Icahn Enterprises LP (IEP) 2008 Q4 法說會逐字稿

Good morning and welcome to the Icahn Enterprises LP fourth quarter 2008 earnings call with Felicia Buebel, Counsel; Keith A. Meister, Principal Executive Officer and Vice Chairman; and Dominick Ragone, CFO and PAO. All lines have been placed on mute to prevent any breakdown noise background noise. After the speakers' remarks there will be a question and answer session. (Operator Instructions). I would now like to hand the call over to Ms. Felicia Buebel, Counsel.

Thank you. I will now read the forward-looking statement. 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 a copy of this presentation at www.IcahnEnterprises.com/investor.shtml. Now, I would like to turn the call over to Keith Meister.

Thank you Felicia. Good morning and welcome to the fourth quarter and full year 2008 Icahn Enterprises earnings conference call. I will begin with a few brief introductory remarks and then turn it over to Dominick to discuss our financial performance and segment business performance in detail, after which we will be available as always to address your questions.

Before I begin, I want to take a moment to thank Peter Shea for his work at IEP over the last two plus years. Peter's employment agreement expired at year and that we collectively agreed not to renew that agreement, so that Peter can pursue other interests. Friday will be Peter's last day at IEP and we wish him well on his future endeavors.

Moving onto the overview of 2008, 2008 was a trying year to say the least for the global financial markets. What began as a subprime credit crunch on Wall Street during the summer of 2007 spread into a full-blown financial credit crisis on both Wall Street and Main Street during 2008.

The rate at which liquidity went from being abundant to nonexistent over the last 18 months has been alarming to all financial market participants. Asset valuations across the globe have depreciated.

We do not intend to recount all of the events that have transpired over the last several quarters, as unfortunately everyone is all too well aware of the uncertainty that is currently gripping our financial system. Today's consensus from most market pundits is that we have never seen anything like today and we do not disagree.

However, historically it has been during periods of the greatest market dislocations and stress that the greatest opportunities have been created for those with capital to take advantage of them. Icahn Entities has historically thrived during these time periods. As acquirers of distressed assets, we are well positioned to take advantage of uncertainty and dislocated markets.

We ended 2008 with $3.3 billion of liquid assets, which positions us well to take advantage of what we believe will be unique opportunities to either grow our businesses by providing them with capital or to acquire new businesses through acquisitions during the year.

Our investment management business and industrial operating businesses were not immune from the effects of 2008. However, as Dominick will discuss, our businesses continue to make progress on key operating initiatives and have strong balance sheets and are hopefully well positioned to emerge from the cycle as stronger competitors.

In 2008 we were quite active. We sold our gaming assets and realized a substantial profit. Many industry experts believe we [top ticked] the market for gaming valuations on that sale. We redeployed a portion of those proceeds into low risk, unlevered, net leased real estate assets with a long dated, high credit quality single tenant and we were able to successfully defer substantial taxes to a Section 1031 exchange.

Additionally, we used a combination of our depository units and cash to acquire an approximately 75% interest Federal-Mogul which we believe provides us with a great platform to invest in and grow in the automotive industry, which is obviously going through tremendous dislocation. Federal-Mogul, like Icahn, has a strong balance sheet and we believe it is well prepared to take advantage of opportunities that will be present in the future.

Despite the current economic weakness, the strength of our balance sheet allowed the Board of Directors of Icahn Enterprises to recently approve a cash distribution of $0.25 per depository unit payable on March 30, 2009. In addition, as a confirmation of the opportunity that we believe lies ahead in distressed securities, Icahn Enterprises further increased its commitment to the private funds in January of 2009 by investing an additional $250 million into the funds.

Before I turn the presentation over to Dominick, let me spend a brief moment on our investment management segment. In 2008, our investment funds' result did not meet our expectations. The funds performed consistently with the US financial markets. Gross returns for the twelve months ended December 31, 2008 were negative 35.6% compared to negative 38.5% for the S&P 500 for the same period of time.

Total assets under management were $4.4 billion at year end. While we do not find last year's returns to be acceptable, we are pleased that despite a 20% continued decline in the S&P 500 since year end, our funds have had positive performance year to date.

While it is difficult to predict future performance and we will not try to do so, we believe the core positions in our portfolio represent attractive businesses at compelling valuations. And the new opportunities to redeploy our capital in distressed situations are as good as we have seen in many, many years.

With that, let me turn it over to Dominick to discuss our other businesses in more detail.

Thanks Keith. I will briefly review our consolidated results for the fourth quarter and for the full year 2008. I will then highlight the performances of our operating segments and comment on the strength of our balance sheet.

Our full year 2008 loss from continuing operations was $528 million which included restructuring expenses and impairment charges primarily for goodwill and intangible assets aggregating $453 million. This compared to income of $219 million for 2007, which included restructuring expenses and impairment charges primarily for tangible assets aggregating $32 million.

For the fourth quarter our net loss from continuing operations was $467 million as compared to a loss of $15 million in the prior-year period.

Income from discontinued operations for 2008 was $485 million compared to income of $89 million in 2007. The increase was primarily due to the $472 million gain from the sale of our Las Vegas gaming properties in February 2008. Discontinued operations for the fourth quarter of 2008 resulted in a loss of $1 million compared to income in the fourth quarter 2007 of $13 million. The prior period's results included the Las Vegas gaming operations.

As Keith mentioned, the performance of the private funds continues to be affected by the global selloff in the equity and debt markets that began in the third quarter. We believe that our cash position going into 2009 provides us with the ability to take advantage of opportunities that may arise as a result of these market conditions.

I will now provide more detail regarding the performance of our automotive, metals, real estate and home fashion segments.

In December we acquired an additional 24.5 million shares of Federal-Mogul bringing our total ownership to 75.7%. Federal-Mogul had strong sales and operating performance for the first three quarters of fiscal 2008 but faced a significant drop in sales in the fourth quarter. For 2008 Federal-Mogul had net sales of approximately $5.7 billion and gross margin of $922 million or 16.3% of sales. For the fourth quarter, Federal-Mogul had sales of $1.3 billion and a gross margin of $183 million or 13.9% of sales.

Restructuring expenses and impairment charges related to the economic downturn led to operating losses for both the full year and the fourth quarter of 2008. Federal-Mogul recognized impairment charges of $434 million in 2008, all of which was recognized in the fourth quarter. Restructuring expenses were $132 million for 2008 and $118 million for the fourth quarter and were part of Federal-Mogul's global restructuring program announced in September and December 2008.

Despite these challenging market conditions, Federal-Mogul's restructuring plan will put it in a strong position to benefit from a turnaround in the global economic situation. Specific actions which have been instrumental thus far in reducing the effect of the downturn on sales were pricing activity and aggressive cost reduction initiatives in both manufacturing and SG&A.

For those of you who are interested in more detailed information on the Federal-Mogul quarter or full year, I refer you to their earnings presentation on February 24 that can be found at their website.

Turning to the metals segment, unprecedented global demand drove up ferrous scrap pricing to historical high levels through the third quarter of fiscal 2008 which helped drive full year net sales to $1.2 billion and operating income to $103 million. In the fourth quarter however, the metals segment faced a significant decline in demand and prices, resulting in a net operating loss of $20 million.

Steel mill operating levels fell to a 25 year low by the end of December. [Shredded] material prices quoted as high as $594 per gross ton in July dropped as low as $131 in November and approximately $150 below 2007 levels.

[Service] sales volume was down 85% from one year ago, non ferrous pricing and volume were also off significantly from one year ago. As a result of the economic downturn, our metals segment has implemented various measures to align its cost structure to the current market environment. Some of these measures include significant staff reductions and salary freezes, temporary idling of major equipment at certain operations and reduced capital spending.

Next is our real estate segment. Operating income for 2008 was $19 million as compared to $14 million in 2007. This improvement primarily reflects an increase of rental income from the acquisition of the two previously mentioned net leased office properties in August 2008. This was offset part by a sharp drop-off in property development sales from the previous year.

In 2008 we sold 39 residential units for $42 million at an average price of $1.1 million. In 2007, we sold 76 residential units for $61 million at an average price of $800,000. Our resorts operations at New Seabury and Vero Beach performed slightly ahead of last year.

In 2008, impairment charges of $4 million were recorded, primarily attributable to inventory units in our Grand Harbor and Oak Harbor, Florida subdivisions. In 2007, there were impairment charges of $3 million related to our condominium land in Oak Harbor.

During turning to our home fashion segment, net sales declined 30% to $107 million for the fourth quarter as retailers pulled back on replenishing existing programs in reaction to a sharp decline in consumer demand for home products as the economic recession worsened. Operating losses before restructuring and impairment charges for the fourth quarter were $15 million compared to $23 million in the fourth quarter of 2007 due to improved gross margins and reduced SG&A.

For the year, net sales of $425 million were 38% lower than the prior-year due to the weak home textile environment and the elimination of unprofitable retail programs.

Gross margin increased by $29 million to $31 million as a direct result of shifting manufacturing capacity from the United States to lower cost countries. SG&A expenses were reduced by lowering warehousing and shipping costs, consolidating locations, reducing headcount and implementing other cost reduction measures.

The operating loss for 2008 was $95 million compared to $159 million for 2007. The operating loss in 2008 includes $37 million of restructuring expenses and impairment charges, as compared to $49 million for 2007. Our home fashion segment's liquidity position remains strong. At the end of 2008, home fashion had $131 million of unrestricted cash and $45 million of unused borrowing ability under its working capital facility.

Now I will highlight our debt and liquidity position.

We finished the year with ample liquidity. Our cash, cash equivalents and liquid assets totaled approximately $3.3 billion. It should be noted that liquid assets include our cash we invested in our private funds as well as our holding company investments. These investments have a ready market and could be liquidated quickly.

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. Thank you. And with that, I will turn it over and open it up for questions, operator, please.

(Operator Instructions) Andrew Berg.

Hi, guys. Dominick, going back to the cash for a second, when I look at the $2.6 billion, that includes your $660 million that is in the funds?

I'm sorry could you repeat that?

On page 13 in the slide deck, where you say your cash of $2.6 billion, that includes the $660 million that is in the funds, correct?

Yes. And that is the fair value of the investment at 12/31.

And funds that you invest or moneys you put into the hedge fund business, it is that subject to the same lockup restrictions and penalties that outside investors are subject to, with the -- I think it was the 4% and the 8%?

No, it is not.

You guys purchased a significant amount of debt in the fourth quarter. I was having difficulty reconciling the debt shown on the balance sheet versus the noted repurchase. Can you guys tell me exactly how much of each issue you repurchased?

We are not going to give specifics on that. I'd refer you to the footnote that shows the debt balance on a deconsolidated basis. And I think that will help you decipher exactly which debt securities were repurchased.

Okay, I will go back and try again, because from the amounts you are showing in your debt table, I was coming up with significantly lower changes in debt versus the numbers you had if I am looking on page -- I think it's 142.

We can chat about it off-line, but my guess is you are focusing only on the corporate holding company obligations. And I think you need to look across the consolidated capital structure and I will leave it at that.

Okay, so what is included, the [ACT] bonds?

I'm going to leave it there.

Okay. I will let somebody else ask questions.

(Operator Instructions) [Miles Weiss].

Just a quick question on the redemptions, were the total redemptions from the funds about $900 million for the year? And I was wondering, given the redemptions that you had, how did you increase your cash during the second half of the year?

This is Keith Meister. I think you may be comparing apples and oranges. When we talk about cash and liquidity, we are talking about it -- most of which comes from our holding company and sort of the permanent capital at Icahn Enterprises.

When we speak of capital inflows and outflows from the funds, that is sort of third-party, limited partner capital or additional money from the parent, which is in a segregated vehicle that makes investments. So, the total liquidity at the parent company was increased substantially. The biggest component obviously would be the sale of the gaming assets during 2008.

Vis-a-vis the funds, we had less than approximately 14% net outflows at year end. That is less than our total net flows for the year because there were inflows earlier in the year. So I think that was -- while we are not happy with the performance, the net flows of capital were on the high end of industry standards.

Okay, thank you.

[Ken Van].

Good morning. On the metals segment, could you give us an idea of how much in the way of costs you have cut out so far? Given the pricing current pricing environment, with those cost cuts do you expect you will be profitable in that unit going into 2009? Or do you need some further recovery in prices or further cost cuts to get there?

We continue to reduce our costs. We have not released the amounts of those cost cutting reductions. We certainly would benefit from increased prices and increased demand. We believe we are -- we are well positioned for a change in the market. And that is where we stand now.

I would just add one thing which I think is important. This is an unlevered business, so I think it puts us in a much stronger position than some of our competitors. There is no debt at the metals business so they can continue to, while cutting costs, make the right investments and prosper through the cycle.

Okay. Could you comment on the home fashions segment? You have obviously gotten a lot of [that business] from moving manufacturing to other places. Are most of those benefits -- have they already been achieved or are there other significant reductions in costs that can be achieved from that move that you will get in 2009?

We continue to restructure the home fashion business. We do expect some benefits in 2009 from that restructuring. We are certainly very pleased with our gross margin and where we have been historically and how we have improved that over the last year and a half. We continue to review any additional costs that we can take out of the business.

Are you concerned about any of your retail partners in that business that might have some write-offs related to any of those retailers?

Certainly. We are watching our competitors and customers very, very closely, monitor credit continuously, very concerned about what is going on in the retail market and believe we -- our balance sheet is well positioned to move through this economic downturn and look to take advantage of situations in the market that could be advantageous for us.

But just one, before I move to the next question, one of the things whether this how fashion or any business, frankly today I think you need to be concerned about the financial health of your customers, your suppliers, etc.

I think part of what we need to do at the holding company to be a good stewards for our businesses is make sure Dominick and his team are really working with our various CFOs at the companies. Making sure that we're focused on this, because I think it is a real challenge for everyone in every industry during the current economic environment.

So it is something we are really on top of. We are going to do the best we can to mitigate these problems. But there can be no assurances that there won't be problems with suppliers or vendors down the road, but it's something we are really focused on. It is a top priority.

Okay, great. Thank you.

Andrew Berg.

Following up on the home fashion segment, obviously you guys have been working real hard to improve it and it made some good headway. In the past, you guys had talked about significant margin expansion potential as you tried to optimize manufacturing, move stuff offshore and did other efforts. I think that was like a 20 point kind of operating improvement potential if you could get there.

Given the revenue levels, where things have come down to because of the external environment, can you still get those sorts of margin improvements? Or lower revenue levels that we are seeing now, do we need to adjust our expectations lower just because the sheer order of magnitude of the sales drop?

I think, clearly, the economic environment and the current revenue trajectory in the industry is not something we were forecasting 12 or 24 months ago. So the ability to get margin is going to be affected by having reduced volume, period.

With that said, we still think there is opportunities to improve the business, to become a low cost provider, so that we then can be in a more aggressive position to grow the top line. So in a sense they are sort of circular. I think there is opportunity to improve but clearly it is a tough retail environment.

Should we move our expectations down 500 basis points or so to just try and keep realistic and not give you guys too high a hurdle then to try and meet?

In terms of projections and exact expectations, we will let you draw your own conclusions other than we're going to continue to try and take the appropriate restructuring actions to be a low cost provider and then try to get margins that are consistent with best of breed in the industry. And ultimately the economic backdrop is going to drive what kind of margins a low cost provider can get in this business.

Okay, thank you.

(Operator Instructions). [Christopher Bell].

I was wondering if you have taken advantage of the discounted price in your convertible bonds in the marketplace and to what extent?

I'm not going to talk about various securities. But there is disclosure in our 10-K that was filed today with regard to the balances outstanding of a variety of different debt securities in our capital structure. I think you can do the math to see that there is less outstanding today than there was at the beginning of Q4.

So, the answer is yes. We have been opportunistically acquiring different securities in our capital structure.

Okay, thank you.

(Operator Instructions). We have no more questions over the phone lines at this time, sir.

So, with that, I would like to thank everyone for their continued interest in Icahn Enterprises and for joining us. And we look forward to chatting with you again as we release first quarter results. Thank you very much.

This concludes today's conference. You may now disconnect.