Harsco Corporation
Q4 2007 Earnings Call Transcript

Published: 31 Jan 2008

[Operator:]

I would like to welcome everyone to the Harsco CorporationFourth Quarter Release Conference call. (Operator Instructions) This telephone conference presentation and accompanyingwebcast made on behalf of Harsco Corporation are subject to copyright by HarscoCorporation and all rights are reserved. I would now like to introduce Mr. Derek Hathaway, Chairmanof Harsco Corporation.  Mr. Hathaway, youmay begin your call.

[Derek Hathaway:]

Thank you very much. Good afternoon, ladies and gentlemen, and welcome to this conferencecall which principally will be dealing with the year 2007 and its fourth quarter.  With me in the room today are Gene Truett whois the Investor Relations principal and also Chief of Credit Control for HarscoCorporation, Ken Julian who is our Director of Communications, Stephen Schnoorwho is the Chief Financial Officer, formerly Controller, who became the ChiefFinancial Officer on January 1, 2008.  He was present at the last conference calland is present with us here today.  MarkKimmel who is Chief Counsel and Board Secretary and Sal Fazzolari who is ournew Chief Executive Officer, formerly our Chief Financial Officer as you areaware. It is a very considerable pleasure obviously for me toconduct what will be my last conference call. In the long career that I have had with Harsco Corporation and most ofthe meeting will be I guess led by Sal, our new CEO and the gentleman who weanticipate will become the Chairman immediately following the annual meeting onApril 22, 2008. You will understand the particular pleasure that it gives mepersonally to account for the results of the year and the fourth quarter.  They’re quite self-explanatory in the pressrelease and all I can say is, as a summary for the year, we did what we said wewere going to do and more and that all of the principal objectives that we laidout in 2006 relating to 2007 were accomplished plus a little bit.  So without any further ado, I am going tohand the call over now to Mr. Fazzolari who will give us a lot more detail onthe results.

[Sal Fazzolari:]

I do need to haveMark just briefly read the Safe Harbor Statement before the commencement ofcomments.

[Mark Kimmel:]

As we do at the beginning of all of our calls we just wantto let you know that we will be having forward-looking statements in ourdiscussion with you today.  Thestatements relate to the future of our business, our operations, our results,economic expectations and other aspects relating to and affecting ourbusiness.  While what we say today isbased on the best information we have available, it is possible that theresults could differ from what we tell you today.  We have listed in our SEC statements reasons,risk factors that affect our business and these could be the reasons for anydifference that could occur.  We inviteyou to you review the SEC filings at your convenience. We would also like to remind you that replays of this calland related information are available at our website.  Please take the time to access that at yourconvenience and you can also access replays at that website.

[Sal Fazzolari:]

Thanks, Mark.  Goodafternoon everyone.  It is certainly apleasure to be here with you today.  Wewere obviously very pleased with the fourth quarter 2007 performance from continuingoperations.  Sales, income, dilutedearnings per share and operating margins were all records, underpinning exactlywhat Derek just said.  Also, the overallfourth quarter operating margin for the company was quite pleasing to us aswell where we hit a record 11.4% and that is an 80-basis point improvement overlast year’s 10.6%. Additionally, we are very pleased with the improvement onthe return on invested capital for 2007. The return on invested capital for continuing operations improved byapproximately 120-basis points to 11.8%. Margin expansion and improvement in the return on invested capital ofcourse all translates to value creation. This value creation is captured in what we call the measurement of EVAor EVA performance.  For 2007, our EVAperformance exceeded the target by nearly 400%. I would also like to remind you that the annual EVA target of Harsco isset independently by Stern Stewart, our EVA consultant, and the ManagementDevelopment Compensation Committee of the Board of Directors.  We do not set or control the EVA target, wejust simply try to exceed it. Staying with the full year results, there are some othersalient points that I would like to make regarding the overall exceptionalperformance of 2007.  Operating marginsfor the company overall for the year, a record 12.4%.  That is a 100-basis point improvement overlast year’s 11.4%.  Our strongperformance, we believe, was underpinned by a well constructed andwell-balanced global portfolio of substantial industrial service businessesthat we believe are well positioned both geographically and operationally tocontinue their forward momentum in 2008. This balance was manifested well in 2007 in the overalloperating income of the company.  Thefull year operating income was $458 million with Access Services accounting for40% of the total, Minerals and Rail accounting for 31% and Mill Servicesaccounting for the remaining 29%.  Webelieve that is balanced. Sales increased 22% in 2007 to a record $3.7 billion.  Organic growth contributed about 9% whileacquisitions contributed 7% and foreign currency translation accounted for theremaining 6% of the growth in sales. This performance again exemplifies Harsco’s balance. We are also pleased with our business profile at the end of2007.  For the year, our industrialservices portfolio accounted for 86% of total sales while international salesaccounted for almost 70% of total sales. Our sales for the year were geographically balanced asfollows

[Operator:]

(Operator Instructions) Your first question comes from Curtis Woodworth with J.P.Morgan.

[Curtis Woodworth -J.P. Morgan:]

In terms of your comments around Access on the outlook,based on what you are saying that you expect to see more of the same, so areyou essentially saying that you think you can continue to grow organic growthin sort of that mid-teens level?  Is thatkind of embedded in your guidance for 2008?

[Sal Fazzolari:]

No, we never gave specific percentages.  What we said is that the business willcontinue to grow at a healthy rate.  Wecertainly see that business can grow at high single digits or better and it isgoing to depend on the amount of capital investments we make this year.  Right now, I can tell you, we are pretty muchtracking where we were last year, so if that continues for the year, I couldcertainly a scenario where that business can grow in double digit rates revenuewise.

[Curtis Woodworth -J.P. Morgan:]

In terms of disaggregating the growth, I do not know if itis possible, but how do you think about it in terms of actual end market demandrelative to your ability to penetrate new markets, gain market share; just totry to get a sense of how we think the market is growing high single digits?

[Sal Fazzolari:]

We have got a lot of things going for us.  First of all, we think we are the best in theworld, number one.  Number two is, we’remaking a lot of progress in some very key markets like the Middle East, Eastern Europe.  We are also looking at parts of Asialike India forexample.  We are looking at many otherparts of the world where we are starting to get a footprint in and we areexpanding in other geographies as well and in addition to that, in some of themarkets that we are in, we are gaining market share because of what we bring,the value we bring; we have, we believe the most modern equipment and we havethe best people and the best engineers and so forth, so we think we can bring alot of value and so that is why we are so optimistic.  We think this business has a lot ofmomentum.  It is very focused and theopportunities are there.

[Curtis Woodworth -J.P. Morgan:]

In terms of just resources for this industry globally orwhere you operate, are you seeing any shortages, any inability to meet demandwhich would essentially lead to a better pricing scenario next year?

[Sal Fazzolari:]

There are pockets we see, but historically, what happens inthese markets is actually, competitors rent equipment with each other insteadof -- if there is a shortage of equipment, it is not uncommon for actuallycompetitors that rent equipment with each other and we call it rent forre-rent, and that happens, but it is not a major thing, but that is one way youcompensate if there is a shortage somewhere.

[Curtis Woodworth -J.P. Morgan:]

And can you comment on the acquisition pipeline or strategynow that the balance sheet is re-geared a little lower?

[Sal Fazzolari:]

Well, certainly, we are very pleased where we are.  Like what we said in the comments, we have are-armed balance sheet and we are looking at everything like we always do.  We look at share repurchases.  We look at growth capex.  We look at acquisitions and we are not goingto do anything silly like overpay for an acquisition, so it is going to reallydepend on valuations.  There arecertainly numerous opportunities out there, but it always comes down tovaluation and EVA and value creation and we have an internal house rule and thehouse rule is that if it is not EVA and EPS accretive, we do not do that.  And the final thing we look at is raising thedividend as well.  We have done, I think,12, 13, 14 consecutive years, so we are a balanced company and that is how theway we run the business and that is the way we run the company and we look atwhere the best place. If you look at the projected cash flows for the year and thestrong balance sheet, we should be able to fund all the growth without addingany kind of leverage at all, unless there are numerous opportunities thencertainly we are willing to leverage up a little bit.

[Curtis Woodworth -J.P. Morgan:]

And from the seller’s perspective, has there been any changein kind of valuation parameters that some of these companies are stillexpecting as part when you re-set a little bit lower post the credit issue?

[Sal Fazzolari:]

We are just starting to see that.  Just recently, there has been a little bit ofan adjustment which is, believe, it was needed because the market has gottenway ahead of itself.  Some of the EBITDAmodels we saw in some transactions that we were bidding in were just ridiculousand so, we are very pleased and we welcome this change.

[Operator:]

Your next question comes from Jeff Hammond with KeybancCapital.

[Jeffrey Hammond:]

Sal, you did a good job articulating the progress on the Millside.  I just want to get a better senseof what do you think the timing is for an inflection point where you start tosee that notably improve.  What are someof the swing factors therein?

[Sal Fazzolari:]

That is a good question. Production seems to be holding up well, which is good.  We are starting to make some in-roads on themaintenance cost issues, which is good. Fuel prices have kind of moderated, if you will, relativelyspeaking.  So all of those things arevery good signs.  We have taken someactions in some contracts.  So it isgoing to be a nice, even progression as the year goes on, Jeff.

[Jeffrey Hammond -Keybanc Capital Mkts:]

There seems to be emerging concerns about non-resconstruction in the US, Western Europe in general, I mean, it does not seem tobe showing up in your business as you go out and quote projects, are you seeingany pockets of weakness anywhere?

[Sal Fazzolari:]

We are not seeing a drop and the thing is, you have got tobe careful.  People say Western Europe and then they say the US,what does that mean?  You have got tolook and see what markets we are in.  Donot forget, we are very diversified.  Weprovide forming, that is shoring, scaffolding, the whole thing.  We provide industrial maintenance.  We are in concrete forming and we are a verydiverse market-wise.  And then you’ve gotto look to see what areas are being impacted. In Europe for example, you are seeing maybe a little bit more impact onthe residential side like you are seeing here in the US, but the majorinfrastructure projects and the industrial maintenance, we are not seeing anyslow down, in fact, we are seeing a pick up in some markets in some of thosekey areas.

[Jeffrey Hammond -Keybanc Capital Mkts:]

Can you just give us a better sense with Excell being anewer business how that business is from a seasonality standpoint?  Is there much in the way of seasonality?

[Sal Fazzolari:]

No, it is a little bit like MultiServ in the sense that youhave a little bit of January and December are not the two best months, they arethe two worst months, but other than that, it is not too bad.

[Operator:]

Your next question comes from Bill Fisher with RaymondJames.

[William Fisher -Raymond James:]

Just following up on Jeff’s question, looking at the growthcapex, I think you said roughly 70% of it was in Access, do you have any senseif well over half of that was in more to your emerging markets, if you couldput some color there?

[Sal Fazzolari:]

Believe it or not, actually it was pretty welldispersed.  We are making some very good headwayin Canada andthe US, we aremaking good progress.  Eastern Europe, alot in the Middle East and a little bit in Western Europe and a little bit inthe South America, with Chile and so forth, so it is pretty evenly dispersed,so we do not have a concentration where all the capital is going in oneparticular part.

[William Fisher:]

You touched on some of the global production on the steelside, but supposing that the Chinese government puts some export reduction orrestrictions on steel I think in their Q4 and it seemed to help some of thevolumes outside China in the fourth quarter, is that something your customerssee a benefit from since you are more weighted outside China.

[Sal Fazzolari:]

That is why we think production is holding up well.  I mean, the Chinese had a very severe winterthat will slow production as well, and you see steel prices are really held up,in fact, they keep coming up with higher prices everyday, it seems like, sothat seems to be working well for our customers outside of China, yes.

[William Fisher -Raymond James:]

You mentioned the rail sales are down due to the timing inthe fourth quarter and you said the record backlogs, but do you have apercentage on what that overall backlog on the mineral side was up in thequarter?

[Sal Fazzolari:]

If our exchangers have record backlogs, HTT has record backlogs,IKG’s backlog is very strong, so you go through each of the businesses, andevery one of them has a very, very strong backlog.  It is another reason we feel confident about’08.

[Operator:]

(Operator Instructions) At this time, there are no further questions.

[Derek Hathaway:]

Well thank you very much. Brevity is better than anything else, we think, because that maybe anindication that people areat least pleased with thedetail that has beengiven.  That is what particularlyimpressed me as nowsomewhat a littleremoved now from theleadership and now we have anew Chief Executive Officer, but these things can belistened to again and thething that impresses meabout our new CEO and theteam’s report today is thedetail that we have given and, more importantly, I think, thecarefully chosen words regarding optimism for thefuture.  There is aplan in place; I dobelieve that it will beexecuted and that arewelcome listening to theQuarter 1 report obviously some time inApril.  That being said, on apersonal note, I want to thank you allfor the support thatyou have given this company and I use theword Company, this is not apersonality cult organization.  We havealways worked as ateam, but thank you for thesupport of the team.  I hope that that will continue under thenew leadership as you play your part inassisting this corporation to achieve its goals and objectives.  And finally, I would, knowing that many of themanagers around this company arelistening to this and to thegentleman that share this board room with meat themoment, I just want to saythank you to the teamfor all of theirsupport and to saypublicly, I said this inDecember, I am taking theopportunity again, this is agreat corporation, which I have been privileged to lead for many years and I amvery, very proud and I hope that people will regard thelegacy that I will leave, theprincipal legacy is not somuch the presentperformance, but ateam that will even improve theperformance in theupcoming years. So thank you.  We lookforward again to talking with you in April and in the meantime, wish you allwell.  Thank you very much.

[Operator:]

This concludes today’s conference call.  You may now disconnect.