Harsco Corporation
Q3 2012 Earnings Call Transcript
Published:
- Operator:
- Good morning. My name is Denise, and I will be your conference facilitator. At this time, I'd like to welcome everyone to the Harsco Corporation Third Quarter Earnings Release Conference Call. After the speakers’ remarks, there will be a question-and-answer period. Also this telephone conference presentation and accompanying webcast made on behalf of Harsco are subject to copyright by Harsco and all rights are reserved. Harsco will be recording this teleconference. No other recordings or distributions of this telephone conference by any other party are permitted without expressed written consent of Harsco. Your participation indicates your agreement. I would now like to introduce Mr. Jim Jacobson, Director of Investor Relations. Mr. Jacobson, you may begin your call.
- Jim Jacobson:
- Thank you, Denise, and welcome to everyone joining us today. I'm Jim Jacobson, Director of Investor Relations for Harsco. With me are Patrick Decker, our President and Chief Executive Officer, and Steve Schnoor, our Chief Financial Officer. This morning, we will discuss our results for the third quarter of 2012 and provide our outlook for the fourth quarter, then we will take your questions. Before we begin, let me take care of a few administrative items. First, our third quarter press release was issued this morning before the market opened. The press release has been posted to the Investor Relations section of our website. Second, we are starting a new practice for our earnings calls. As a convenience to all of the participants on the call today, we have prepared a slide presentation that accompanies our formal remarks. A PDF of the slides has been posted to our website as well. We encourage you to access these slides as we will be referring to them during our remarks. Third, this call is being recorded and webcast, and a replay will be available on our website later today. Next, we will make statements considered forward-looking within the meaning of Federal Securities laws. These statements are based on our current knowledge and expectations and are subject to certain risks and uncertainties that may cause actual results to differ materially from the forward-looking statements. For a discussion of such risks and uncertainties, see the Risk Factors section in our most recent 10-K and 10-Q, as well as in certain of our other SEC filings. The company undertakes no obligation to revise or update any forward-looking statement. And lastly, in this call, all references to adjusted operating profit or loss, adjusted operating profit margin, adjusted diluted earnings per share, cash from operations, excluding payments for restructuring, and discretionary cash flow are on a non-GAAP basis. These non-GAAP measures exclude restructuring charges and other special items. A description of the special items and a reconciliation to U.S. GAAP results are included in our press release issued today, as well as in our slide presentation, both of which are on our website. Now I'll turn the call to Patrick Decker, our President and CEO.
- Patrick K. Decker:
- Thanks, Jim, and good morning, everyone. I'll provide an overview of our third quarter performance and then share with you a few of my early observations about the company since I became CEO in early September. Steve will then discuss our consolidated and segment financial performance in more detail. I'll then come back and provide you with our outlook for the fourth quarter and then open the call to your questions. Let me start with Slide 3. The team is squarely focused on improving our margins and return on capital profile despite the very tough end market conditions we face. We were able to deliver an 8% increase in operating profit in the quarter and results the exceeded our guidance. This resulted in 130 basis point expansion in adjusted operating margins despite significantly lower revenues. The team has taken meaningful steps to demonstrate our ability to manage through difficult circumstances and deliver on our commitments. Now please turn to Slide 4, and I'll take a few moments to share with you where I've been focused in my onboarding and then share with you a few of my early observations. Currently, I'm in the early stages of what I call my active listening period. I've been traveling around the world meeting with each of the business unit leadership teams. I visited a number of our customer sites and met directly with a number of our top customers to gain their perspectives on their markets and our performance. I've also visited a number of our operating facilities and manufacturing centers. During these visits, I've spent considerable time meeting face-to-face and in town hall meetings with Harsco colleagues across the globe. Thus far, my initial visits have focused on Europe and the U.S. and in the next several weeks, I'll be conducting similar visits to China, the Middle East, India, Brazil and other countries across Latin America. These are critically important markets for us, and I want to see firsthand our progress to date and engage with current and prospective customers, as well as channel partners to see how we may accelerate our growth in these markets. This intensive on boarding process will allow me and our leadership team the opportunity to strengthen our alignment across the company around our key focus areas. It's also providing me the opportunity to assess what we may need to do in order to accelerate the achievement of our objectives. Now let me share a few of my early observations. First, I've been very encouraged by the energy and commitment I've seen from our colleagues around the world that I've met. They clearly want to be part of a winning team and they've remained focused on delivering value and staying close to our customers despite the many challenges they faced over the past few years. Second, these are people who clearly understand and embrace the need for us to improve our financial returns and to return to a focus on the basics. Third, I'm fully committed to the strategic focus areas that Henry Knueppel, as previous Interim CEO, and our senior leadership team recently developed. They've led the renewed focus away from being seen as a perpetual restructurer to a company focused on the proven principles of customer centricity, continuous improvement, innovation, employee engagement and value creation. The key to our success is going to be our ability to execute on the most important initiatives within each one of those focus areas. Lastly, while doing this, we will maintain an intense focus on improving cash returns and on building our continuous improvement culture. Continuous improvement in cost and capital management will be the cornerstones of our operating discipline. We cannot expect the near-term health of our end markets to provide much help, so we're going to focus on those things that we can control. In summary, while I'm happy we delivered results that exceeded expectations this quarter, there is still a lot of work to do across the company to make sure that we are creating real sustainable value. My primary focus right now is on listening and learning so that we drive alignment around the most important focus initiatives and put the right people and the right processes in place to ensure successful execution. Let me stress one other important point. The company and the businesses are moving forward. I can assure you our businesses are not on hold, waiting for me to complete my onboarding. This was demonstrated by the solid results in the third quarter in the midst of a very tough external environment. Now I'll turn the call to Steve for a more detailed review of our financial performance.
- Stephen J. Schnoor:
- Thank you Patrick. I'll start on Slide #3, with consolidated revenues. Our sales declined $99 million in the quarter to $757 million from $856 million in the third quarter of 2011. During the past year, we have taken several actions to increase returns and invest capital more effectively. Two of these include exiting unattractive contracts in Metals & Minerals and ceasing operations in certain countries and Infrastructure, which together accounted for $32 million of the year-over-year revenue decline. Foreign currency translation also negatively impacted sales by $41 million in the quarter. The revenue performance also reflects lower volume due to soft end markets in Metals and commercial construction. That lower volume was partially offset by mid-single-digit sales growth in Rail and Industrial. Now please turn to Slide 7 and I'll cover adjusted operating income. As Patrick said, we grew adjusted operating income by 8% to $55 million in the quarter from $51 million in the prior year quarter. Adjusted operating margin increased 130 basis points to 7.2%. All business units improved their adjusted operating margin in the quarter. The successful execution of our cost reduction strategies was the primary driver of this performance. Strong profit growth in Industrial and Rail also contributed to our improved operating performance. Collectively, these segments increased operating income by more than $5 million in the quarter. These gains are partially offset by foreign currency translation, as well as lower results in Metals & Minerals as a result of the softness in the global metals industry. However, it should be reiterated that despite this, Metals & Minerals' operating margin increased from the prior year. Foreign currency translation negatively impacted operating income by $2 million in the quarter. I'll review each of the segments in more detail momentarily. Next, please turn to Slide 8 and I'll cover adjusted earnings per share. We reported adjusted earnings per share of $0.39 in the quarter which exceeded our guidance. These results were $0.01 lower than the third quarter of 2011 due to higher year-over-year income taxes based on an unusually low tax rate in the prior year quarter. We also experienced a negative impact of foreign currency translation this year. Our income tax expense was $14 million in the quarter compared with $7 million in the third quarter of 2011. As noted, the prior year quarter's tax rate was an unusually low 18% and was primarily driven due to one-time benefits. This year's third quarter tax rate was 29%. Net interest expense declined 12% to $10 million in the quarter from $12 million in the third quarter of last year. This decrease primarily reflects foreign currency translation and lower carrying costs for our new revolving credit facility. I'll review our balance sheet shortly. Now please turn to Slide 9 and I will discuss our segment performance, starting with Metals & Minerals. The segment's revenues declined 14% to $345 million in the quarter from $400 million in the prior year quarter. Adjusted operating income declined 12% to $27 million from $31 million. Our decision to exit certain contracts accounted for $16 million of the year-over-year revenue decline. Foreign currency translation had a negative impact on the quarter, reducing sales by $27 million and operating income by $2 million. The revenue performance also reflects softness in the global steel industry. Overall, our customer's steel production declined 3% in the quarter. Despite these headwinds, we expanded adjusted operating margin by 20 basis points to 7.9% in the quarter, primarily due to the benefits more previously announced restructuring actions. This is a very solid accomplishment by our team in the face of difficult circumstances. Next, turn to Slide 10 and I'll cover Infrastructure. Sales declined 19% in the quarter to $229 million from $282 million in the third quarter of 2011. This segment reported an adjusted operating loss of $2.5 million in the quarter compared to a loss of $3.3 million in the prior year quarter. These results primarily reflect the successful execution of our cost reduction strategies. Our decision to cease operations in certain countries reduced revenues by $16 million in the quarter. Foreign currency translation reduced sales an additional $14 million in the quarter. Our sales performance also reflects softness in the commercial construction markets. Equipment utilization in the quarter remained at the lower end of historical norms due to softness in the global commercial construction markets. It was approximately 60% in the third quarter, essentially the same as in the prior-year quarter. Rental rates were flat. In addition, we experienced lower industrial maintenance services activity in Europe and North America. Now please turn to Slide 11, and I will review the Rail segment. This segment reduced -- delivered a strong third quarter. Revenues grew 5% to $91 million. Operating profit increased 20% to $14 million and operating margin improved 190 basis points to 15.2%. Rail's performance was primarily due to the timing of unfavorable mix of equipment deliveries. In particular, we delivered a higher quantity and more favorable mix of machines to China as part of our large order with the Ministry of Railways. We also shipped machines as part of a previously announced order with Saudi Arabia in the quarter. This order will support the Kingdom's new north-south railway system project. These gains were partially offset by lower contract services volume. Now please turn to Slide 12, and I'll cover Harsco Industrial, which delivered an outstanding quarter. Revenues increased 7% to $91 million. Operating income increased 22% to $17 million and operating margin also improved 220 basis points to 18.3%. Industrial's third quarter performance primarily reflects a favorable mix for air-cooled heat exchangers and strong shipments in the grading business partially offset by soft demand for industrial boilers. Now turn to Slide 13, and I will review a few balance sheet metrics. Cash totaled $114 million at September 30, 2012, down from $121 million at the end of the year. The decrease in the quarter reflects capital expenditures in Metals & Minerals. Total debt was $969 million as of September 30, 2012, up from $909 million at year end, but down from $978 million as of June 30, 2012. An increase in commercial paper was a primary driver for the higher level of debt compared with the calendar year end. This is due to the timing of cash receipts. I'll remind you that our cash flows have historically been strongest in the fourth quarter and I expect the same in 2012. Our debt-to-total capital ratio was 44.7% as of September 30, up from 42.7% at year end, but down from 45.7% as of June 30, 2012. Next, I'll turn to cash flow on Slide 14. Cash flow from operations, excluding cash payments for restructuring activities, was $181 million in the first 9 months of 2012 compared with $207 million in the same period last year. Discretionary cash flow, excluding restructuring activity, which is defined as cash flow from operations plus proceeds from asset sales plus the maintenance capital expenditures, was $110 million year-to-date in 2012 compared with $82 million the same period in 2011. Total capital expenditures were $173 million year-to-date in 2012 compared with $241 million in the first 9 months of 2011. The year-over-year reduction reflects our proactive actions to allocate capital more effectively. However, we are continuing to invest in high-return projects to support our future growth. For example, TISCO's joint venture and other projects in India. Based on our year-to-date spending, we believe capital expenditures for all of 2012 will approximate $216 million. The growth in the fourth quarter includes our investment in TISCO. Before I turn the call back over to Patrick, let me reinforce an important point that Patrick made. Businesses are not on hold waiting for his onboarding. Let me give you a few examples to provide evidence of our forward progress. In Metals & Minerals, we will begin the metal recovery operations with TISCO joint venture in the fourth quarter. These operations are part of the 25-year environmental solutions contract but also includes slag coproduct commercialization. Market development coproducts will proceed in parallel with metal recovery operations. During the third quarter, we announced the extension of our relationship with Tata Steel in the U.K. We will provide an array of services at 2 sites, Scunthorpe and Port Talbot. These include metal recovery, scrap management, briquetting, slab handling, coke crushing and machine scarfing. The new agreement is a solid base from which to introduce and apply new technology-based solutions to tackle environmental challenges facing the steel industry. In infrastructure, new President Mark Kimmel and his team have taken a series of actions that should improve this segment's performance. Sales growth and improving operational efficiency are their 2 top priorities. For the past 18 months, the segment has been intensely focused on restructuring. Clearly, we've benefited from those actions this year despite end market softness. Now growing the business and operating effectively across the globe are paramount. To that end, Mark and his team have begun to leverage new structures and key appointments focused on major global accounts, projects management, continuous improvement and asset optimization. In Rail, we're seeing strong bidding activity globally. This is encouraging as we work to address the completion of a lost tranche of our large order in China. Recently, we announced 3 international orders. They included new orders in India for track maintenance machines, which are scheduled for delivery in early 2014. Our first orders in Italy for rail-grinding services, which will begin in 2013. Also in Italy, rail-grinding equipment, which is scheduled for delivery in 2014 and 2015. And a multi-year extension and expansion of our services contract in the U.K. for Network Rail, which extends our services through mid-2015 with an option for 2 additional years. With that, I'll turn the call back to Patrick.
- Patrick K. Decker:
- Thanks, Steve. Now let me provide you with our outlook for the fourth quarter, which is summarized on Slide 16. As we look to the fourth quarter, we continue to see very challenging market conditions. Metals & Minerals revenues and earnings are expected to be lower than the fourth quarter of 2011 and this past quarter. We do anticipate further reduction of steel production at certain customers, driven by slower global economic activity. Infrastructure results are expected to reflect the continued impact from soft end markets, as well, mitigated by the cost savings benefits from prior restructuring actions. This is expected to yield fourth quarter results that will be similar to the quarter we just ended. The Rail business has a large number of equipment deliveries scheduled for customer acceptance late in the quarter. This is expected to result in a strong fourth quarter performance compared with the prior year quarter. These deliveries are tied to our large order with the Ministry of Rail in China. When we entered this year, we thought the last tranche of the shipments for this order would be split evenly between 2012 and 2013. Based on the current schedule, we anticipate earlier equipment deliveries than previously expected. The industrial business expects results in the fourth quarter to be lower than the fourth quarter of last year, as well as the quarter just ended. This reflects softness in order trends the past few months in the markets for industrial boilers, as well as continued caution on the part of customers in the North American natural gas market. As most of you know, the typical conversion cycle for from bookings to revenues in this business is 3 to 4 months on average, so we're seeing the impact of a lower bookings from a few months ago in our fourth quarter revenue forecast. We expect our tax rate to approximate 29% in the fourth quarter, excluding special items. Based on those factors, we expect diluted earnings per share from continuing operations to range from $0.28 to $0.33 in the fourth quarter excluding special items. Now let me briefly cover another administrative and calendar item of potential interest to you. As I outlined earlier, I'm in the early stages of an intensive onboarding process, traveling extensively and visiting many of our customers, channel partners, operating sites and our Harsco colleagues firsthand. Over the coming weeks, we'll also be finalizing the development of our 2013 plans and long-range goals. Right now, I feel this is the best use of my time as the new CEO. For that reason, I've decided to postpone our previously scheduled Annual Investor Day from December 7 of this year to sometime in 2013. Now as you all know, the company has traditionally participated at several broker-dealer conferences in the first quarter of the calendar year. I look forward to continuing that practice and engaging with you in this time frame. I trust that you'll understand the importance of me spending my time with the leadership team and out in the field focused on the important work I've outlined. I don't want anyone to think there is any underlying message associated with my decision to postpone the event. It's simply the fact that given the timing of my start with the company and the way my onboarding is proceeding, the company's traditional time frame to host this event in early December, I felt was simply too soon. I want to make sure that when I do meet with you, I'm able to communicate meaningful updates from the company, our progress and my thoughts on the future based on more substantive time out in the field with our businesses and with the leadership team. And now that I have that final administrative item covered, we'd be happy to answer questions. So, operator, please open the lines for Q&A.
- Operator:
- [Operator Instructions] Your first question comes from Jeff Hammond with KeyBanc Capital Markets.
- Christopher T. O'Cull:
- This is actually Chris O'Cull filling in for Jeff Hammond. Yes, I guess, first, I was hoping you could give us an update on what you're seeing so far in October. Anything noteworthy since the end of the third quarter?
- Patrick K. Decker:
- I don't think that we see anything noteworthy in terms of moving other than the fact that, certainly, as we got near the end of Q3, kind of in the month of September, late September, we did receive announcements of some of our steel customers extending their mill shutdowns through the quarter and, certainly, that has continued through Q4, which is part of the reason why we've guided down a little bit for Metals & Minerals. I think other than that, we haven't really seen any notable change in market conditions from Q3.
- Christopher T. O'Cull:
- Okay, great. And then in the release, you called out exiting of certain Metals & Minerals contracts. Can you just remind us how far along you are in that process and how much more you have to go there?
- Stephen J. Schnoor:
- This is Steve. As you may recall, we started 3 years ago, even longer than that, exiting what we called loss contracts. Since that time that we've been assessing our entire portfolio for what we call unattractive contracts, and these are contracts that don't meet our return requirements. So at this point in time, we've been -- we are in that process for a couple of years now, so we're actually towards the end of that process. And of course, as renewals come up, we look at each individual contracts to make sure that they meet the return requirements we've established. So there are some contracts which are in current negotiations. And those contracts, if we get the returns that we require, we'll go forward with them but there could be other contracts that come off that we do determine to make the decision to exit. So we're well along the way with that. We continue to look at our contacts and focus on our strategies to -- for environmental solution and resource recovery projects, principally in emerging markets that meet our return requirements.
- Patrick K. Decker:
- Chris, I would just add that I think that, as you know, a number of our contracts churn every year. So as Steve pointed out, we've increased the hurdle rates that we'll accept projects and at the same time, as each contract comes up, we certainly try to improve the terms and conditions because we obviously want to hold on to the business but only if it's meeting our return profile.
- Christopher T. O'Cull:
- Okay. And then if I could sneak one more in here. It looks like Infrastructure is still working towards profitability. Any thoughts around when that business hits breakeven or maybe what kind of improvement do you need to see in those markets to get there?
- Patrick K. Decker:
- Sure. I think that first of all, I'd certainly want to applaud Mark and his team. Mark's been in the role now just for a few months and I want to applaud his team for the work they've been doing to turn that business around. I think it's clear that progress is being made. Obviously, the markets are much softer now than what they were when the original commitment to getting breakeven and profitable was made some time ago. So obviously, you don't see the full benefit of restructuring actions mitigating that but it certainly has helped reduce the impact of the softer end markets. I would say that as Steve pointed out, the team right now is focused -- balanced. One, there are continued operational efficiencies that we want to go after in that business, managing stock yards, things of that nature, but there are also plenty of opportunities in the growth side. And so they're looking at opportunities around some of the major global accounts, executing projects that they're pursuing, multi territory and also really again trying to focus in on which parts of that business are most profitable and generate the best value over time. It's premature for me having been here now for about 6, 7 weeks to give you a definitive marker as to when that business will reach breakeven and profitability, but we're still confident that we can get it there.
- Operator:
- Your next question comes from the line of Bill Fisher with Raymond James.
- William H. Fisher:
- You had some comments, obviously, on focus on cash returns and you've really been able to ratchet down, I guess, the CapEx this year down to around $70 million year-to-date. Can you give some color on which of the segments actually had the biggest changes and then also just directionally, just the factors that would impact '13 CapEx like TISCO coming on and things like that?
- Stephen J. Schnoor:
- Bill, it's Steve once again. As we've discussed before, we have a new disciplined approach in the last couple of years to capital expenditures and capital allocation. We focused on the high return projects that I mentioned earlier. In this particular year, both Metals & Minerals and Infrastructure CapEx were down from prior year. Now we are, as I said, focusing on high return projects. We have opportunities out there in the market, we're -- and our strategy of emerging market penetration, as well as resource recovery and environmental solutions, there are opportunities and that will affect the timing of the capital, capital expenditures. So going forward with those opportunities, the timing of the capital will be affected but we are focused on the high return projects. We're not going to walk away from those, so we still have that very disciplined capital allocation approach in place. And as you could see, it's been working for us this year.
- William H. Fisher:
- Okay. And maybe just a follow up. You mentioned Q4 is your strongest cash flow quarter. Is that -- you expect like APM [ph] as from the working capital shifts to move back in your favor in Q4?
- Stephen J. Schnoor:
- Yes, and that's the based upon historical trends. I don't see that changing this year at all. I think it will be the highest quarter for our cash from operations.
- Patrick K. Decker:
- I would just add to, that based upon my short time here that I -- again, I want to commend the team on the actions that have been taken in the area of receivables, particularly in terms of managing that area. That's been a benefit to us but there are still plenty of opportunities out there for us to improve working capital, but based on what we see, there will be an uptick in cash flow in Q4.
- Operator:
- Your next question comes from the line of Bhupender Bohra with Jefferies & Company.
- Bhupender Bohra:
- Just a question on the same thing on your cash returns over the long term. If you guys can just give us what you guys are plan to do beyond your restructuring, like anything on working capital side, do you have any long-term plans like how DSOs and BPOs cash cycle basically will improve. If you can just give some clarity on that?
- Stephen J. Schnoor:
- Yes, this is Steve once again. I can tell you the trend is certainly positive. It's been renewed focus, a major focus on working capital this year especially. It's always been a focus of ours, but it's more intense focus from ever one throughout the company on that and the trend is certainly improving. And that is on the receivables, as well as inventory, and the payable side of it as well. So I mean, I think the trend going forward is positive and I expect to see improvements in our cash conversion cycle, DSO on a go-forward basis as well. So it's a positive trend that you've been seeing this year and the numbers will continue going forward. That will be a focus of ours on an ongoing basis.
- Bhupender Bohra:
- Okay. And, Patrick, just -- you've been with the company for a few months now. Just any initial thoughts you are looking in the channels for 2013, like on the sales and margins like for all the segments?
- Patrick K. Decker:
- Sure. I mean, I think that, certainly, there have been no surprises coming in. I get that question a lot. Has anything surprised me? I would say no. I have certainly been encouraged by the energy, the commitment of all of our people around the world. You've heard us talk about the renewed focus on the basics in the business. The key, let's be honest, is going to be -- is going to come down to our ability to continue to execute on those most important initiatives in each one of those focus areas. I think that the markets are not going to be helping us anytime soon. I certainly feel that there will -- that there's some positive signs out there in parts of the business but there are equally challenging signs in other parts in terms of the end markets. So again, we've got to focus on what we can control. And I'm confident that when we stay focused and get focused on the right initiatives, and drive execution, then we'll be able to weather this and extend our returns as we've committed to do.
- Operator:
- Your next question comes from the line of Tim Hayes with Davenport and Company.
- Timothy P. Hayes:
- Just one question. On the guidance for Rail, you gave the year-over-year, but how would that compare to Q3 for Rail for as you look at Q4?
- Patrick K. Decker:
- I'll take it. Yes, so I think the outlook right now for Rail, your question, I believe, was Q4 versus Q3?
- Timothy P. Hayes:
- Correct.
- Patrick K. Decker:
- Yes. So right now, in our guidance, the top end of the range would have us growing that business by roughly $20 million to $25 million in terms of top line revenue versus Q3. And on the bottom line, we're talking about roughly about $0.05 of earnings coming from Rail from Q3 to Q4. Now there is -- the reason for the range there is there's some risk there, as you all know, that the timing of customer acceptance of deliveries is always a question. So right now, the teams feel confident that we can get those acceptances. We're following along the customer schedule, but obviously, in the event that any one of those grinders would not accept it on current schedule, then that would obviously have some impact on EPS for the quarter.
- Operator:
- Your next question comes from the line of Jonathan Luft with Eagle Capital.
- Jonathan Luft:
- So there's been a lot of talk about high return projects, but there's no sense of what that number is for the return. I was hoping if you can maybe talk a little bit about what your threshold is when evaluating new projects given the amount of capital spend that does go on in the business.
- Stephen J. Schnoor:
- Yes, basically, we look at value creation. We're not an EVA company but as far as the returns ago, we've established a hurdle rate based upon the type of service we're providing and the associated value added to the customer by country, by project and these are hurdle rates, which exceed our cost of capital. So we look at each project independently depending on the risk assessment for the country that it's in, type of work we're doing, and we've established hurdle rates for each business.
- Jonathan Luft:
- Would it be fair to say those hurdle rates are somewhere in the low-teens or are those in the 20%, just to get a rough number? Obviously, it depends on the country but just overall if you took an average...
- Stephen J. Schnoor:
- I mean, I can't -- what I can tell you, which we disclosed previously, we generally start with our cost of capital, which we've disclosed previously, is 10%. That's the starting point. And then as adjusted, depending on, like I said, the risk, the country, the project, the business et cetera, et cetera.
- Patrick K. Decker:
- So our commitment here is to -- we obviously need to be flexible, we will make sure that we are more than covering our cost of capital on any new investments and projects that are out there. Obviously, these contracts have to be managed within the context of what's happening in the market, reserving share where it makes sense, et cetera. So each contracts are evaluated differently, it depends upon the customer, the risk profile. But directionally speaking, Steve is right, the hurdles are maintained and adhered to and obviously, first work for the customer to try to get better terms and conditions. And part of the way of doing that is much of what I know company's talked about and that is bring higher value-added services to the customers over time so that they're willing to pay a higher price and premium for what it is we're doing.
- Jonathan Luft:
- Understood. So what is considered a higher turn project, just from your perspective? Is it the environmental recovery? Just so maybe I could ballpark when I see a press releases, what's considered a higher return versus more towards your cost of capital?
- Stephen J. Schnoor:
- When we add value to the customer, such as -- it's really resource recovery environmental solutions that we're providing. For example, in Metals & Minerals, those are focused on more strategies because we believe they bring high returns to us, as well as benefit the customer as well.
- Patrick K. Decker:
- And I would just add to that. I think it's higher value to the customers, it's obviously helping them resolve and address some of their own challenging conditions, environmental concerns, et cetera. But secondly, there are services that we can provide that are much less capital intensive in terms of the upfront investment. So that in and of itself tends to drive a more favorable return to us.
- Jonathan Luft:
- Okay, understood. And following up on this question of this maintenance CapEx. The maintenance capital spending, is this that just sustaining capital spending or does that also include the renewal of contracts?
- Stephen J. Schnoor:
- It includes what we call -- the way we describe maintenance capital expenditures are the capital required to maintain current revenues, as it generally is. So it's renewals with the current business that we have. Now if we have incremental business beyond the current contract, that would be growth capital expenditure.
- Jonathan Luft:
- So for example, the Tata Steel contract, that includes a maintenance capital spending, also some new growth capital spend. Is that the right way to think about it?
- Stephen J. Schnoor:
- That's correct.
- Operator:
- Your next question comes from the line of Gregory Macosko with Lord, Abbett.
- Gregory M. Macosko:
- Just a follow-up on the discussion of returns and your hurdle rates and the like. I'm assuming we're talking about working capital and all aspects of a customer investment?
- Stephen J. Schnoor:
- Yes, we are. We look at the entire profile, all assets employed on a project and the returns associated with that, yes.
- Gregory M. Macosko:
- And if I just look at it, look across the businesses, then would it be fair to say that with regard to new opportunities or renewing of existing contracts, the gap between the sort of the hurdle rate and what you're seeing in the marketplace is widest or it's lower in the metals area than in the other businesses?
- Patrick K. Decker:
- I would -- this is Patrick. I would say certainly from what I've seen that the challenge is probably greatest right now within Metals & Minerals based upon where our customers are from a profitability standpoint. And therefore, it does put more pressure on us to again do all of the things we've outlined and particularly, being seen as adding more value to them, things that they're willing to pay for, et cetera, et cetera. Secondly, the teams have also done a good job from what I've seen over the last year or so in the new contracts in building in kind of some minimum kind of requirements in cost profile in terms of kind of generating a flow of what our returns are. So that's been helpful. But yes, Metals & Minerals would be the most challenging across the floor, but again we feel it's a challenge that can be met and overcome.
- Gregory M. Macosko:
- And with retard to that, it sounded from your discussions as if the Metals recovery aspect in that business, that particular service that you offer, is that the one that is fair to say maybe offers more opportunity? Are you seeing more opportunities in that than in sort of the renewal of kind of existing mill service contracts?
- Patrick K. Decker:
- I think it's fair to say that the resource recovery is one of the more attractive, it's not only one that's out there, but it's certainly one of a number the team is focused on and for the reasons I mentioned earlier, it is -- it does generate a more favorable financial return for us. I think it also gets us to closer to the customer in terms of serving needs of theirs, which is obviously the most important thing here. And then I think lastly, there are, even in some of the other standard contracts that we've got, depending upon where it is in the world, customers are willing to pay a higher premium for that depending upon, which country we're talking about, which geography.
- Gregory M. Macosko:
- Okay. And then finally, just with regard to the pipeline in the Metals and service business, Metals business. I mean, obviously, you look at customers and contracts and the like but are the opportunities -- I assume the opportunities, you mentioned emerging markets, et cetera. How has that pipeline been changing over the last couple of 3 quarters? Is it -- in other words for the new opportunities maybe where you don't have a service and you're looking to add and that seems like where the opportunity is. Do you see that pipeline as improving, stable, declining?
- Patrick K. Decker:
- I'll add my comments then Steve can certainly comment here over time. From what I've seen in my first 6, 7 weeks here and looking back over the last, I would say, 12 to 18 months, we've actually seen, I don't know if I want to say record, it could be a record number of contract wins over the last 12 to 18 months than in past history. Having said that, that's been mitigated by our decision to explicitly walk away from certain contracts. Certainly, we've lost a few for competitive reasons, but even more so we decided to walk away because we could not get the terms and conditions to where we thought they were favorable. But on balance, to answer your question, yes, we feel that there are still attractive contracts and businesses out there to be won. We think that we've got contracts that when they're renewed, we can attract more favorable terms and conditions. And again, the whole geography play in terms of winning new business in places like China, Brazil, India, just to name a few.
- Operator:
- Your last question comes from the line of Robert Norfleet with BB&T Capital Markets.
- Robert F. Norfleet:
- Most of my questions have been answered, but just one quick one. Patrick, what's your confidence that the restructuring initiatives and infrastructure that have been undertaken and again, a lot of these were undertaken before you got to the company are enough at this point to get that segment back to breakeven, given that market conditions still remain very challenging?
- Patrick K. Decker:
- Sure. Great question. Again, I've only been here a handful of weeks, so I'll give you my -- I'll put that caveat there as I continue to spend time with Mark and his team understanding how we best create value, what some of the opportunities and challenges are. But what I can say is the team is focused on both growth, which includes winning new business and winning some of the business back that we arguably lost during the restructuring period, as well as looking at a number of areas of operational efficiencies to improve our returns as I do believe that using CF and other tools, there are opportunities out there and Mark shares that view as does his team. I'd say, there are no active restructuring plans on my desk right now. But certainly, if we saw significant further downturn in the end markets, I'm never going to say never that there's no more is restructuring out there in any of these businesses that we need to do. But again, there aren't any restructuring plans on my desk as we speak. And we're really trying to take a more balanced focus on both top line growth, as well as driving efficiencies. So it's premature for me to talk about where I think that business can get to in terms of margins. I think that it's got a collection of market-leading service and product lines that certainly, I think, can have an attractive return on margin profile over time. We've got our work cut out for us, which I think we can do to win back some of the share that I think we probably lost over the last year or so. But that's what we're here to do. So that's our focus right now is optimizing the results of that business.
- Operator:
- Ladies and gentlemen, this concludes the question-and-answer period. I would now like to turn the call back over to Patrick Decker for closing remarks.
- Patrick K. Decker:
- Sure. Thank. Again, thanks, everybody, for joining this morning. And before we conclude the call, I just want to leave you with just a few thoughts. First of all, we're very pleased the team delivered a solid quarter. While we continue to see very challenging end markets, we are focused on the things we can control. And lastly, I am very encouraged by the level of commitment throughout the company and the interest that I've seen to align around the key focus areas that I've shared with you. And I look forward to our next call. So thank you very much.
- Operator:
- This concludes today's conference call. You may now disconnect.
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