Icahn Enterprises LP (IEP) 2008 Q3 法說會逐字稿

Good morning and welcome to the Icahn Enterprises L.P. Third Quarter 2008 Earnings call with Felicia P. Buebel, Counsel, Keith A. Meister, Principal Executive Officer and Vice Chairman, Dominick Ragone, CFO and CAO and Peter K. Shea, President. I would now like to hand the call over to Felicia Buebel, Counsel.

Thank you. I will now read the forward-looking statements. 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 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.shtml.

Thank you. I'll now turn this over to Keith Meister.

Thank you, Felicia. Good morning and welcome to the Third Quarter 2008 Icahn Enterprises Earnings Conference Call. I will begin by providing key highlights for the third quarter and a review of our Investment Management segment after which, Dominick Ragone our CFO, will provide an overview of our financial performance followed by Peter Shea, our President, who will provide an overview and performance of our business segments after which, we will be available to address your questions.

Year-to-date, Icahn Enterprises has achieved net income of $415.6 million, or $5.83 per depository unit. During the third quarter net income totaled $23.3 million or $0.32 per depository unit. Icahn Enterprises maintains a very strong liquidity position with liquid assets of approximately $3.5 billion as of quarter end.

During the third quarter Icahn Enterprises purchased two net leased real estate properties for a total purchase price of $465 million. These transactions utilized a portion of the proceeds from the sale of our gaming assets under a 1031 exchange and successfully deferred income taxes of over $100 million. The assets that we acquired are net leased to a tenant with a strong investment grade credit rating of A2 and a market value well in excess of $100 billion. Furthermore, these properties currently have no leverage on them.

Subsequent to quarter end, Icahn Enterprises invested an additional $250 million into the Icahn Funds. Icahn Enterprises' additional investment in the funds illustrates our belief that the current dislocations in the financial markets while having painful short-term effects on many market purchase [spins], ourselves included, present opportunity for attractive returns over the long-term. In addition, as a reflection of our strong balance sheet and strong liquidity position, our Board of Directors affirmed our quarterly cash distribution of $0.25 per depository unit payable on the fourth quarter of fiscal 2008.

Moving to our Investment Management segment, gross returns for the three months ended September 30, 2008 were negative 8.6% compared to a negative 9% return for the S&P 500 during the comparable period. As a result, year-to-date gross returns were down 16.8% through September 30, 2008 compared to negative 20.7% for the S&P 500 for the comparable period.

We, like others, have not been immune from the dislocations in the global financial markets. However, we have a strong capital base with significant internal capital from Carl Icahn and Icahn Enterprises, L.P.'s whose original investments were all subject to three-year lock-ups and unlike many other market participants our investment model is not heavily reliant on leverage.

Said differently, we believe that we are in a position to take advantage of volatility in the current markets to make investments that will result in attractive long-term returns.

As of September 30, 2008, total assets under management were approximately $6.6 billion. Like many others in the investment management industry we will not be immune from redemptions at year end. However, the total net amount of redemptions from our funds at year end will be less than 15% of assets under management. As such, we believe that we are in a strong position to continue to execute our investment strategy and hopefully produce returns that are more consistent with our standards.

With that, let me turn to Dominick to discuss our consolidated financial results.

Thanks, Keith. I will briefly review our consolidated results for the third quarter and then highlight the strength of our balance sheet.

The results of the third quarter include the operations of Federal-Mogul. Icahn Enterprises acquired 50.5% of Federal-Mogul's shares on July 3rd for approximately $863 million. Net income from continuing operations for the third quarter of 2008 was $24.7 million as compared to $6.8 million in the third quarter of 2007. As Keith mentioned, the performance of the private funds continues to be affected by the turmoil in the global markets. We believe that our strong capital base will enable us to take advantage of these market dislocations.

Federal-Mogul had quarterly sales of $1.692 billion and a gross margin of $279 million, or 16.5% of sales. Unfavorable macro-economic factors including turmoil in the credit markets, higher energy prices and sustained high material prices negatively impacted consumer confidence, limited new car purchases and vehicle miles driven in global markets. Despite these challenging market conditions, Federal-Mogul's revenue remains solid as a result of global diversification.

The Metal segment had a strong performance in the third quarter resulting from an increase in the average selling price of ferrous metals and an increase in volume of shipped ferrous production.

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

The Home Fashion segment have reduced net sales due to weak home textile retail environment as well as from the exit of unprofitable programs. However, our restructuring efforts in this segment have begun to pay off in terms of significant cost reductions as evidenced by improved gross margins.

Discontinued operations for the third quarter of 2008 resulted in a loss of $1.4 million compared to income in the third quarter of 2007 of $17.2 million. The prior period's results include the Las Vegas Gaming Operations that were sold in the first quarter of 2008 and the $7.7 million gain on net leased properties that were sold.

Peter Shea will provide more detail regarding the performance of our Automotive, Metals, Real Estate and Home Fashion segments.

Now I will highlight our debt and liquidity position. We've finished the quarter with ample liquidity. Our cash, cash equivalents and liquid assets totaled approximately $3.5 billion. It should be noted that liquid assets include our holding company investments as well as our cash we invested in our private funds. These investments have a ready market and can be liquidated quickly.

In addition to our strong cash position, we have undrawn credit facilities totaling $751.9 million as of September 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 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.

Thanks, Dominick. Turning to Federal-Mogul. Our Automotive segment delivered a solid performance for the quarter with sales up slightly over a year ago despite a decline in the automotive market and a global economic downturn. Compared to 2007 volume declines in OE and after market were offset by share of market gains, customer pricing and foreign exchange.

Operating performance held strong with EBITDA increasing by 7% to $178 million as management reacted quickly to the weak market environment with operational and structural changes to reduce costs. Gross margin of 16.5% was equal to last year. Federal-Mogul continues to take aggressive actions to improve operating performance and respond to increasingly challenging conditions in the global automotive market.

On September 17th, the Company announced the restructuring plan that is expected to reduce the global workforce by approximately 4,000 positions or 8% of its workforce. The announced plan includes restructuring charges of $11 million in the quarter add to an additional $69 million through December 31 of '09. As the majority of these costs are related to severance, this plan is expected to yield future annual savings at least equal to the incurred costs.

The Company is focused on ensuring the top line is protected in a downsizing industry environment through leveraging market diversification and leading technology and innovation in fuel economy, alternative energies, emissions and safety systems.

For those of you who are interested in more detailed information on Federal-Mogul's quarter I refer you to the earnings presentation on October 22nd that can be found at their website.

PSC Metals, in the metals business net sales for the third quarter increased by 104% over a year ago to $406 million. Historically high ferrous scrap prices continued into the quarter reaching $594 per gross ton in July. Approximately $285 higher than the same period in 2007.

These extraordinary prices were driven by strong worldwide demand for recycled metals and by a weak dollar but began to deteriorate by September when world economic conditions began to affect the Scrap Metal business as demand from steel mills significantly declined at the end of the quarter and continued to deteriorate into October.

Operating income in the third quarter increased to $32.4 million from $9.8 million a year ago. All product lines contributed to the improvement including non-ferrous and secondary products but the largest increase was with ferrous.

Gross margin, an increase for the period, from 8% to 10% and includes a $10 million charge to adjust inventory to lower of cost or market reflecting the lower prices at quarter end. Overall, ferrous volume increased by 26% over last year.

New scrap yards acquired subsequent to Q2 of 2007 also contributed $46.3 million to revenue and $3.8 million to gross margin.

Let's turn to Real Estate. Operating income in the third quarter was $6.2 million, up $700,000 from last year and includes income of $3.2 million from the two office properties we acquired that Keith referenced earlier. Partially offsetting rental income was weak development activity, particularly at the Florida properties. The quarter included asset impairment charges of $1.5 million principally related to inventory units at our development property in Vero Beach Florida. Despite the general slow down in real estate, New Seabury development income improved during the period on unit sales equal to last year.

Next is Home Fashion highlights. Third quarter net revenues were $108 million as compared to $183 million a year ago. This decline relates to the exit of certain non-profitable Bed and Bath programs plus the continuing effect of a weak retail environment that has been further impacted by the financial market crisis.

Operating losses before restructuring and impairment charges were $10 million compared to $23 million a year ago as gross profit margin improved 5 points to 8%.

Compared to 2007 the Company has significantly reduced costs by shifting manufacturing capacity to low-cost countries, reducing logistics costs, outsourcing certain support functions and right-sizing headcount throughout the Company.

The third quarter operating loss in 2008 included $4.5 million of cash restructuring charges as compared to $4.6 million last year. Third quarter also included $3.7 million of non-cash asset impairment charges compared to $9.5 million a year ago. The restructuring charges relate to the continuing costs of closed manufacturing facilities, severance costs and logistics transition expenses.

WestPoint's liquidity remains strong with the Company ending the quarter with approximately $129 million in unrestricted cash and $62 million of unused borrowing availability under its working capital facility.

The Company continues to sell off excess machinery and equipment as well as clothes manufacturing facilities and other real estate to further fund its operations.

Thank you. And, Operator, can you please open it up for questions?

Yes. (Operator Instructions) Andrew Berg, Post Advisory Group.

With respect to your capital that's down at the investment funds, safe to assume you guys aren't subject to the same restrictions and you can pull that at any time you want?

Andrew, this is Keith Meister, subject to Carl Icahn affiliate entities having a certain amount of minimum investment in the funds, the incremental capital has very good liquidity provisions and it's safe to assume that Carl's base investment in the funds is multiples of that minimum level. So the capital put in by Icahn Enterprises, yes, has lost liquidity although I want to be specific, there's obviously no intention to take it out because we think there's very strong investment opportunities right now.

And you said the redemptions are 15% of assets or less than 15%?

Slightly less than 15% but it's less than 15% but you can use that as a benchmark number.

So that would take the -- are those all fee paying assets or those --?

It's 15% of total assets.

Okay. But that 15% of total assets -- I know when you guys break out the assets under management is fee paying and non-fee paying. Are those all fee assets or could some of those be non-fee assets, some of the impact?

You should assume they are fee paying given that we have committed further capital this quarter as a non-fee paying investor so we're investing, not withdrawing.

Subsequent to the end of the quarter you guys repurchased bonds. Can you guys give us a little bit better understanding of what bonds were repurchased?

We're not going to get into specifics on that. I think we continue to look at our liquidity and our balance sheet and try and find the best uses for that whether it be new investments or opportunities to repurchase a variety of our securities through our consolidated affiliate entities and we'll continue to look across the capital structure and see what we think makes the most sense for all of our stakeholders.

Is it safe for me to assume that it was one of the three classes of the Icahn Enterprises securities? It wouldn't have been a pay down from where it's payable to the other debt?

I'm not going to comment on what securities they were.

Not even a hint, huh Keith? The buildings you guys invested in, can you guys disclose there those are? Where those buildings are for the 1031s?

Yes. We can disclose the location. Felicia, do you want to disclose the locations?

Yes. They were two office buildings. One is in Dallas, Texas and the other is in Atlanta, Georgia.

The one point I would make about them is we cannot, under our agreement, disclose the tenant but it is one of the strongest -- it's a tenant whose credit we are very, very comfortable with. That, as I mentioned in my prepared remarks, has an equity market value well in excess of $100 billion.

Okay. I'll drop out and let others ask and then I'll pick up again.

Great. Thanks.

Miles Weiss.

I just wanted to check something -- just two quick questions, actually. In the 10-Q it says that Icahn Enterprises -- the net asset value of its investment in the consolidated funds is $88.5 million but it also says you've invested -- well, I guess prior to the $250 million, $700 million. So I just was wondering what the explanation is on the difference between those two?

Hi, Miles. It's Keith Meister. I'm not sure what the first number you are referencing is. Your facts are correct in that the original investment by Icahn Enterprises in the funds was approximately $700 million and then on November 1st we invested an additional $250 million. The value of those positions are disclosed in the queue. They are nowhere near the number you referenced.

You mean the $88.5 million?

Correct.

Yes. I think it must be -- I don't know if it's referring to like interest in the general partnership or something like that. I don't know how --

I'd be happy to discuss off line where you're coming with that number and to walk you through it but just to be specific the $950 million that has been invested in the fund is worth some number.

Right. No, I didn't think it was due to losses. I just couldn't understand -- it's two different things.

The other thing I wanted to ask is it looks like the cash position in the funds as of September 30, 2008 was pretty high. You had $2.9 billion of cash in the fund plus I guess restricted cash if I was reading your financial statements correctly. Can you give any sense of how much of that cash is actually in the funds and how you built that cash position?

Sure. I'm not going to walk through the specifics. I will refer you to our balance sheet which I think does a very good job of providing segment financials. The Investment Management segment, both its assets and its liabilities, are broken out separately so you can see as of quarter end that there were $9.6 billion of assets at the funds against $3.2 billion of liabilities for approximately the $6.6 billion of net asset value. And you can see what appears to be, compared to many other hedge funds, a very conservative balance sheet looking at the amount of cash held at the Investment Management business.

We've tried to -- we're not reliant on leverage and try to manage our business conservatively in these challenging times.

Thank you.

(Operator Instructions) Andrew Berg.

Dominick, looking at the balance sheet last quarter you had, and you guys have [rejiggered] how you laid out the balance sheet this quarter versus last quarter, but last quarter you had restricted cash showing up as a roughly $1.2 billion number and this quarter it shows up as just shy of a $31 million number and I'm just trying to reconcile how that got split out. Obviously some of it was used for the office building because obviously that $1.2 was all restricted cash but can you help me reconcile those two numbers?

The $1.2 billion was related to the 1031 transaction. The $30 million is the restricted cash you see in the holding company level on the face of the balance sheet.

So just to be specific, we had money in a 1031 escrow account. We used some of it to purchase two office buildings, the rest of the capital came out of the 1031 exchange account and is no longer restricted.

Okay. So that (inaudible) is in that $1.5 billion of cash and equivalents.

Right.

Thank you.

There's an online question regarding our capital structure and our comfort with our current leverage of leverage and thoughts on buying back additional debt securities. We are very comfortable I think, as we've alluded throughout our remarks, with our balance sheet. With regard to purchases of debt securities, we're not going to comment but we continue to look at what makes the most sense for returns on our capital.

Warren [Goodwrench].

Can you give an update on the PSC metals process? I know in July you put an 8-K and hired advisors?

Yes. That process continues and once again we're not going to comment on that until it either gets to its completion with the announcement of a transaction or until we terminate that process but it's continual.

Thanks.

(Operator Instructions) John Old.

Maybe you said this earlier but on the cash and cash equivalents, can you break that down between (inaudible) the parent company? That's not -- those aren't parent company numbers, are they? The $3.5 billion?

This is Keith. I'd refer you once again to the balance sheet in the 10-Q which gives a breakdown of where our cash and equivalents sits. You'll see on the face of the balance sheet approximately $1.83 billion of cash, cash equivalents and other assets at the holding company and you can then also see how much cash is at our various businesses. The biggest piece of our cash that is at a subsidiary is approximately $781 million at Federal-Mogul.

So that's $1.8 billion plus 700 and that gets you to $2.5 billion and where does the other billion sit?

There's liquid investments that the holding company holds and there's also our investment in the funds.

Which gets canceled out in consolidation so you do not see anywhere on our balance sheet the $700 million originally invested in the funds. What we do is we consolidate the assets and the liabilities and then we back out a non-controlling interest. But if you look to the detailed footnotes you can see more clearly the financials of the funds on a deconsolidated basis.

And in the money management business, when you changed the fee structure in, I guess, the beginning of last year to more of an allocation as opposed to a paid fee, correct me if I'm wrong but given that we're down what we are, there's really no cash flow coming out of that business until such time as the results are positive and then the allocations can be made. Do I have that correct?

You do.

Great. And maybe I missed this too but assets under management were $6.5 -- $6.6 billion, how much of that is fee paying?

Do you want to take that?

Approximately $4.3 billion.

And the -- the Federal-Mogul interest at 50% is sort of an awkward ownership percentage. I guess Carl still owns the other 25%. Would you look to try to consolidate that at some point or --?

We have no comment on that at the moment.

Thanks.

(Operator Instructions) John Old.

Just a follow-up. How do you guys see the, just given the macro-economic environment, how do you see that unfolding? How are you sort of positioning yourselves to take advantage of it and what's your -- do you have any sort of feeling or forecast as to how the economy plays out over the next year or so and how would you take advantage of that?

We're not going to use this conference call as sort of a forum to provide a forecast into the future. Clearly, there's been tremendous volatility and confidence in the markets have been destroyed over the last several months. So historically during these periods of times Carl Icahn and his affiliate entities have been able to capitalize on this by having strong capital positions and looking to find dislocations where obvious opportunities for value could be present for someone who has capital and a willingness to do the work. We're going to try to do the same thing. We're going to position ourselves with as much capital and liquidity and try to find some gems or some bargains out of all the dislocation and volatility and be prepared to try and take advantage of that when it occurs.

Can you give us any sense as to how things have transpired in October?

We're not going to give specific numbers until quarter end other than to say I think October's been a difficult month for all participants. Our [reals] were directionally consistent with the S&P 500, not as severe.

Right.

Thanks for the questions, John.

(Operator Instructions) There are no questions in queue at this time.

Thank you all for joining us and for your interest in Icahn Enterprises and we look forward to chatting with you when we host a conference call to post our year-end results. Thank you.