of a challenging sales environment continuing for our development business. We have reduced headcount and spending to levels in line with current market conditions. We remain of the belief that our properties in the long-term are unique and highly valuable assets.

Next, Home Fashion. In our Home Fashion segment, fourth-quarter net revenues of $152.6 million were 30% less than a year ago. While operating losses of $33.5 million were reduced by $4.7 million. These results reflect the impact of WPI, reducing revenues with less profitable programs, weak consumer demand in the home decor retail category, and high operating costs associated with underutilization of U.S. manufacturing facilities during the transition to low-cost operations overseas. The operating loss for the quarter includes $10.6 million of restructuring costs for closed manufacturing facilities and non-cash fixed asset impairment charges relating to manufacturing plants to be closed as compared to $11.9 million of restructuring and impairment charges in the fourth quarter a year ago.

During the quarter WPI exited its retail store business with the closure of 30 stores. The Company also announced the closure of its remaining towel manufacturing operations in the U.S. During the fourth quarter, production at our joint venture in Pakistan became fully operational. And, as of March 2008, WPI is sourcing all its towels from overseas.

For the full-year 2007, revenues of $683.7 million were down 23% from a year ago, and operating losses were $158.5 million versus $143.4 million in 2006. The operating losses include restructuring and asset impairment charges of $49.3 million in '07 as compared to $45.6 million a year ago.

As we enter 2008, we expect continuing soft demand in the retail home decor category, along with a keen competitive environment. We are confident, however, that WPI will be a stronger -- in a stronger position from a product cost perspective as now all towels and sheets are sourced from low-cost overseas locations.

The Company has recently engaged a top-tier logistics service provider to consolidate warehousing and distribution operations, which we will realize substantial efficiencies and cost savings.

Overall SG&A cost reduction initiatives will continue in 2008 with additional backoffice operations being outsourced.

Finally, WPI's ability to undertake all of these initiatives is due to a high level of liquidity with the Company ending the year with approximately $136 million in unrestricted cash and in available and presently unused working capital facility.

Thank you, and operator, can you open it up for questions.

(OPERATOR INSTRUCTIONS). [Stan Ostrowsky].

I was wondering if anybody had an opinion on the recent stock performance of IEP?

As a matter of course, we do not comment on the performance of the shares. What the purpose of this conference call is is hopefully to give investors some transparency into the performance of the businesses so they can ultimately make those determinations for themselves.

Andrew Berg.

A couple of questions. First, on WestPoint, can you give us a sense -- I know you have been bleeding off some business intentionally and trying to focus on the core operations. Revenue is obviously down meaningfully. As we think about the business on a going forward basis, are we getting to a level of revenue run-rate that should stay sort of in upper 600's range? Or as we think about this, how much more of a decline should we see in the business or what are you guys expecting?

Andrew, I'm going to refer that question to Peter Shea.

Yes, we are in an industry where much of the selling occurs once a year, and we are still in a mode where we are selling off of last year's orders. So it takes a little while for us to catch up and reach that level where we believe that sales will stabilize.

The most important thing with what is going on with WestPoint is our cost reduction initiatives. And I think that, if you look back over the last few years, has been the primary reason why we have not been able to maintain the topline. We have not been able to -- we have been reluctant I should say to pursue programs that we are losing money.

So now we believe where we are with our overseas production facilities, with our infrastructure throughout the Company, we believe that we can be cost competitive. We believe that we can be competitive at retail with anybody who is in the industry.

Okay. Let me try maybe reasking the question in a slightly different way then. If we look at where you ended up at the end of '07 with the revenue reductions and based on your comments about trying -- what is going to be profitable with others in the industry, can we assume at this point that all of the intentional deliberate bleeding of revenues and sales because programs were unprofitable, that that piece is done and so that any changes we will see in the topline now are more associated with general economic issues and what is happening with retail versus an intentional desire on your part to lower your revenues to get out of programs?

Well, again from last year, we still will see the effect of programs that we so-called walked away from or chose not to participate in those bids later on in the year. So we will see the effect of that in terms of year-to-year comparisons into '08.

The other thing that is going on in the home decor sector is at retail, retail sales are, as you know, same-store sales are off. The home decor sector is being affected even more so than total store to store sales. So I think we will probably see given our current assumptions, we will see a weak economy, we will see weak pull-through at retail in this category, so I would expect that we will probably see some softness on the topline again in '09.

Yes, no doubt you guys have some (inaudible) on that that compounds trying to turn this around, so I wish you the best of luck on that.

Can you comment at all on any exposure you may have to Linens'n Things in terms of balance sheet risk, receivables?

Yes, that is a situation that we are watching, and we don't think that we have any material exposure there.

Okay. With respect to the cash balances, if we can just go back to the one slide where you are showing the liquidity, I think it was on page eight. Just clarify for me the $684 million, that is liquid cash at Icahn Funds?

No, the $684 million represents the mark-to-market value as of year-end of the limited partnership interest in the Icahn Funds that are held by Icahn Enterprises.

Okay.

Those underlying funds are then invested in highly liquid securities, and to the extent Icahn Enterprises wanted access to that capital, they would have it available through a redistribution or redemption, excuse me.

Okay. And then lastly, we all know markets were pretty challenging in the fourth quarter. They have continued to be challenging. So far this year, I'm glad to hear you guys are holding your own this year.

But can you go back and give us a little bit of a sense as we look at the performance of the Investment Management business in the fourth quarter, sort of market softness there. Were there any -- were there a couple of one, two big hits that caused the results to be what they were, or was it just the whole portfolio just took a pretty good hit in the fourth quarter like a lot of other people?

Sure. So let me frame this question before I answer it. While we are obviously much happier with the 38%-odd return in '06 than with the 12% return in '07, clearly the returns for the year were still substantially ahead of the S&P, which I believe was up 5% or 6%.

The two negatives that had the greatest effect on portfolio returns for 2007 were the performance of Motorola and the performance of WCI Communities. As you have seen from public filings, we have been adding to our Motorola position so clearly we have a belief that that presents an undervalued situation with opportunity in the future.

With regard to WCI, clearly the homebuilding environment and specifically in Florida has turned out to be in the short-term worse than we and others anticipated. Hopefully we can help provide stewardship to the company to manage through, so we have the best opportunity to participate when recovery does inevitably occur in the Florida marketplace.

Okay. And lastly, when you look at the assets under management in the business, in the Investment Management business, can you quantify how much of that would be potentially subject to lockups in terms of any lockup provisions?

Sure. Let me answer that question generically by saying that the structure of our funds are such that when an investor puts new capital in, they have a one-year hard lockup. And then between months 12 and 24, there is an 8% redemption fee, and between months 24 and 36, a 4% redemption fee. Thereafter, there's two dates on which investors can redeem, June 30 and December 31 with 90 days notice.

So we have a what I will call a very well defined liquidity profile where we see that we have substantial permanent capital, and then to the extent that some of the capital becomes available for redemption, we have a large early warning.

I will say since the launch of the fund, we have had limited, very limited redemption. So from a liquidity perspective and from a base, we believe we're well-positioned. Furthermore, as disclosed in the 10-K during the period from 12/30 through the current date, we have had net positive capital flows, i.e. more money coming in than leaving the funds, so we believe we're well-positioned with a stable and growing asset base.

Okay, yes. I hadn't had a chance to get through the K. It came out last night for us. And you said that was -- I'm sorry, the redemption period was, did you say 30 days or 90 days?

It is, hang on a second, it is 90 days notice (multiple speakers) June 30 and December 31.

Got you. That's one of the things I think that provides you guys a great benefit is having that capital sort of semipermanent, so to speak. So fantastic. Appreciate it, guys. Thank you.

Kaja Whitehouse.

This is Kaja Whitehouse with Dow Jones. I was hoping that you guys might be able to maybe talk a little bit about the distressed opportunities that you're seeing. Where exactly are you maybe putting money in distressed or has that not yet been allocated?

Sure. We tend to try not to publicly discuss our investments before we do them because it puts us at a disadvantage. So we're not going to get granular about where we are looking. Other than to say that the credit markets have experienced lots of volatility and pain over the last, really beginning in this last summer. Spreads have widened substantially, and if you look back at our filings during the period of 2005 and 2006, we did not have exposure to the stress securities as we felt their risk was not being appropriately compensated.

We believe that now has started to change. We're beginning to scale positions. We believe there were tremendous excesses in the last few years, which will present opportunities for the future, and we're gearing up to take advantage of them. But we're not going to specifically identify on this call which names we're looking at. Potentially you will see that in future filings.

But is this going to be sort of maybe bonds, loans or just any sense of what kind of credit we're talking about here?

Sure. We have the ability to invest throughout the capital structure whether it is bank debt or bonds or other forms of fixed-income securities. So I think we will be looking at a broad array of debt securities similar to how we have done in the past when we bought assets such as the casinos and the Oil and Gas interests out of bankruptcy.

So I think one of our advantages is our flexibility throughout the capital structure, and I think we will be very opportunistic.

And just one last question, just so I can get a better sense of how much maybe money is going to distress out of the total portfolio. Any sense of like how much is being allocated to this percentagewise maybe?

We are not going to give specifics, but what we do everyday is look at the risks associated with owning equities versus debt, and where we find a better opportunity is where we're going to allocate our capital.

[Miles Weiss].

I had two quick questions. Can you give any sense of how your short positions in the Investment Management portfolios perform during the fourth quarter? It looked like you covered a lot of short positions.

I am not sure where you are getting that information from, but I will say, as I said earlier in the materials, that we're very defensively positioned in the marketplace during this quarter. So to assume that we have gone more "net long" and covered short positions I think would be an erroneous assumption.

In terms of the specific performance, we're not going to provide detail on that, other than to say as we did in the prepared remarks, that the performance year-to-date is positive.

Okay. The other thing I wanted to ask is, can you give some sense for why -- it looks like you are eliminating the management fee for the funds and replacing it with some sort of incentive fee. I did not really understand what that was. Is that correct?

Not exactly. The economics of the compensation received by the management company are not changing. There are some slightly different allocations in terms of how it gets paid, but there is no change to the economics.

Andrew Berg.

Just a quick follow-up and clarification. You had commented that you had positive performance year-to-date in the Investment Management business. You also commented that you have had an increase in assets under management in the first quarter? So we have had two positives there?

That is correct.

Okay. I just wanted to make sure I got that right. Thank you.

We have no more questions in queue at this time.

Well, we would like to thank everyone for joining, and we look forward to chatting again as we provide first-quarter results later in the year. Thank you.

This concludes today's conference call. You may now disconnect your lines.