Harsco Corporation
Q3 2007 Earnings Call Transcript

Published: 25 Oct 2007

[Operator:]

At this time, I would like towelcome everyone to the Harsco Corporation Third Quarter Earnings ReleaseConference Call. (Operator Instructions) I would now like to introduce Mr.Derek Hathaway, Chairman and CEO of Harsco Corporation. Mr. Hathaway, you maybegin your call.

[Derek Hathaway:]

Thank you very much. Goodafternoon, ladies and gentlemen and thank you for joining us on today's thirdquarter conference call. I have with me today Gene Truett, who directs ourInvestor Relations efforts; Ken Julian, who does Communications, both internaland external, on behalf of the Company; Mark Kimmel, who is General Counsel andSecretary of the Board, and also joining us today is Stephen Schnoor. It was recently announced thatSteve would become the Chief Financial Officer succeeding Sal Fazzolari in thatjob from January 1, and this is the first of the such meetings that he isattending. And I thought it would be a good idea for him to start to get a feelfor these lion's den experiences. Also, obviously, with me today is SalFazzolari. It was recently announced thatSal will be succeeding me as the Chief Executive Officer from January 1 and asChairman of the Board, it's expected after the annual general meeting, whichwill take place in April of next year, April the 22nd to be precise. So thoseare the welcome and introductions and I'm going to ask Mr. Kimmel if he would,please read to us the Safe Harbor Statement.

[Mark Kimmel:]

Thank you, Derek. Good afternoon,everyone. Let me just take a moment to remind you that our comments today,including our responses to your questions, will likely contain forward-lookingstatements. These statements relate to thefuture of our business and may address operations, results, economicexpectations, and other aspects of, or factors affecting our business. Ourstatements made today are based on the best available information, futureresults could differ materially from what we tell you today. Possible reasonsfor these differences may be because of the occurrence of one or more factorsthat are discussed and listed in our periodic filings with the Securities andExchange Commission. We invite you to review this information at yourconvenience. I would also like to remind youthat replay's of another information relating to this call are available at ourwebsite, www.harsco.com. You can access telephone replays of this call bydialing the numbers provided in this morning's press release. Derek?

[Derek Hathaway:]

Thank you very much, Mark. Well,as reported this morning, we achieved another record quarterly performance. Weare pleased with the balance of the growth achieved through our major operatinggroups. This balance resulted in diluted earnings per share from continuingoperations being up 30% over the corresponding period last year. I'm going toask Sal Fazzolari now to give you more details on our performance for the thirdquarter. We'll then take your questions and followed by any closing commentsthat we may deem to be appropriate. Thank you, Sal.

[Sal Fazzolari:]

Thank you, Derek. Good afternoon,everyone. It is certainly a pleasure to be here with you again. Please bearwith me here, I do have quite a few salient points that I would like to make.So, hopefully by the end, you'll realize why. We were, of course as Derekindicated, very pleased with our third quarter performance. Sales, income,diluted earnings per share, and operating margins were all records. We are alsopleased, that was not mentioned in the press report, with the improvement inEVA and the return on invested capital for the first nine months. In fact, ouryear-to-date numbers for return on invested capital, we've had a 140 basispoint improvement year-over-year and our EVA improvement, again year-over-year,is substantially ahead of our target. So we believe we are well on ourway to another record year of strong EVA growth as well as our return oninvested capital. Let's look at some of the performance of the third quarter,as well, I'll make a few comments on the nine months performance asappropriate. Overall, the third quarteroperating margin for the Company was a record 13.4%. That is 70 basis pointimprovement over last year's 12.7%. Again, as we probably say to you everyquarter, we'd like to remind you that margin improvement has been and willcontinue to be one of our primary management objectives. Also stated in previousconference calls, which I believe, again, warrants repeating, the continuingoverall strong performance of the Company is underpinned by a well-constructedand well-balanced global portfolio of mainly industrial services businesses. Webelieve that this third quarter, particularly, manifests this balanceespecially well. For example, operating income for the nine months for theCompany was $347 million. Again well-balanced between the three businessgroups. Access Services accounted for $132 million or 38%, Minerals and RailTechnologies accounted for $112 million or 32%, and Mill Services accounted for$103 million, or 30%. I think that is pretty good balance. Sales for the third quarter grewby a strong 20%. Organic growth contributed over 9%, while acquisitionscontributed approximately 6%, and foreign currency translation accounted forthe remaining 5%. We are very pleased with the organic part of the growthstory, as we have been telling you all along that we will continue to invest,and we do have the opportunity as a Company invest in organic projects and thisis augmented by our ongoing acquisition strategy. Again, the third quarterresults really manifest this well. For the first nine months of theyear, the sales have grown 22%. Organic growth contributed 10% of that growth,while acquisitions contributed 7% and foreign currency translation accountedfor the remaining 5% of the growth in sales. Again, exactly the point I wasjust making about the balance between organic growth as well as in augmented byacquisitions. For the quarter, our industrial services portfolio accounted for85% of total sales, while our international sales accounted for almost 70% oftotal revenues. Cash flow from operations for thequarter was a record $176 million. This compares with $95 million in lastyear's third quarter, an improvement of 86%. Based on this strong cash flowperformance, we are quite confident that we will exceed our cash flow targetfor 2007 of $445 million. It continues to be evident that Harsco's operationsare prolific generators of cash flow and do add to Harsco's ability to selffinance a considerable amount of its growth. Consistent with our growthinitiatives, we invested a record $326 million in CapEx in the first ninemonths of the year. This is an increase of approximately 27% over last year's$256 million. Importantly, over 55% of this year's CapEx, or about $180million, has been invested in strategic growth initiatives, with the remaining45% allocated to sustaining the current revenue stream. As a point of interest,approximately 72%, or $129 million, of the growth capital for the first ninemonths of the year was invested in our fast-growing Access Services business.Naturally, these investments are all evaluated under our conservative andprudent EVA discipline. Another important metric for usis our debt-to-capital ratio, which decreased, I'm pleased to say, by 200 basispoints during the quarter to 48.4%, and that's from 50.4% at June 30th. Thedebt-to-cap ratio, in fact, is now only 30 basis points higher than it was atthe end of the last year, at 48.1. With the expected strong freecash flow for the year augmented by the anticipated proceeds from the sale ofour Gas Technologies business, we expect our debt-to-cap ratio to continue toimprove during the fourth quarter and return to more normal historical lows. Atthe same time, we are confident that we will be able to continue funding ourglobal growth initiatives. Now, let's turn just briefly tothe performance of each business group. Our global Access Services business,again, set new quarterly records for sales, operating income and margins. Thirdquarter performance was again broad based. We were especially pleased with theexcellent 19% organic growth of this business in the third quarter. Thisfollows about a 20% organic growth rate in the second quarter. Also noteworthyis the fact that operating margins in Access Services improved by 100 basispoints to a record 13.7%. The industry outlook across are large and expanding,I may add, global footprint for Access Services, remains quite positive. Wecontinue to see favorable market conditions for both the fourth quarter, aswell as 2008. Let's move on to Mill Services.The lower Mill Services performance in the third quarter compared with lastyear is due principally the two factors; unplanned and unexpected lower steelproduction, particularly in North America, and highermaintenance costs. The lower steel production is driven by the steel industrystrategy of maintaining prices by controlling supply. Clearly, we are notsatisfied with the recent performance of our Mill Services business. As such,we are implementing a margin improvement strategy that we expect will lead tomore normalized margins in 2008 back in the area of 11%. Some of the key components ofthis margin improvement plan, in no particular order of importance, include thefollowing. First, we will renegotiate and if unsuccessful, exit several older,underperforming contracts, principally in North America.We also intend to divest a low margin transport business in Europeby the end of this year. We will continue to execute our geographic expansionstrategy in Eastern Europe, Middle East and Africa, Latin America, andAsia-Pacific, where we generally achieve higher returns than we do in NorthAmerica and Western Europe. An example of this strategy isthe late third quarter acquisition of Alexander Mill Services in EasternEurope, principally Romania and Poland.This acquisition is expected to be followed later this year, as well as nextyear, with new contract announcements in key previously noted targeted areas.That is the rest of the world outside of North America and Western Europe. We are also quite focused on costoptimization initiatives, which are also key components of this strategy. Weare closely examining shared services opportunities and other cost reductioninitiatives, including fewer administrative centers, improved procurementpractices, and site optimization. Site optimization simply means and includes,among other things, reducing maintenance costs and improving overall siteefficiency. Senior management is optimisticthat these actions can be largely completed by the end of the year and thatthey should restore margins to more historical levels. This should provide, webelieve, the foundation for further margin improvement in 2008 and beyond. Infact, our optimism is further underpinned by the projected rise of 6.8% inglobal steel consumption in 2008, and this is recently according to theInternational Iron and Steel Institute. Moreover, just coincidentallytoday, CIBC issued a report on the steel sector that we -- is encouraging, webelieve, and also underpins exactly what we're saying. They state in theirreport two things. One is that U.S.service centers' inventories are at multi-year lows, which should lead, quote,unquote, to a strong start to 2008. They also state in the same report thatcertain Chinese steel mills are shutting down capacity due to high input costs,which, again, quote, should result in lower exports and this bodes well forNorth American producers. We also believe that this couldpositively affect the European producers as well. One final comment on thethird quarter of Mill Services margins of 9.2%. I would remind you that in thethird quarter of 2005, we experienced a similar quarter with 9.1% margins. Thenext year, the Mill Services business came back and posted 10.8% margins forthe year. We are confident that we will have a repeat of this scenario in 2008.And we are also quite confident in the 11% target margins for next year. Finally, the Minerals and RailTechnologies Group. The extraordinary performance exceptional results led bythe minerals business, that is both Rested and Excell Minerals. In addition tothe two minerals businesses, all businesses in this group posted recordmargins. This is the first time that allsix businesses in the group posted record margins. As a result of this, thegroup as a whole reported 21.1% operating margins. That is a 410 basis pointimprovement over last year. We believe that both the short and longer termoutlook for the Minerals and Rail Technologies Group is favorable. We expect astrong fourth quarter and we expect a strong 2008. Based on our continuing strongend-markets and encouraging global growth opportunities, we are raisingslightly our EPS guidance from continuing operations for 2007 from a range of$2.90 to $2.95 to a new range of $2.93 to $2.97. This is the third time thisyear that we have raised our guidance. Using the midpoint of the guidance, ourexpected result will represent a year-over-year improvement in diluted EPS of33%. I would also like to remind youthis is the fourth consecutive year of significant EPS growth for the Company.Our outlook for the fourth quarter, same thing. We expect very strong fourthquarter and another record quarter. Using the midpoint of our guidance for 2007to calculate the fourth quarter diluted earnings per share from continuingoperations forecasted to be $0.67 and that compares with $0.55 in the fourthquarter of '06. This will represent, again using the midpoint, an increase of22% year-over-year. The high end of the range will represent a 26% increase inyear-over-year fourth quarter performance. Finally, I would like toreiterate what we've said in the press release today about our outlook for 2008.We expect 2008 to be another year of growth, another record year. AccessServices and Minerals and Rail Technology should continue to perform well, asthey have done this year. This, coupled with the expected improvement in MillServices, should provide the foundation for another strong year. Our expected growth in 2008 isfurther underpinned by the investments that we've made in 2007, as well as ourcost optimization initiatives. We will provide much more details on our 2008outlook at the Annual Analyst Conference that's coming up in New York City on December 7th and we look forward toseeing you there. That completes my comments,Derek, and thank you for your attention.

[Derek Hathaway:]

Well, thank you, Sal, for thatcomprehensive and very informative analysis of the performance of the quarterand of the year-to-date so far. It's now time to receive your questions, if youare so inclined. Thank you.

[Operator:]

Thank you. (Operator Instructions).Your first question comes from the line of Curt Woodworth of JP Morgan.

[Curt Woodworth:]

Yes, hi, good afternoon.

[Sal Fazzolari:]

Good afternoon, Curt.

[Curt Woodworth:]

You know, Sal, you expressed afair amount of confidence in getting back to 11% margins in Mills in '08 and Iguess I'm just wondering

[Sal Fazzolari:]

Well, it's a cumulative effect oftwo things. One

[Curt Woodworth:]

Okay, great. And then in terms ofthinking about the new contract signings coupled with adding more content permill, do you feel like -- I mean

[Sal Fazzolari:]

Like for example

[Curt Woodworth:]

Yeah.

[Sal Fazzolari:]

They do about $30 million plus inrevenues, that will go away. There is a couple contracts we may or may notrenew. So forth and so on. We're more interested, in all honesty to get in themargins going back up to where we think we can get them and we're certainly notgoing to be satisfied at 11% either. We're still shooting for much highermargins over the long-term. Personally I would like to see them back at 12% andon. And so, I think maybe we'll suffer a little bit on the revenue side, but westill should see some reasonable revenue growth. But you're not going to seehigh single-digit or double-digit revenue growth.

[Curt Woodworth:]

Okay. And then on Excell

[Sal Fazzolari:]

We would like probably defer thatone until December, Curt, because I think that maybe a better forum for us toreally articulate our strategy. What we are doing here.

[Curt Woodworth:]

Okay.

[Sal Fazzolari:]

But the only thing I will say isthat, we are quite focused on two areas of the world, some key parts of WesternEurope and Asia, okay. More Asiathan anywhere else.

[Curt Woodworth:]

Okay.

[Sal Fazzolari:]

So, hopefully, we'll give you alittle more color on that in December, because we're still working through thatright now as we speak.

[Curt Woodworth:]

Okay. And in terms of growthCapEx, it's been pretty, pretty balanced for the company in the past year. Doyou feel that that's going to continue to be kind of the hallmark of theCompany, where it's going to be kind of equally distributed? Or

[Sal Fazzolari:]

Hopefully you should see abalance, because, I mean

[Derek Hathaway:]

I think, also, in regards to it,if I may just interject for a second, the Company has gone through really, byour standards, an extraordinary growth spurt and what we're looking for, as Iunderstand Sal's strategies are going to be and I endorse them, and that isthat quantity is not going to be so important next year as quality. The growthspurt clearly has brought and its wake and its trying, obvious inefficiencies,which can be improved upon. And I think that, if I could just summarize, Sal, Ithink your goals are very clear, which is that investments have been made. Clearly there are someinefficiencies that have followed the growth spurt and greater deal ofattention will be given next year. We are actually talking about a 100 basispoints in Mill Services. You've seen the margins in the other. And so no onecan deny that we're very, very margin conscious in this business and we seeopportunities which have been enunciated by Sal, and 100 basis pointsimprovement on a small revenue improvement may be, even in Mill Services, willhave a serious impact on the EPS in a very positive way.

[Curt Woodworth:]

Great, okay. Thank you.

[Sal Fazzolari:]

You're welcome.

[Operator:]

Your next question comes from theline of Jeff Hammond with KeyBanc Capital.

[Jeff Hammond:]

Hi, good afternoon, guys.

[Sal Fazzolari:]

Good afternoon, Jeff.

[Jeff Hammond:]

So on Minerals and Rail, we'vehad two quarters now with Excell in there with operating margins north of 20. Iguess, just trying to understand

[Sal Fazzolari:]

Well, Jeff, again, you got toremember what we said. All six businesses had record margins and don't want tocomment on each specific one for a lot of reasons, but I can assure you it'scertainly not just Excell.

[Jeff Hammond:]

Okay, so I guess, if underlyingdemand remains solid for the businesses, I mean

[Sal Fazzolari:]

Yes, we think it is and we'relooking at expansions in key parts of the world to grow the business.

[Jeff Hammond:]

Okay, great. And then, I guess,as of, maybe to ask the Excell question a little bit different way, you did $42million last quarter, $30 million this quarter. Is this a more reasonable, atleast, run rate?

[Sal Fazzolari:]

It is, Jeff. Remember, we said atthe last quarter that that was a highly unusual quarter for them. Theyliterally ran 24/7 every single day of the quarter, which probably never to beseen never again, unfortunately, but that's the reality. This is the morenormal rate. I think they actually did about $29 million to be exact. I'll giveyou the number, but that's what they did for the quarter, so that should bemore the norm, more normal run rate, yes.

[Jeff Hammond:]

And then, as you add newcontracts, etcetera, you would see some growth from that run rate?

[Sal Fazzolari:]

That's correct.

[Jeff Hammond:]

Okay. On Access

[Sal Fazzolari:]

No. In fact, I could tell you, Imean

[Jeff Hammond:]

Okay. That's great to hear. Andthen finally, I guess the one surprising thing is that the stubborn maintenancecosts within Mill Services. I think, last quarter you mentioned some one-timeissues and some unplanned maintenance, but that seems to be stubborn issue intothis third quarter, I just wanted to get a better sense of

[Sal Fazzolari:]

It's actually a simple answer.We've narrowed it down to a handful of mills, if you will, our sites, and whatwe've done is we sent a team of people in and we're re-engineering the site, ifyou will. Part of it will involve new equipment, okay, that can do the job moreefficiently, more effectively. So, we'll have to invest incapital to get that done, but we think the EVA is going to pay for itself onthis. So, we are well into it and, hopefully, we won't be having thisconversation too much longer relative to maintenance. You're always going tohave some maintenance issues, because they come up, but certainly not to thelevel that we've had the last two quarters particularly.

[Jeff Hammond:]

Okay. Perfect. Thanks, guys.

[Operator:]

Your next question comes from theline of Ted Wheeler, Buckingham Research.

[Ted Wheeler:]

Good afternoon, all.

[Derek Hathaway:]

Hello, Ted.

[Ted Wheeler:]

Just on the Mill Services issue

[Sal Fazzolari:]

Up -- I don't remember the exactnumbers, Ted, but I mean that as we said that, North America was down,particularly at the sites we were at, was down about 4% and production was, butin total the U.S.was down 4%. But if you look at the specific sites some were down a lot more,obviously. I know, for example, Mittal took some quite drastic cuts in some oftheir production in the U.S.

[Ted Wheeler:]

In the U.S.,okay. And

[Sal Fazzolari:]

In the U.S.,it's a site here and a site there. And so it's really country-specific.

[Ted Wheeler:]

If we look at the 11% potentialmargin for next year and kind of slice there and issues that seem to beeffecting now, production cuts, poor contracts, maintenance, and then theinitiatives, those four. What would be the relative contribution of each ofthose to getting the margin back to 11?

[Sal Fazzolari:]

Well, it's a good question, but Iwould say they are all important. They are all very important. Certainlyproduction's important. Certainly the maintenance cost and the siteoptimization issues are important.

[Ted Wheeler:]

Well, if you were successful withthe -- ?

[Sal Fazzolari:]

Let's say, proportionately, onethird/one third for the top three, let's say, or something like that.

[Ted Wheeler:]

Okay. In other words

[Sal Fazzolari:]

Well, I think the combination ofnew contracts and exiting out contracts including the, exiting out that smallbusiness product line that we mentioned. The combination of that wouldcertainly is going to make that one third contribution. Production will be theother one third. And then the other one third would be the cost issue. So ifyou had the proportion, they would all be in those equal buckets, if you will,the three -- .

[Ted Wheeler:]

Okay. Thanks for the call. Whatdo you think growth CapEx will be next year?

[Sal Fazzolari:]

Well, I don't see a materialchange from their run rate of this year, in all honesty. If you look at ourcrystal ball and you look at the opportunities that we have, our Access Servicebusiness is constantly demanding more capital or holding them back, in honesty.The Mill Services business, I think you will see some new signings, some newopportunities there and then, again, the Rail and Excell as well you'll see. Sowe don't see any material change in that picture at all.

[Ted Wheeler:]

Okay. And then, so that the Chinarails work starts to accelerate and that won't push the CapEx up unusually?

[Derek Hathaway:]

No, those are sales. Those aredirect sales. You're talking about the Chinaorder?

[Ted Wheeler:]

Correct.

[Sal Fazzolari:]

Yes, that's a direct sale. You'retalking about HTT, right?

[Ted Wheeler:]

Yes, yes, yes. I just wondered --so you don't need a capital infusion?

[Sal Fazzolari:]

That's not CapEx, that'sinventory. That goes against inventory and we have the capacity for that, so wedon't really need--

[Ted Wheeler:]

That's what I meant, yes.

[Sal Fazzolari:]

Yes.

[Ted Wheeler:]

Okay. Thank you very much. Goodquarter.

[Sal Fazzolari:]

Thank you.

[Operator:]

Your next question comes from theline of Matt Goldfarb GSO Capital.

[Matt Goldfarb:]

Hi, guys, how are you doing?

[Derek Hathaway:]

Good afternoon.

[Matt Goldfarb:]

Can you just speak to anymaterial contract activity on the Mill Services side in third quarter? Andbeyond that, maybe a bit about your relationship with Mittal and the impact of[Fannie] and the broader relationship from any decision to cease work in anindividual mill.

[Sal Fazzolari:]

Well, as far as any materialcontracts, if they were material, we would have announced them. And certainlywe can't disclose them here without announcing them. So, as I indicated, we doexpect to announce some new contracts in the fourth quarter as well as nextyear. So, it will just have to play out through the press releases, so we can'treally comment further on that. Derek, I don't know if you want to talk aboutthe Mittal or I'd be happy to.

[Derek Hathaway:]

Yes, it's been a very interestingyear and part of the margin issue that we've talked about is that, to be frank,we're finding that the consolidation and the competition that's taking placeamongst mills in general has caused them to become much more effective in theway that they manage their way to market and how that they control theirproduction. Previously, we were given always plenty of warning as to what mighthappen and therefore we could run our businesses accordingly, being servants ofthe mills on their sites. The amount of notice we get thesedays for modifications in production requirement has shortened, because theysimply don't wish to telegraph that information themselves to the markets. Andthat enables them, I guess, as part of their overall strategy, which I think isa very credible and all credit to them, it has enabled them to maintain infierce competition, their prices in the marketplace. So we're seeing ahealthier steel industry. We, for a short period of time,have needed to look at how we serve that industry and how we now are to respondto what has become a state and not an occasional circumstance. And that's why Idon't think that -- I think, not I don't think, that's why I think that we arein 2008 going to be perfectly prepared for the new state of things in the steelindustry and how we serve it, with an appropriate cost base, an appropriatelevel of service, with well maintained plant. And that's why I think I take, Ipersonally take, a great deal of heart to what Sal and his colleagues have beendoing these past several months, in preparing for that. I know that ourfinancial plans for 2008 have taken that particular phenomenon into account andthat's why I think Sal could speak with such confidence.

[Matt Goldfarb:]

I just -- the reason -- I don'tmean to put you guys on the spot. I just heard anecdotally that you guys wereout at Sparrows Point and that is kind of what I was getting at to see if thatwas real or not.

[Derek Hathaway:]

It's a tiny, tiny contract thatwe were pleased about the outcome of that. It's one we inherited previouslyfrom acquisition of a firm called Langenfelder.

[Matt Goldfarb:]

Sure.

[Derek Hathaway:]

It was absolutely a waste of timeand was given frankly to two guys in a start-up situation. That's what happenedto it. We fought with all kinds of problems and we're very happy to cooperatein handing that over.

[Sal Fazzolari:]

And one thing we've been saying,I know recently I've been out quite a bit with Gene on investor relation'svisits and we're making it very clear that the status call is no longeracceptable. We will walk away and this is a case where we walked away. It was amutually agreed thing. Contracts that either have no EVA or negative EVA orhave very little prospects for improvement and this is one of those contracts.And we're working through one or two others right now in the U.S, becausethat's no longer acceptable to us.

[Matt Goldfarb:]

All right, great. Thank you verymuch.

[Derek Hathaway:]

Thank you. And thanks for askingthe question. That enables us to put things in perspective and put themstraight. It was a good question, thank you.

[Operator:]

Next question comes from the lineof Bill Fisher with Raymond James.

[Bill Fisher:]

Good afternoon.

[Derek Hathaway:]

Good afternoon, Bill.

[Bill Fisher:]

Just on the growth spending onAccess, where you're obviously devoting a lot of capital. Can you just givesome maybe broad color on where it's maybe being weighted, whether it's formingand shoring or pretty broad-based and then also maybe geographically, if it'smore in some of these overseas markets you've been trying to expand.

[Sal Fazzolari:]

Bill, it's very well balanced.Like I was implying with the earlier question, as you look at all threebusinesses, it's evenly spread through all the geographies, it's evenly spreadbetween forming, shoring, scaffolding, commercial/industrial and so forth. Andagain, that's how we're running the portfolio, because we want to maintain thatbalance. For example, about 25% plus roughly of that business is industrial,repeat type business. It's not commercial -- non-res construction and so forth.Then within the non-res, you look at the forming and shoring as capital aswell. But there's really no one concentration in any particular geography orservice level or anything like that. It's well, well dispersed and we're tryingto keep that discipline.

[Bill Fisher:]

Okay. And, I guess, maybe asimilar answer on the margin improvement you're seeing there? Is that prettybroad based or is there a bigger mix of forming and shoring or anything likethat?

[Sal Fazzolari:]

Again, it's very broad based.It's consistent, though, with our geographies, like we've said. We do a littlebit better in the markets outside North America and Western Europe,but in this business it's not as pronounced as it is, for example, in the MillService side. It's a little better balance between the two. But, nonetheless,we're seeing good investments in the Middle East, aswell as Eastern Europe and Latin Americaand other parts of the world.

[Bill Fisher:]

Okay, great. Thank you.

[Sal Fazzolari:]

You're welcome.

[Operator:]

Your next question comes from theline of Trey Snow, Priority Capital.

[Trey Snow:]

Hi, thanks. Question I had was, Ithink it's been sort of answered in parts here, but I just want to ask it tomake sure. And it's about the restructuring or the improvement in MillServices. Trying to figure out how sensitive that 11% margin goal would be toyour global steel production forecast. So, if you were to hit on yourimprovement targets, just absolutely knock them out of the ball park, but yourbaking in like 6.5% increase in global steel and it comes in at 5.5%

[Sal Fazzolari:]

Well, we build sensitivity intoour projections for production. So, really the big part is more the cost issuethan, like I say, we think we're getting a very good handle on the cost issuesand those are the things that we can control. And so as we optimize the sitesas we take some of these other actions, reduce some administrative costs,reduce maintenance costs, and do some other things a little better than perhapswe've done this year, we can control quite a bit of that. Certainly we can't controlproduction, but, again, our strategy of investing across the globe and so forthand spreading the investments out, again, and some of that, more of that willbecome forthcoming with recent press announcements. We'll see, we'll see thatimprove. So hopefully that answers your question but --

[Trey Snow:]

It does. Let me follow-up withone other thing. The divestiture of the transport business in Europe,if it's only doing $30 million in sales in a slow margin, I assume, that'sprobably the smaller of the projects for improvement. Is that?

[Sal Fazzolari:]

Right, right. What I said was thecombination of several new contract signings as well as the divestiture of thetransport business and a few other miscellaneous contracts we may exit. Thecombination of those as a whole will contribute about one third, if you will ofthat improvement.

[Trey Snow:]

Right, okay. That's definitelyclearer. All right. Thank you.

[Sal Fazzolari:]

You're welcome.

[Operator:]

(Operator Instructions). Yournext question comes from the line of Timothy Hays of Davenport & Company.

[Timothy Hayes:]

Hey good afternoon.

[Sal Fazzolari:]

Good afternoon.

[Timothy Hayes:]

I have a question on ReedMinerals. I was a little surprised that the operating margin is at a recordhigh. We know that some of that or a large portion of that business goes intoresidential construction here in the State. Could you talk and give more coloron how that business has improved, despite some challenging end markets?

[Derek Hathaway:]

Yes, well, thank you for thatquestion. I'll take it and answer it. We anticipated a very long time ago thatwe needed to shift the use of the limited resources in Reed, limited rawmaterial sources to higher margin activities. And so what has happened is that we'veslowly overtime, almost imperceptibly to the outside markets; we havetransferred the usage of the limited availability of the raw material intoabrasives. We've now become the best known manufacture of non-carcinogenabrasive materials. That has gone well, so we've seena market decline clearly and anticipate it would happen in non-residentialconstruction. And quietly and stealthily, we have just shifted that emphasis.And what has happened is that, of course, we got that right. Our marketingpeople and the management team there got that exactly right. What we'veactually seen is a very, very considerable improvement in the performance ofthat business with our own proprietary branded product as opposed to sellingthese valuable raw material at low prices and low margins to a what was arather voracious client base in the Mill Services business, in the ReedMinerals business. So, it simply is anticipation ofa phenomenon, dealing with it, coming up with solutions, and being rewarded forthe foresight to do it. And I'm sure that that principle that Sal has justenunciated regarding Mill Services, you recognize the phenomenon and do with itaccordingly. That's why I've got every confidence in this management teams todeal with the issues. Same principle, really.

[Sal Fazzolari:]

The other thing I may add too, istheir cost. We've done -- the management there has done a very good job ofoptimizing the sites. They have spent a lot of time over the last year or sogoing through every single site, re-engineering it and reducing the operatingcosts, so it's an efficiency issue and, certainly like Derek said, it's abusiness model change in the markets that we go after.

[Timothy Hayes:]

I guess you guys did a better jobforeseeing it than some of the mortgage brokers.

[Sal Fazzolari:]

Well-- .

[Derek Hathaway:]

That's your company.

[Timothy Hayes:]

Thank you.

[Derek Hathaway:]

You're welcome.

[Operator:]

At this time there are no furtherquestions.

[Derek Hathaway:]

Well, thank you very much. We, asI said, are very encouraged. You have heard the future Chief Executive Officerof the Company talk about his confidence in this next quarter and given you ahint of 2008. I'm looking forward to being with you in New York, as is Sal and our colleagues, if you'll bepleased to join us there in early December. And I'm asking them all toproduce a very, very good final quarter for me as the present CEO, and I lookforward to discussing that with you in January when we produce the results. Butthey are going to give me one for the gipper, I guess. That's what I'm askingfor and I'm sure that we'll deliver. So thank you for your time andyour attention and as always, there's an invitation on follow-up questions orclarifications that you might wish to review with us at the end of this call.Thank you again and we look forward to seeing you in December or talking to youin January, whichever is convenient for you. Thanks a lot.

[Operator:]

Thank you. This concludes today'sHarsco Corporation third quarter earnings release conference call. You may nowdisconnect.