Harsco Corporation
Q1 2013 Earnings Call Transcript

Published: 9 May 2013

[Operator:]

Good morning. My name is Jona, and I will be your conference operator today. At this time, I would like to welcome everyone to the First Quarter Earnings Release Conference Call. [Operator Instructions] Jim Jacobson, Director of Investor Relations, you may begin your conference.

[James Jacobson:]

Thank you, operator, 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; Nick Grasberger, our Chief Financial Officer; and Barry Malamud, our Corporate Controller. This morning, we will discuss our results for the first quarter of 2013 and provide our outlook for the second quarter, then we will take your questions. Before our presentation, let me take care of a few administrative items. First, our earnings news release was issued this morning before the market opened. The release has been posted to the Investor Relations section of our website. Second, 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. And 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 last, there were no special items in the first quarter of 2013. However, in this call, all references to first quarter 2012 adjusted operating income or loss, adjusted operating income margin and adjusted diluted earnings per share are on a non-GAAP basis. These non-GAAP measures exclude net 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. And now I'll turn the call to Patrick Decker, our President and CEO.

[Patrick K. Decker:]

Thanks, Jim, and good morning, everyone. Before we get into the details of today's call, I'd like to take a few moments to welcome Nick Grasberger to our team as Senior Vice President and Chief Financial Officer. I'm extremely pleased to have Nick join Harsco. As you know, we went through an exhaustive search process to find the right candidate with the right credentials and background, and I believe we've done exactly that. Nick joined us on April 22, just a few short weeks ago, and he's quickly immersing himself in his own on-boarding process and learning the company and our businesses. I look for Nick to be far more than the financial leader of this company but really a true strategic business partner and thought leader as we navigate the difficult challenges of our markets, improve the operating mechanisms of the company and build a sustainable profile of long-term value creation. Nick has tremendous experience in large, market-leading global companies that face similar challenges, and he has led on both the operations and financial fronts. Last but by no means least, he brings a fundamental value structure founded on uncompromising integrity that is exactly in line with my own values, as well as Harsco's. So welcome, Nick. This is also an opportunity for me to publicly recognize the excellent work that Barry Malamud performed for us during his tenure as interim CFO and the critical work he'll continue to perform as he returns to his post as VP and Corporate Controller working directly with Nick. Before I turn the call over to Barry to cover our results for the first quarter, I'd like to update you on where I've been focused the past few months since our last earnings call. I outlined for you in an earlier call the general scope of what I labeled as my active listening tour. Throughout this period, I visited all of our primary regions throughout the world, most of our large operating sites within each of our 4 business groups and met with many of our important customers. It's given me a firsthand opportunity to get inside our operations, better understand the dynamics and challenges of our markets and the strength of the value propositions that we offer and be able to assess the quality of our operating mechanisms and the relative strength of our leadership talent. This is extremely important work, which helps me assess our landscape as we set to establish the future direction and profile of the company. I believe it's important that I share with you some of the key attributes I look at in assessing our businesses. First, I look at the long-term attractiveness of the industries we serve. Secondly, the quality of our value propositions to customers, as well as the degree of competitive differentiation and strength, and therefore, how attractive is the long-term growth and return on capital profile of each of the businesses. Hence, my assessment process is examining the ability that we have within each of our businesses and markets to deliver the growth and financial returns over the course of cycles that our shareholders should expect. I look forward to the opportunity this summer to more fully share with you my views and perspectives. In the meantime, let me share with you a few of my early observations from my active listening travels. Some of the basic operational building blocks are beginning to take shape, both from our previous restructuring and cost-reduction actions and from our renewed focus on getting back to the basics from the standpoint of corporate-wide initiatives. I see the early and encouraging signs of adoption towards building a true continuous improvement culture. I've been impressed by the level of commitment, dedication and sacrifice our Harsco colleagues around the world are demonstrating every day and their strong desire to further strengthen this company's performance in the eyes of our key stakeholders. I'm also encouraged by what I see in the technology pipeline for certain of our businesses, as this could serve as an important source of faster-than-market growth over time. We've also initiated an intense focus on cash and working capital management that I expect to yield meaningful and repeatable results over time. Given the difficult market conditions for many of our customers, this will require us to generate these benefits through improved internal operating disciplines. In summary, this is a journey that we're on towards rebuilding this company and our credibility with investors. Now, Barry, let me have you go over the quarter's results.

[Barry E. Malamud:]

Thanks, Patrick, and good morning, everyone. I'll start on Slide 2. We are pleased to report operating income growth and margin expansion, as well as earnings per share that exceeded our guidance. We delivered these gains despite lower revenues, which were expected. Our first quarter profit improvement reflected the benefit from our prior cost reduction actions in Metals & Minerals and Infrastructure, a favorable overall product mix in Industrial and lower tax expense. These favorable factors were partially offset by the expected unfavorable mix of equipment deliveries to the China Ministry of Railways compared with the prior year quarter. Additionally, we continued to face challenges in the metals and construction markets. Moving to Slide 3, I'll review consolidated revenues. Revenues declined to $715 million from $752 million in the first quarter of 2012. The majority of the revenue decline was due to our decision to exit underperforming contracts in Metals & Minerals and cease operations in certain countries in Infrastructure in 2012. We also experienced lower volume in Metals and commercial construction. These factors were partially offset by improved demand for Industrial products and better-than-expected revenues in Rail due to the timing of equipment deliveries. Foreign currency translation negatively impacted revenues by $12 million in the quarter. Now turn to Slide 4, and I'll cover consolidated operating income. We grew operating income by 2% to $26 million. Operating margin increased 30 basis points to 3.6%. The primary drivers for operating improvement were the benefits of our prior cost reduction actions in Metals & Minerals and Infrastructure, better equipment rental activity in Infrastructure, as well as our profit growth in Industrial. These gains were partially offset by an unfavorable mix of equipment deliveries in Rail compared with the prior year and the impact from lower revenues in our 2 larger businesses. We grew earnings per share to $0.09 in the quarter from $0.07 adjusted earnings per share in the first quarter of 2012. Our first quarter EPS exceeded the guidance range we provided in February, primarily due to the shifting of Rail shipments from the second quarter to the first based on accelerated customer schedules. Our year-over-year EPS growth was a result of our improved operating income, as well as lower net interest and tax expense. The primary drivers of the lower taxes were certain retroactive tax law changes and the expiration of statutes of limitations for uncertain tax positions in specific foreign jurisdictions. Now turn to Slide 5, and I'll cover cash flow. Cash flow from operations improved $4 million year-over-year, primarily driven by improved cash income and lower payments for restructuring activities, which were partially offset by lower customer advances and changes in restructuring reserves. Let me discuss the main drivers, starting with cash income, which is defined as net income plus noncash items, such as depreciation, amortization and a noncash restructuring adjustment in the first quarter of 2012. Cash income increased $20 million to $75 million in the first 3 months of 2013, primarily due to higher net income. Working capital changes, which include accounts receivable, inventory, accounts payable and customer advances, declined $11 million. This change was primarily due to a decline in customer advances, mostly in Rail and related to our nearly completed contract with the China Ministry of Railways. Cash payments for restructuring activities are largely finished. However, we did have some severance and lease payments in the quarter. As you see on the slide, cash outflow for restructuring activities declined $21 million year-over-year. However, this was more than offset by the change in the other line item, which was principally due to the reduction in the restructuring reserves on a year-over-year basis. Total CapEx was $52 million in the quarter, consistent with the first quarter of last year. The mix change between growth and maintenance reflects the timing of growth capital expenditures as we continue to invest in high return projects to support our future growth, such as for our resource recovery solutions provided to the Jindal Group in India for contracts we recently announced, as well as for environmental service contracts with TISCO and Tangshan in China. We continue to believe CapEx for 2013 will approximate 2012 levels, with the mix approximately 40% growth and 60% maintenance. As you see on the slide, we received lower proceeds from noncore asset sales in the first quarter of 2013. In 2012, we sold equipment in Infrastructure as part of our restructuring activities that did not recur in 2013. While we still expect some proceeds from noncore asset sales this year, they will not be at the same level as 2012. In summary, the lower free cash flow is largely the result of the lower asset sales, partially offset by higher cash from operations. As we mentioned on our last call, we have heightened our focus on enhancing cash returns and improving working capital through continuous improvement and Lean disciplines. We are in the early stages of deploying these skill sets more broadly and deeply throughout the company, and it will take time for these disciplines to manifest into material gains. However, we see improving cash returns and working capital as a large and important opportunity. Next, turn to Slide 6, and I'll review 2 balance sheet metrics, which show we remain in compliance with our debt covenants. I'll note both metrics are shown on the slide according to the definitions of our debt covenants. On the left, we show our debt-to-capital ratio. The increase at the end of 2012 was largely driven by the goodwill impairment charge we took in Infrastructure. The ratio increased slightly to 55% at March 31, 2013, but remains well under the debt covenant maximum of 60%. As you see on the right side of the slide, our EBITDA to interest coverage is 7.5x and well over the minimum of 3x coverage. Now please turn to Slide 7, and I will discuss our segment performance starting with Metals & Minerals. As expected, this segment's revenues declined 6% to $337 million in the quarter from $360 million in the prior year quarter. Exiting certain contracts accounted for $10 million or more than 40% of the year-over-year revenue decline. Our revenue performance also reflects lower steel production volumes of our customers, which declined 5% year-over-year in the quarter. Foreign currency translation had a negative impact on the quarter, reducing revenues by $9 million. These negative factors were partially offset by revenues from new contracts. While Metals & Minerals operating income declined 3%, its operating margin improved 20 basis points to 5.9%. Our margin expansion was due primarily to the benefit of our prior cost reduction actions, our continued discipline to manage costs in the current challenging market conditions and contributions from new contracts. Next, on Slide 8, I'll review Infrastructure. Revenues declined 9% to $216 million from $238 million in last year's first quarter. Half of the revenue decrease was attributable to our decision to cease operations in certain countries. Our revenue performance also reflected lower Industrial maintenance services in Europe and continued softness in certain commercial construction markets. These negative factors were partially offset by improved equipment rental activity in certain geographies, such as North America and the Middle East. Foreign currency translation reduced revenue an additional $2 million in the quarter. As expected, Infrastructure improved its operating results, reporting an operating loss of $12 million compared with an adjusted loss of $18 million in the prior year quarter. This improvement primarily reflected improved rental equipment activity, the benefit from our prior cost reduction actions and the positive impact of exiting certain countries in 2012. Now please turn to Slide 9, and I will review Rail. Revenues grew 5% to $72 million. While operating income declined to $3 million from $9 million in the prior year quarter, it was better than the guidance we provided in February due to timing of shipments. Operating margin declined 900 basis points to an unusually low 4.7%. Rail's performance was primarily due to an unfavorable mix of equipment deliveries to the China Ministry of Railways compared with last year's first quarter. As Rail nears completion of this large, multiyear contract, its production content shifted to lower margin components in the first quarter, which was consistent with the contract structure. Now turn to Slide 10, and I'll cover Industrial. As expected, this segment delivered another quarter of very strong results, in which operating income grew $2 million and operating margin increased 160 basis points to 17.8%. Industrial's first quarter performance is a result of the team's continued focus and strong execution of its plans. It also reflects a favorable overall product mix, as well as improved demand for Industrial boiler and air-cooled heat exchangers. Now I'll turn the call over to Patrick for his perspective on our 4 businesses and our outlook for the second quarter.

[Patrick K. Decker:]

Thanks, Barry. Let me start on Slide 11 with Metals & Minerals. In terms of macro level perspective, the global steel industry continues to be impacted by the overall weak economic climate, particularly in the developed markets. In the first quarter, our LST was down 5% year-over-year. In the second quarter, we expect LST to decline approximately 10% from the second quarter of 2012, which was the highest quarterly steel production last year. While we are seeing mixed signals for LST volume in the second half of 2013, we are assuming LST to remain at current levels for the balance of the year, which would be generally in line with the second half of last year. Metals & Minerals has maintained its focused in this current climate. The business continues to find ways to lower its cost structure for its traditional logistic services, but it's also shifting its service mix to higher valued resource recovery and environmental services and building relationships with market-leading customers in key growth markets, such as India, China and Brazil. This service shift is important for a number of reasons. First, reducing the environmental impact of waste streams is a top priority for many steel producers in emerging markets. Our resource recovery technologies respond directly to this need. Secondly, steel production continues to shift to emerging markets. And third, resource recovery is less capital intensive than traditional services and therefore, we expect the resource recovery contracts will drive returns that exceed our cost of capital over time. Next, let me move to Infrastructure. We are seeing mixed levels of market recovery by region. Overall, Europe remains challenged, although we have seen some green shoots in North America and the Middle East. We recognize Infrastructure is dependent on revenue growth to return to attractive profitability. To that end, the business's leadership has done a lot of work to execute its restructuring plans and lower its breakeven point. Furthermore, we are taking a series of additional actions. We are leveraging our portfolio of offerings to pursue attractive global projects. We're improving our operational efficiency through better and more consistent yard management, and we are leveraging engineering and service expertise globally. These actions position us to improve the performance of this business over time. Let me move to Industrial and Rail on Slide 12. There are several common traits in these businesses that I like. Both businesses are well positioned in attractive industry sectors of rail and energy. Both have an aftermarket parts and services profile that should enhance returns and strengthen our relationship with customers. Both businesses have technology and new products in the pipeline that should help drive above-market-average growth. Both are further along on the continuous improvement journey, and their financial results have benefited for doing so. Neither business is capital intensive and both have generated very attractive returns on their invested capital. Now let me provide our outlook for the second quarter, which is on Slide 13. We believe Metals & Minerals revenues and operating income in the second quarter will be moderately lower than the prior year quarter. This is due to expected year-over-year steel production declines at certain customers and the carryover impact of exited contracts. These factors are expected to be partially offset by growth from higher return contacts. Infrastructure's revenues and operating results are expected to be generally in line with the prior year quarter. This reflects continued softness in commercial construction, particularly in Western Europe, partially offset by early-stage improvement in North America. Rail's second quarter revenues, operating income and operating margin are expected to grow from the prior year quarter. This is principally due to equipment delivery timing and favorable contracting services mix compared with the second quarter of 2012. As a reminder, as we communicated in our last earnings call, we expect to complete the large order with the China Ministry of Railways in the second quarter. As a result, we expect a $50 million reduction in high margin revenues in Rail for the full year 2013 when compared with 2012. We believe Industrial's second quarter revenues and operating income will be slightly below the prior year quarter's strong results, due to the expected timing and delivery of certain shipments. This business continues to see solid demand for its products, particularly air-cooled heat exchangers. We expect our effective income tax rate to approximate 32% in the second quarter. This modest increase from historical levels is due to losses from operations in certain jurisdictions where tax benefits will not be able to be recognized, as well as the geographic mix of income. Going forward, there may be some variability in the reported GAAP tax rate from quarter-to-quarter depending on the actual geographic mix of earnings. Based on the aforementioned factors, we expect diluted earnings per share from continuing operations in the second quarter to range from $0.30 to $0.35. We reported diluted earnings per share from continuing operations of 43% -- or $0.43, excluding special items, in the second quarter of 2012. Now we'd be happy to answer your questions. So operator, would you please open the lines for Q&A?

[Operator:]

[Operator Instructions] Your first question comes from Jeff Hammond from KeyBanc Capital Markets.

[Jeffrey D. Hammond:]

Nick, welcome to the team.

[F. Nicholas Grasberger:]

Thanks, Jeff.

[Jeffrey D. Hammond:]

Just can you expand on what's -- what you're seeing in Industrial maintenance? You mentioned weakness there in Europe. And if you can just talk about any kind of weather dynamic that would have impacted Infrastructure or any of the businesses in 1Q as well.

[Patrick K. Decker:]

Sure, Jeff. The -- I would say that in Europe, we do continue to see softness there both on the scaffolding and access business, as well as the industrial services business. Although again, we've seen some projects on the horizon that we are pursuing, and we're encouraged by some of the early-stage project activity that we see there, but they've not yet come to fruition. That's been offset, as I pointed out, in terms of some early signs of strength in North America in that business. In terms of weather, we did see some impact in Q1 from the weather, most notably in the Northeast here, as well as in parts of Europe. But at the same time, we also saw some offsets to that in other geographies. So I would say net-net in the quarter, there really was not a notable impact on us in terms of weather.

[Jeffrey D. Hammond:]

Okay. And I guess, on free cash flow, I'm a little surprised by the weakness there and that you're not generating more working capital. Can you just talk about what you think -- you mentioned that in your prepared remarks, what you think you're seeing in terms of progress on -- early progress on working capital metrics?

[Patrick K. Decker:]

Sure. Yes, from my perspective, there does remain a sizable opportunity in terms of taking money out of working capital and being able to improve our cash generation. As Barry commented in his remarks and I in mine, at the end of the day, given the challenging markets that we face right now in terms of the economic conditions of our customers, I think for us to continue to make notable improvement on the receivables side, given some of the natural inherent pressure there, it really is going to come down to our deployment of Lean and other CI tools in that area. I see some attractive projects that the team is now putting in their pipeline to drive those improvements, but it is going to take time. It is going to be a journey. Secondly, there is a level of normal seasonality here, as you probably know, Jeff, from your experience, in terms of what the first quarter looks like relative to the back half of the year. So I don't think that you should draw any concerns by what you saw in the first quarter. There's some element of normal seasonality there as well.

[Jeffrey D. Hammond:]

Okay. And what's your update for kind of total CapEx for the year and growth versus maintenance?

[Patrick K. Decker:]

Yes. No change, Jeff, in what we guided to in the last quarter. We're pretty much on plan there, and that is that our capital would be very much in line with last year and, again, the same split between growth and maintenance, as we've indicated earlier.

[Operator:]

Your next question comes from the line of Bill Fisher with Raymond James.

[William H. Fisher:]

Just on Infrastructure, your Q2 guidance infers like a slight loss or breakeven. Just big picture for '13, are you seeing like solid profits in North America, Middle East, kind of the rest of the world, and some of the European markets are at a loss? Or are the differences more minimal on that side?

[Patrick K. Decker:]

No, I think there is a distinction by region as to where we are seeing a return to profitability or at least approaching profitability. And I think you've -- you laid it out pretty nicely there. In terms of where we see the business going over the course of this year and into the future from a big picture perspective, obviously, still very uncertain markets. I mean, I think even the early signs of recovery that we're seeing in North America and the Middle East, obviously, I want to see a few more quarters here of sustained progress there before I would say that we've seen some kind of turn. We definitely need help from the end markets to be able to get the overall business back to sustainable profitability. I would say that we are targeting getting to a breakeven quarter by the -- sometime in the second half of the year. But as I've said previously, there's not going to be a straight line to success here. I mean, this is also a seasonal business, so there will be some puts and takes on this. But I'm encouraged by the progress that I'm seeing.

[William H. Fisher:]

Okay. And just a quick one for Barry. Was there any -- on that working capital, was there any pension outlay or anything unusual in Q1 on that regard?

[Barry E. Malamud:]

No, not unusual. It's normal pension payments, which are pretty much consistent with prior year amounts.

[Operator:]

Your next question comes from Glenn Wortman with Sidoti & Company.

[Glenn Wortman:]

You had mentioned you're expecting a 10% year-over-year decline in LSTs for Metals & Minerals in the second quarter, which does imply a sequential top line decrease from the first quarter, and 2Q is typically a stronger seasonal quarter. I just wanted to make sure I have that right. Or do you expect to see offsets from some of the newer contracts?

[Patrick K. Decker:]

Yes, no, you've got that right, Glenn. I think we -- again, we are seeing what is unusual. I mean, it's unusual for us to see -- from what I understand and studying the business, it is unusual for us to see a sequential decline from Q1 to Q2 historically. But based upon the forecast and visibility we have from our customers, which is the basis on which we develop our forecast, that is what we're seeing right now. That's what they're telling us. I think when you get beyond Q2, while we're certainly assuming a flat line in terms of volume over the back half of the year, there are mixed signals there, and again, we're trying to be prudent here.

[Glenn Wortman:]

Okay. And then on Infrastructure, can you just go over what you're seeing for rental rates overall and then maybe by region?

[Patrick K. Decker:]

Sure, yes. We typically won't give the rental rates by region, and I don't know that we've disclosed specific rental rates in the past, but I can certainly speak directionally as to where we are. We've been flat now, as I look back over the course of the last several quarters. It's really been pretty much a straight line over that time frame. And we're really seeing the same as we look ahead at Q2. We actually had a little bit of a dip in Q1 but we see a slight recovery in that in Q2. But again, on a year-over-year basis, it's pretty much in line with last year.

[Operator:]

Your next question comes from Bhupender Bohra with Jefferies & Co.

[Bhupender Bohra:]

I'm sitting in for Scott Graham here. So the first question, you guys did actually an excellent job on Minerals & Metal. Could you give us what were the contract wins actually? How much did those actually impact the sales in the quarter?

[Patrick K. Decker:]

Sure, yes. I'll speak to the contract wins themselves. Again, we have the contract wins that we've had in China in the past year that we've announced. The most recent ones that you're probably alluding to are in India, and we have a couple contracts there that we've won that we've announced publicly that are going to be about $350 million of contract revenue over time. And feel good about the attractiveness of those contracts. They're attractive returns, they're accretive and again, a good indicator of where we think we can add value in those developing markets.

[Bhupender Bohra:]

Okay. Now we are looking at like -- you did actually give China Rail, Rail's sales basically in 2Q. Big picture like, what do you think about the China Rail spending overall, like beyond like 2Q, the rest of 2013 and going into 2014?

[Patrick K. Decker:]

Sure, yes. So just thinking about the Rail business, what we indicated before is we have -- for 2013, we have a roughly $50 million year-over-year negative impact in revenue. That's $50 million. As we look ahead based upon where we are right now, looking at 2014, we've still got about a $30 million hill to climb in terms of a revenue comp '13 versus '14. But I'm encouraged by the level of quoting activity and project activity that's out there right now. I can't speak specifics or choose not to share specifics on the contracts that we're pursuing. But there are opportunities, again, in China, and certainly we're in active discussions there. There are opportunities, obviously, in a number of other international markets around the world. And then secondly, what I also am encouraged by is the level of effort the team's putting into growing our aftermarket spare parts and service business, which has attractive margins. And again, as I've said before, it's very high quality because it drives the higher level of intimacy with our customers as well. So I'm encouraged. We have a hill to climb, but the team's working it hard. And it does impact the second half of our year in a year-over-year perspective in terms of revenue and earnings, but that is a transition period.

[Bhupender Bohra:]

Okay. And the last one, I may, on the Infrastructure, you did actually say you're seeing some early signs of some project activity. I mean, could you just elaborate on that?

[Patrick K. Decker:]

Sure. There's about a dozen decent-sized large projects. I mean, obviously, we chase projects every day. These are projects that would be larger in magnitude that are out there that are global projects. These are things where, really for the first time as a company, the Infrastructure business is pulling together the capabilities from around the world to pursue those jobs. They typically are, again, high-profile jobs. They require a high level of engineering and tailoring in our design to those job sites. And we think we've got real clear competitive advantages on those jobs. But again, you'll hear us announce the wins on those as they come forward. And all I'm saying is it's encouraging to at least see the activity out there. Now we obviously have to see it come to fruition.

[Operator:]

[Operator Instructions] Your next question comes from Chris Haberlin from Davenport.

[J. Christopher Haberlin:]

Just to kind of follow-on to the prior question on Rail. I guess, you mentioned that there were some shipments that were pulled forward in Q1 and it sounds like we'll see some more of that in Q2. Notwithstanding the roll-off of the Chinese contract, I guess, is that indicating a difficult top line environment in the second half of this year?

[Patrick K. Decker:]

Yes, it definitely is, Chris. So again, as we had mentioned before, and I'm sure you guys will be able to do the math on this, that we're looking for the ag- -- we're actually up in the first quarter and we're guiding up in Q2 versus last year as we work through the remainder of the China contact, and we've seen some growth in the base business. When you then project that out over the course of the entire year, we're saying that for the full year, we're still going to be down year-over-year by $50 million in revenue, and that is high-margin revenue, given the nature of that Chinese contract. So it is going to be a difficult compare in the second half of the year. My comment earlier is simply that we don't look at that as concerning over time. It's a transition period and it happens, obviously, any time you have that kind of a large project that works its way through your backlog.

[J. Christopher Haberlin:]

And then on Infrastructure, I think you mentioned that Europe, you're seeing some projects on the horizon that haven't come to fruition. I guess, what's the major holdup there? And then what should we be looking for as a signal of a turn in Europe or at least a bottom in the Europe construction markets?

[Patrick K. Decker:]

Yes, it's a good question. In terms of what's holding the projects up, I wouldn't say that they're being held up. I mean, these are long lead time, highly engineered kind of jobs where we'll be very much on the tail end of those projects. So like projects in any environment, if it's the energy industry or others, these are just long lead time in nature. So they'll run their due course, and we're -- again, we're encouraged that later this year, we'll have more to share with you there as we have some wins. I think in terms of how do we know there is success in Europe, I -- again, we'd like to see some growth in the base business here, and we just haven't seen that. And I think that the team is working it hard. And I think we need to see a couple, 3 quarters behind us here where we actually had some revenue lift in Europe for us to be able to say that we're turning a corner.

[J. Christopher Haberlin:]

And then just last one for me. There's been a lot of discussion about oversupplied steel markets. However, I think the World Steel Association is projecting close to 3% annual growth this year in steel production or steel demand. Your assumptions for the second quarter and the back half are a little bit inconsistent. I guess, does that reflect just where you're operating versus where the growth is in the U.S.? And then second, are you seeing any signs from your customers or maybe, more broadly, the global steel industry that producers are trying to be more disciplined with supply just given tough the steel pricing environment out there?

[Patrick K. Decker:]

That's a great question. And I would start with your last one, and that would be, yes, we are seeing a greater level of discipline in terms of our customers in their operating environment, in the way they plan their production and volumes. And again, some are better than others at doing that, but we see that as a general trend. Two, I think there is -- our outlook for the year does reflect some level of impact of where our customers are and the geographies they operate in, most notably our presence in Europe but also the U.S. versus other markets. I would say in terms of the other factor, though, is again, we hear the mixed signals and see them as well in terms of where the back half of the year could be. The tough comp in Q2 is just going back to the fact that Q2 of last year was the largest quarterly production volume, at least in our customers. And it had been quite a big uptick from Q1 of last year, and then it trailed down after that over the course of '12. So it's a tough comp in Q2. And then the back half of the year, again, we're just trying to be prudent in terms of what we're forecasting here in terms of LST.

[Operator:]

Your next question comes from Glenn Wortman with Sidoti & Company.

[Glenn Wortman:]

I just had one more question here on minority interest jumped up in the quarter. What were the contributing factors there? And how should we think about modeling that going forward?

[Barry E. Malamud:]

Yes, Glenn, this is Barry. The minority interest increase is due to increased profitability for the joint ventures that we participate in. So going forward -- some of the joint ventures include TISCO, as well as other joint ventures that we've historically operated in. There's probably about 20 or 25 of them. So as the profitability increases in those joint ventures, that minority interest line increases as well for their respective shares.

[Operator:]

[Operator Instructions] There are no further questions at this time. I'll turn the call back over to the presenters.

[James Jacobson:]

All right. Thank you, operator. This concludes our call today, and we, again, thank everyone for joining us today, and we look forward to the next call.

[Operator:]

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