Icahn Enterprises LP (IEP) 2008 Q2 法說會逐字稿

Good morning, and welcome to the Icahn Enterprises LP second quarter 2008 earnings call with Julie Allen of Proskauer Rose, outside counsel; Keith A. Meister, Principal Executive Officer and Vice Chairman of the Board; Dominick Ragone, CFO and CAO; and Peter K. Shea, President. I would now like to hand over the call to Julie Allen, of Proskauer Rose, outside counsel.

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 disclosed in our filings with the Securities & 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.

Thank you, Julie. Good morning and welcome to the second quarter 2008 Icahn Enterprises earnings conference call. Joining me on today's call are Peter Shea, our President; and Dominick Ragone, our new Chief Financial Officer and Chief Accounting Officer.

Let me spend a brief second introducing everyone to Dominick, from whom you'll hear in a moment. Prior to joining Icahn Enterprises in late July, Dominick spent the last year and a half as an assistant controller at Bear Stearns. Before Bear Stearns, Dominick worked from 2004 to 2007 as a managing director at Morgan Stanley in their transactional advisory group.

From 1988 to 2004, Dominick worked at PricewaterhouseCoopers, including a stint from 1999 to 2001 as an SEC Accounting Fellow. Clearly, Dominick brings a tremendous amount of financial and accounting management oversight and experience to the Icahn organization. And as our businesses continue to grow and become more diverse, we welcome someone with Dominick's credentials and background.

I would be remiss if I didn't take that opportunity to take Andy Skobe, who for the last year has served ably as our interim Chief Financial Officer. Andy, thank you for your efforts over the last year. Currently, Andy has assumed other financial responsibilities within the Icahn organization.

Let me briefly review the agenda for today's call. I will provide a brief overview of some highlights and subsequent events for the quarter and a discussion of our investment management segment and then turn it over to Dominick to discuss our financial performance for the quarter, and then Peter who will provide a business segment review, after which, as always, we will be available to address your questions.

For the six months ended June 30, 2008, Icahn Enterprises had net income of $371.5 million, or $5.51 per depository unit. For the three months ended June 30, 2008, Icahn Enterprises had a net loss of $98.8 million or $1.37 per depository unit. First half results were positively driven by the divestiture of our gaming assets in February.

Those results were offset by the negative performance of our investment management operations over the first six months of 2008, which I will discuss on the next slide. Icahn Enterprises ended June in a strong financial position with liquid assets of approximately $4.1 billion. As a reflection of the continued strength in our balance sheet and the long-term prospects for our businesses, the board in August declared a dividend of $0.25 per depository unit to be payable in the third quarter of fiscal 2008.

Subsequent to quarter end, Icahn Enterprises acquired a 50.5% interest in Federal-Mogul. Icahn Enterprises acquired the interest from Carl Icahn in a cash transaction valued at $862.8 million. We recently filed an 8-K that provides pro forma financials relating to the Federal-Mogul acquisition. Federal-Mogul is a leading automotive parts supplier servicing both the OE market and the after market. Despite the well publicized difficult macroeconomic headwinds facing the automotive industry, Federal-Mogul has continued to thrive.

Led by Jose Maria Alapont, the company has a first rate management team, a strong balance sheet and a topnotch strategic position with a globally diverse customer base. Furthermore, Federal-Mogul is well positioned to play an active roll in acquiring other automotive parts businesses in the years to come. We look forward to growing Federal-Mogul as a larger part of our holdings at Icahn Enterprises.

Finally, subsequent to quarter end in an effort to be opportunistic with regard to the dramatic increase in valuations for our Philip Services metals business, we hired an investment advisor to explore strategic alternatives. Peter Shea will walk you through the performance of that business and you'll see the growth has been extraordinary. We believe this business is currently worth a multiple of the price we paid to acquire it in November 2007.

Moving to a brief overview of our Investment Management segment, during the first six months of fiscal 2008, the U.S. equity and global markets have experienced tremendous volatility. For the first six months, our funds earned a negative return of 8.9%, compared to a negative return of 12.8% for the S&P 500 index. We entered June effectively flat for the year and in June had unrealized investment losses from our two largest core holdings, Motorola and Yahoo!, which were each down over 20% for the month.

We continue to believe firmly in the long-term potential of these investments and believe that our funds are well positioned for the future. The Icahn funds continue to have assets under management of over $7 billion. Fund performance since the second quarter end has been quite strong, led by a rebound in Motorola's share price. With that, let me turn it over to Dominick to review our financial performance in detail.

Thanks, Keith. I will briefly review our consolidated results for the second quarter and then highlight the strength of our balance sheet. Net loss from continuing operations for the second quarter of 2008 was [$96.9] million as compared to net income from continuing OPs of [$43.6] million in the second quarter of 2007.

As Keith mentioned, the performance of the private funds was affected by the declines in value of key strategic investments. Volatility in the financial markets is expected to continue through the remainder of this year.

The Metals segment had strong performance in the second quarter as ferrous pricing reached historically high levels driven by strong worldwide demand for recycled metals.

Our Real Estate operations continue to be impacted by the general slowdown in the housing market.

The Home Fashion segment continues to face a weak home textile retail environment, however, our restructuring efforts in this segment have begun to pay off in terms of significant cost reductions.

Discontinued operations for the second quarter of 2008 resulted in a loss of $1.9 million, compared to income in the second quarter of 2007 of $20.6 million. The prior period's results included the Las Vegas gaming operations that was sold in the first quarter of 2008. Peter Shea will provide more detail regarding the performance of our Metals, Real Estate and Home Fashion segments.

Now, I will highlight our debt and liquidity position. We finished the quarter with a strong balance sheet and ample liquidity. Our cash, cash equivalents and liquid assets totaled approximately $4.1 billion which includes $1.2 billion in cash that is in escrow for potential 1031 exchange transactions.

It should be noted that liquid assets include our holding company investments as well as cash we invested in our private funds. These investments have a ready market and could be liquidated quickly.

After deducting our total debt of approximately $2 billion, we had approximately $2.1 billion in cash, cash equivalents and liquid assets as of June 30, 2008.

In summary, we continue to focus on having ample liquidity and a strong balance sheet to enable us to execute our strategy and to capitalize on our opportunities. And now I will turn it over to Peter Shea, our President, who will give more detail on the performance of our business segments.

Good morning. In the Metals segment, net sales for the second quarter of 2008 increased by 102% from a year ago to $434 million driven principally by historically high prices for ferrous scrap as average selling prices increased by 87% to $526 a gross ton. These extraordinary prices continued to be driven by strong, worldwide and domestic demand by steel mills as well as a weak dollar.

Increased demand for scrap metal has resulted in a global shortage with marginal importers like Turkey and South Korea pushing prices to record levels. Operating income in the second quarter increased by $58 million to $63 million with gross margins increasing from 5% to 16%. Ferrous volume increased by 38% over last year.

Nonferrous pricing is off from a record high in 2007, down 11% from last year, but remains at historically high levels. Nonferrous volume increased 28% reflecting management's continuous focus on this segment following acquisitions made the last year. Overall, the yards acquired subsequent of Q2 to 2007 contributed $54 million in revenue and $8 million of gross profit.

Turning to our Real Estate segment, second quarter operating income of $2.9 million was $1.4 million better than a year ago. Last year included, asset impairment charges related to our development business in Florida of $1.8 million as compared to $600,000 this year.

Before these charges, development operations were down $400,000 reflecting very slow activity at the Florida properties along with the wind down of the nearly completed [Baysboard] New York property. This was offset, in part, by continued strength at our New Seabury, Massachusetts development. Resort operations improved $700,000 due to increased membership income and reduced beach erosion expenses at New Seabury.

Moving on to Home Fashions, in our Home Fashion segment, second quarter net revenues were $96 million as compared to $151 million a year ago, a decline of 37%. This decline continues to reflect actions taken last year to exit certain nonprofitable bed and bath programs, plus the continued weak retail environments for home textile products.

During the second quarter, the Company named John Piazza President and Chief Executive Officer of WestPoint. John has 32 years of consumer sales and marketing experience and previously led the apparel group at Sara Lee Corporation. Operating losses declined in the second quarter to $24.1 million as compared to $51.5 million last year. These reduced losses reflect an improvement of 10 points in gross margin year-on-year as the Company begins to realize the benefits from moving manufacturing into low cost overseas locations.

In other areas of cost reduction, the Company continues to aggressively pursue logistics and SG&A outsourcing savings. The operating loss for the second quarter included $5.5 million of cash restructuring charges as compared to $5 million last year. The second quarter also included $1.5 million of non-cash impairment charges compared to $15.4 million a year ago.

The restructuring charges relate to the continuing cost of closed manufacturing facilities, severance costs and logistics transition expenses. WestPoint's liquidity remains at a high level with the Company ending the quarter with approximately $129 million in unrestricted cash with unused borrowing availability of $65 million under its working capital facility.

With the closure of numerous manufacturing plants in 2007 and 2008, the Company will continue to sell off excess machinery and equipment as well as closed manufacturing facilities and other real estate to further fund its operations.

Thank you. And, operator, can you please turn it over for questions.

Certainly. For viewers joining on the Web, questions may be submitted via the website. (OPERATOR INSTRUCTIONS) I'll pause for just a moment to compile the Q&A roster. Our first question comes from the line of Mike [Ginsberg]. Your line is open.

I was wondering is the Carl Icahn hedge fund performance reflected in IEP's performance?

Sure, Mike. This is Keith Meister. IEP is the owner of the general partner and the management companies for the Icahn funds. The economics that are received from managing those funds which include an allocation of management fee as well as a profit participation ultimately do inure to Icahn Enterprises. So the answer is, yes.

Okay. Thank you.

Our next question comes from the line of Andrew Berg. Your line is open.

Thank you. A couple questions for you guys. With respect to the Federal-Mogul purchase, does that cash come out of the $2 billion operational cash or does any of that come out of the restricted cash account?

Sure. Cash comes out of parent company cash, not out of the restricted cash that is in escrow. We, obviously, view those in a sense as being fungable. We'll either find a good investment opportunity with the capital that's been reserved for the 1031 or, if not, ultimately that money will be returned to the parent Company. And then, obviously, Andrew, once we acquire control -- having acquired control of Federal-Mogul once we consolidate it in Q3 we, obviously, our cash balance will go up because they are also holding a substantial cash balance.

Understood. And then the $847 million due to broker liability, what gave rise to that?

That's just reflective of the short sales at our various funds.

Okay. Then what -- I was assuming that the securities sold and not yet purchased was the short sale. No? You have about an $800 million difference. And maybe I need to brush up on my short sale accounting. Liability went from $200 million to $1.1 billion.

Yes, I think that's just the short sales and reflective of increasing hedge exposure and the fund in reflection of a concern toward the general volatility equity markets. We're happy to walk through that with you in more detail offline.

Okay. And then, lastly, Carl's position in ImClone, was that falling into the hedge fund that we own or was that falling into an asset pool outside our credit that accrues to Carl but not us?

Icahn Enterprises is actually a direct shareholder in ImClone. ImClone was an investment that was made prior to the launch of the hedge fund so it is not something that is owned by the hedge fund.

It is owned both by Carl Icahn and Icahn Enterprises. If you would like to see the exact numbers, I would refer you to the 13-D we have on file with regard to ImClone and you can see the exact holdings of Icahn Enterprises in ImClone.

Okay. And any time I see an investment by Carl and it shows up under Icahn Associates, that's outside our credit, correct?

Once again, I would be careful relying on how others make characterizations of our investments. Icahn Associates, though, is not an entity that is part of Icahn Enterprises.

Okay and I was just looking based on filings. And when I see Icahn Associates, I just wanted to confirm that that was outside the credit, not inside.

Icahn Associates is not a part of Icahn Enterprises.

Fantastic. Thank you, guys.

(OPERATOR INSTRUCTIONS) We have no more questions over the phone.

With that, we would like to thank everyone for their participation and we look forward to chatting with everyone later in the year when we report third quarter earnings. Thank you.

This concludes your Icahn Enterprises second quarters earnings call. You may now disconnect your lines.