Harsco Corporation
Q1 2014 Earnings Call Transcript

Published: 8 May 2014

[Operator:]

Good morning. My name is Brianna, and I will be your conference facilitator. At this time, I would like to welcome everyone to the Harsco Corporation First Quarter Release Conference Call. All lines have been placed on mute to avoid any background noise. After the speakers’ remarks, there will be a question-and-answer period. (Operator Instructions) Also, this telephone conference presentation and accompanying webcast made on behalf of Harsco Corporation are subject to copyright by Harsco Corporation and all rights are reserved. Harsco Corporation will be recording this teleconference. No other recordings or redistributions of this telephone conference by any other party are permitted without the express written consent of Harsco Corporation. Your participation indicates your agreement. I would now like to introduce Dave Martin of Harsco Corporation. Mr. Martin, you may begin your call.

[Dave Martin:]

Thank you, Brianna, and welcome to everyone joining us today. My name is Dave Martin. I am the Director of Investor Relations for Harsco. With me today are Dave Everitt, our Interim Chief Executive Officer; as well as Nick Grasberger, our President, Chief Operating Officer and CFO. This morning, we will discuss our results for the first quarter of 2014, provide our outlook for the year and discuss our Metals & Minerals Improvement Plan on Project Orion. Before our presentation, however, let me take care of a few administrative items. First, our earnings news release was issued this morning before the market open. A PDF file of the news release, as well as the slide presentation that supplements our remarks for this call have been posted to the Investor Relations section of our website. We encourage you to access these files. Secondly, this call is being recorded and webcast. A replay will be available on our website later today. Next, we will make statements today that are 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 these forward-looking statements. For a discussion of such risks and uncertainties, see the Risk Factor 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. Lastly, on this call, we will refer to adjusted financial results that are considered non-GAAP for SEC reporting purposes. A reconciliation to U.S. GAAP results is included in our press release issued today, as well as in our slide presentation. With that being said, I'll now turn the call over to Dave Everitt.

[Dave Everitt:]

Thank you, Dave, and welcome everybody. Today as Dave said, we are going to be talking about the two key elements on this call, the first quarter results and 2014 outlook and then we are going to talk about the Metals & Minerals Improvement Plan, which we will refer to as Project Orion. Relative to the first quarter, we are very pleased with the results and market dynamics, and internal execution by the team here at Harsco had beneficial impact this quarter and results are positive as a result of that. Our Rail and Industrial businesses are performing at good levels and we are encouraged by firming of steel and nickel prices for the Metals business and by the execution of the Metals & Minerals team and we will talk more about that in our Project Orion conversation. The first quarter benefited from some favorable timing. Contract renewal costs for Metals & Minerals were somewhat better that we had expected and Rail revenue, we had some part sales that were advanced into the first quarter and that had an impact -- a favorable impact on the first quarter. Our outlook for the balance of the year has not changed, excluding the benefits of Project Orion and we will talk about that in a minute. And overall, the team and I feel very confident about our ability to deliver and achieve the 2014 goals. I am also going to also make a comment on leadership transition at this point in time. As you know, we have gone through a leadership transition here in the last few. Nick has been named Chief Operating Officer and will be assuming the Chief Executive Officer role later this year. That change has been broadly accepted by the organization. I think Nick has great confidence -- the organization has great confidence in Nick, and he and I are working well together. We are happy as well with some additions to our executive team and we are in the midst of and active search for new CFO to relieve Nick of those responsibilities. Let me just talk for a minute about Project Orion. Nick and the team at the December Investors Day indicated we would be discussing the specifics of Metals & Minerals Improvement Plan on this call. And we are excited to share with you a program that we believe will deliver -- create and deliver significant shareholder value over the next few years. The Project will lean out our cost structure and deliver a better contract mix. We expect Metals & Minerals free cash flow per annum to increase two to three times by 2017 and the ROIC of the business, Metals & Minerals business to nearly double by that same time. This project is the culmination of many months of work by the Metals & Minerals team to define what we are doing, where we can add value and where we can prove it, and Nick and the Metals & Minerals team has spent a significant amount of time going through a lot of detail and development plan that we are now in the execution phase. I would also say, I’m very pleased with the addition of Rick Lundgren, our President of the Metals & Minerals business. He has joined us in the last month or so. He has quickly integrated into business. Develop the confidence of the team and leadership he has shown in that short period of time. He has been significant and I think he is great add to the team. I would also tell you that the Board has been very engage in the development of this plan. At the last Board meeting, we reviewed the plan in some detail and the Board has a high degree of confidence in the execution of -- successful execution of the program. I think the thing that, I would, I feel also very positive about is unlike previous, excuse me, unlike previous efforts to boost the performance of Metals & Minerals business, this program, this effort, Program Orion is a program that is broad and deep, and its supported by a greater understanding of data inherent the business, a more extensive analysis of that data to make sure we understand the drivers of the various aspects of the business and a stronger integration of external benchmarking information and I feel very good about the results. At this time, I would like to turn over Nick to talk about quarter results, the forecast for the year and a lot of the detail about the Metals & Minerals business. Nick?

[Nick Grasberger:]

Yeah. Okay. Thank you, Dave, and good morning, everyone, and thank you for joining us. I will spend a few minutes talking about the Q1 results, as well as the outlook for the balance of the year, but spend most of the remaining time here talking about Project Orion. So for those of you following on the slides, I am on slide three. As Dave mentioned, the first quarter results were encouraging. We generated operating income of an adjusted basis of $34 million versus our guidance of 20% to 25%, that’s up about 5% versus the first quarter of last year. Each of the three business unit segments beat the expectations and corporate costs were also a bit lower than we thought. Dave also acknowledged that timing accounted for a large portion of this variance. There were some contract renewal costs within M&M that we thought would incurred in Q1, they will likely be incurred in Q2. We also pulled forward some revenue in the Rail business around contract services and aftermarket parts and that our corporate costs, as I mentioned, were also somewhat lower than we expected, but those will likely be incurred in the second quarter. The markets in the first quarter actually began to firm in March. We had a weak start to the quarter, many companies did due to some weather related conditions. That the month of March was quite strong and particular we saw nickel prices increased, steel production improved and natural gas prices firm as well. So March was a quite strong month across all of our businesses. In terms of Brand, the cash earnings in that business continue to be consistent with expectations and we will talk a bit more about Brand in a minute. In terms of challenges for the quarter, free cash flow was, as you will see was a good bit better than expectations but really due largely to the deferral of capital spending in Metals & Minerals. We also had difficult comparisons in the Rail business in Q1 as we've highlighted in the past due to prior year shipments against say a large China project that was $3 million to $4 million of operating income last year in Q1. We also, even though nickel prices improved in March for the quarter they were still lower than they were a year ago. We also had some incremental pension costs in the quarter that we assume on the infrastructure transaction and we continue to spend $2 million or $3 million a quarter on consulting for the Project Orion, which we did not incur last year. So those were some of the challenges year-over-year in the quarter. We also recorded equity income from the Brand joint venture in Q1. You will recall that we are recording that equity income one quarter in arrears, so the amount that we recorded in Q1 was really the stub period in Q4 between when the deal closed in the end of the calendar year and that was about a loss of $1 million due largely to seasonal issues during December, as well as some one-time costs that were recorded between signing and -- between closing at the end of the year. On chart four, the key performance indicators for the quarter, revenues $513 million, up about 3% versus Q1 of last year, the Metals & Minerals business was about 5%, Industrial up about 13% and as expected given the difficult year-over-year comp, the revenues in Rail were down about 20%. Operating income of $34 million, again that's adjusted on a reported basis, operating income was $32 million. We had $2 million of costs associated with the infrastructure transaction, which are tailing off and I suspect we may have some incremental costs in the second quarter but that should be about it. So that $34 million of adjusted operating income was 5% higher than the same quarter last year. Metals & Minerals was roughly flat, Industrial was up about 5%, Rail was up about 50% and corporate costs were about $2 or $3 million higher than the same quarter last year. Earnings per share of $0.16 were up about 7% just to bridge between operating income and EPS. Interest expense was pretty much flat year-over-year. The tax rate was a bit lower 24% due to a few discreet items. We still expect the tax rate for the year to be 30% to 32%. Then, of course, we have the $1 million loss in equity income. The return on capital figure of 6.4% that's consistent with our plan as well and as we go throughout the year as we've indicated we expect ROIC to be between 7.5% and 8% for the full year 2014. Looking forward to the balance for the year, I am on page five, the outlook as Dave mentioned for the operating performance is largely unchanged. Although, our confidence level has increased and as you will see in the minute, we haven’t increased our range of operating income for the year. In terms of the Metals & Minerals, if you look at the volume trends in the business and the price of nickel, there's a potential upside during the balance of the year. We've not assumed that in this current forecast. We do thing there is some risk as we navigate through Project Orion and more proactively address underperforming contracts its possible that we could have some contract exit costs that are also not in the forecast. So we are looking at the risk opportunity balanced with Metals & Minerals to be fairly balanced. Project Orion, we will talk about that, we expect about $3 million to $5 million of benefits this year. So that’s one of the drivers of increase in the outlook for the balance of the year. Industrial also was looking a bit stronger. Steel prices are firming. Natural gas prices are bit higher and those are both helpful. In terms of Brand, again, as we look at the outlook for cash earnings in the business for the balance of the year. It's very much consistent with the expectations that we had at the time of the deal closed. In terms of challenges for the balance of the year, the Rail projection, as I was saying, equal amount of risk and opportunity. As you may know, we have a sizeable gap in revenue and profit year-over-year to fill from the expiration of the China contract. Free cast flow, the guidance for the year is still around zero and as you may recall that’s driven largely by significantly higher capital spending in the Metals & Minerals business. The cash flow from operations is actually up about 25% year-over-year. I think we need to acknowledge that as we look for the balance of the year even though we have a high degree of confidence in executing Project Orion. Nonetheless, it is a very broad program and there is some execution risk as we navigate through the balance of the year. And then finally, we continue to lack the visibility that we like to have to the projected net income of Brand. As I said, we are very comfortable with the EBITDA projections in the business. But in terms of the effective tax rate, ongoing restructuring charges and perhaps, some foreign exchange gains and losses, we just don't have the visibility to that going forward. So it’s difficult for us to provide projections on net income for Brand. Turn to slide six, the outlook for the full year. These were the KPIs that we guided towards back in February, with exception of operating income. They have -- our outlook has not changed. Operating income guidance we have increased both low and high end of the range and also narrowed the range somewhat. We have been guiding on the full year basis $160 million to $180 million and that range now is $170 million to $185 million. And we will hope to provide EPS guidance in the next quarter, although at this point I think the right thing to do is focus on the operating income within Harsco as well as cash flow and returns on capital. Turning to the second quarter on Page 7, the operating income guidance for Q2 is $40 million to $45 million. That excludes a charge that we will take for Phase one of Project Orion, so $40 million to $45 million on an excluding special item basis versus about $49 million in Q2 of 2013. And the key reasons why our earnings, we expect to be slightly down from last year second quarter. Again, we have the final quarter of a negative comp on the China Rail contract. We also have our pension costs related to the infrastructure business that we have assumed as part of the transaction that we did not have in the second quarter last year. There were some contract exit costs that we talked about expecting in Q1, will now be in Q2 and then we also had some benefits in Q1 around corporate costs and expectation of some contract services and aftermarket part revenue in Rail that was recorded in the first quarter. So the segment outlook on Page 8 really has not changed. This chart is very much the same as what we discussed back in February and so I won’t go through it in detail. This just highlights the expectations for each of the segments in terms of revenues and operating income and the key drivers of those over the balance of the year. So, let’s turn to a more in-depth discussion on Project Orion. I’m on Page 9 and I thought we should start by just again reminding everyone, how we are looking at this business. Historically, the Metals & Minerals business has been very focused on growth as opposed to return on capital. We’ve also had poor execution and of course, we all know that the global steel industry has weakened over time. The two charts that we are showing here, I think, capture the essence of what we are trying to drive. The chart on the left indicates that of all of our customer sites that we will provide services. Approximately, 60% of those we would categorize as acceptable performers and that figure of 60% certainly is far too low. And secondly, moving to the chart on the right, we look at historical free cash flow and a return on capital and that free cash flow has averaged $50 million to $60 million over the past four years. For a $1.4 billion revenue business that of course is not acceptable. We also have a return on capital of between 5% and 6%, that’s also not acceptable. So this just highlights and reminds everyone that we have a lot of work to do here and that's why we are undertaking Project Orion. On Page 10, the overall objective of the project is to boost returns on capital and also to provide more consistent service to our customers. We started the program. You may recall last July, when we introduced this term simplification and so the first several months of the initiative, we are focused on simplifying the business. Since that time, we've also added two additional areas of focus. We felt that looking at our process around the bid-and-contract management and how we approach underperforming sites. Both needed to be overhauled. So we've spent an awful lot of time past several months, building redesigning those two core processes that of course have a very strong correlation to the performance of our business over time. So, four areas of focus primarily in Project Orion and I'll step through each of those for here in a minute. Now, Dave touched on this a bit and questions have been asked rightly so. What's different this time? Harsco Metals & Minerals has undertaken several restructuring programs in the past and we are where we are. So what's different this time? I think there are many differences this time. And let me just step through and I think it’s important that you understand that this is a very different program from the historical programs. First of all, there has been an awful lot of work done on mining the data and analyzing the data on a contract-by-contract basis and all that data and all that analysis is now centrally located here at the divisional and the corporate office. In the past that was spread out across sites and regions and countries. We simply have not done this level of analysis to understand would drive the business on a contract-by-contract basis in the past. We’ve also had a very broad involvement of the internal team. This was not a few people sitting in an office, figuring out how much cost we can take out. There are a lot of people involved, certainly within the Metals & Minerals business but also on the Executive Leadership Team of Harsco that were involved in the project. We also brought an outside support. Initially on simplification and then a second firm, we brought in to help us with the -- to process, redesign around the bid management process and the underperforming contract process. And so the focus was not simply on cost but also on the core processes and the business. And we asked ourselves the question, is this regional organizational structure optimal for the business? And we determined that it was not. So we're changing the structure of the organization as well. We’ve also initiated a number of pilot sites, looking at applying some of these things that we’ve learned and we've been very pleased with the early success of those pilots and those certainly helped underpin the projections that we will talked about in a minute. And finally, we've built a dedicated project office to both drive the execution of Project Orion as well as to monitor the progress against the milestones that we’ve established. Just a few comments on the two elements of simplification. First, looking at the initiatives above-the-site -- we are shifting from a regional to a global functional structure. So we will have a global head of operations, a global head of commercial, a global head of the bid-and-contract management process. We believe this will help us to prioritize the opportunities that we have to leverage the knowledge that we have globally and also to be -- have a more consistent adherence to our best practices. We also expect as part of the above-the-site reorganization to realize a meaningful reduction in headcount and we will be announcing that within a few weeks. In terms of the at-the-site organization, as we've looked at very disparate practices of our sites around the world, we found a lot of inconsistencies and competency gaps. The new organization structures are being more centralized will help to drive, filling those gaps and will facilitate what we call -- we'll call the Harsco Way. The Harsco Way will be a new set of standard operating guidelines and processes that will be driven throughout the globe. I mentioned that the initial pilots that have showed a sizable opportunity here and the benefits include not just headcount reductions but also better maintenance spending and enhanced revenue opportunities. So, Chart 13 shows the financial benefits of the simplification portion of Project Orion and we are executing this in two phases, Phase one starting now and we will continue through the balance of 2014. So as I mentioned, we will be taking the charge in this current quarter of $7 million to $10 million of one-time charge to affect Phase one. We believe that when we reached the run rates of savings from Phase one, we will total $20 million to $25 million. We think we will be at that run rate in the fourth quarter of this year. And that the first full year, I’m going to say it will be 2015. Phase two, we expect to begin early in 2015. We expect an incremental $10 million to $20 million of benefit, realizing the run rates late in 2015, with 2016 being the first full year of those benefits. So in total, we are looking at $30 million to $40 million of benefits. We are going to try to ring-fence the costs in Q2 of 2014 and likely in Q1 of 2015. We are likely not going to be recording charges each and every quarter, but we are hoping to do it just in those two discrete quarters. Turning to Slide 14, the process change as you might imagine. The bid-and-contract management process is really the lifeblood of this business and we're changing the way that’s organized and structured. So we now will have a dedicated central team that owns this process. The benchmarking that we've done of other companies that have similar profiles that is the best-in-class model. They have a single dedicated centrally located team and that’s what we are building. In terms of the process, that central team will reach out to functional experts that we have around the globe. We will have a very standardized stage-gate process that will be applied to every single opportunity, both in new contract as well as the renewal and we are going to focus not just on how attractive the project is, but have a very good idea of how we assess the risk of achieving the returns that are proposed. And then in terms of metrics, we will have a much better profile of metrics that we are tracking, not just to approve the project but also as the project is executed over time, continuing that audit process and ensuring that we are on track to deliver against those initial assumptions. The underperforming contracts, another process change that we are undertaking. We’ve constructed effectively a decision tree that we will use to step through the process of addressing each of the underperforming contracts that we have. We’ve begun that process. There are three or four underperforming contracts that we are addressing as we speak through a disciplined process. As you can see on the right, involves individuals from legal, commercial, from finance and from operations, and is going to be focused on cash flow, right. So what’s the net present value of exiting the contract versus staying the course and points in between in terms of potentially renegotiating. So we are going to approach this effectively in a triage type manner. So on 16, back in December of our Investor Day, we provided some projections for the Metals & Minerals business out to 2016, and we just wanted to update those. So you can see that in terms of the EBIT margin, free cash flow, and return on capital, what we projected for this business in 2016 has certainly improved by over laying the benefits of Project Orion. So we now expect EBIT margins to be about 300 basis points higher and we had projected we expect cash flow to be significantly higher, both driven by EBITDA improvement as well as by lower capital spending. And then the return on capital we think will also increase significantly to 8% to 9%. And remember that that’s burdened by about $0.5 billion of goodwill. If you look at the return on capital in this business, excluding goodwill, we think we can get that to 12% to 13%. On 17, this is a depiction of where we think we can take the portfolio of contracts. The chart on the left, this is the 60% of the contracts today that we think are acceptable, Collectively, we have about 7% return on capital at a site level, which excludes goodwill and corporate SG&A and so forth. We believe that in applying this program that site level ROIC will go from 7% to 15% to 20% and that the percentage of contracts that we view as acceptable will increase from 60% to about 80%. So in summary, we are very committed to allocating capital to Metals & minerals in a manner that’s very closely linked with the success of Project Orion. We are going to focus on returns on cash flow as opposed to growth. Certainly, there will be contracts that we exit and we will be investing in new -- in some new contracts. There will be some growth in new contracts. The focus is going to be on returns and the allocation of capital is going to be based on the team’s ability to execute against what they’ve laid out. And what we will do going forward on future quarterly calls is to provide you an update against the milestones that we’ve established around the size and timing of the benefits as well as how this contract turned and the improvement of the contract mix develops over time. And finally, I just thought I would bring this back to what this mean for total Harsco. The chart shows targets in 2016 for EBITDA, return on capital, and free cash flow, and this is kind of current projection for 2016 relative to what we had provided at our December Investor Day. And you can see if you focus on without acquisitions columns, we are looking at about $50 million improvement in EBITDA, ROIC increasing about 2 points from what we had said, and free cash flow also increasing by $30 million to $40 million. So this is a new kind of internal targets for where we think we can take the key financial measures of Harsco over the next two years. Okay. So with that, I will open the line up for questions for Dave and myself.

[Operator:]

(Operator Instructions) And your first question comes from the line of Jeff Hammond with KeyBanc Capital Markets. Your line is open.

[Jeff Hammond:]

Hey, good morning, guys.

[Nick Grasberger:]

Hi, Jeff.

[Dave Everitt:]

Good morning.

[Jeff Hammond:]

A lot of great detail on the restructuring so congratulations. Just to be clear on a couple million pieces on outlook. I think earlier you talked about a point of margin improvement in metals. Is that still on track or do we look at a higher number with the savings? It’s just a little bit apples and oranges with some of the corporate cost reallocation. I just want to understand if that is still a good thought.

[Dave Everitt:]

Yes. If you take out the -- I will call it the year-over-year noise and the change in your corporate cost allocation. So, on a like-for-like basis, the operating margins in metal should be up 1% to 2%.

[Jeff Hammond:]

Okay, great. And then, the mix, can you give us any sense of how this move in nickel prices impacts you guys and how big of an opportunity that is if these higher nickel prices hold?

[Dave Everitt:]

Well, I think that if they were to hold through the balance of the year, it’s probably a what there maybe a $3 million to $4 million opportunity if the demand for stainless steel stays where it is and nickel prices stay where they are. Because of the volatility of nickel prices we’ve chosen not to build that into our forecast as I mentioned earlier. There are some other risks in the business, as we execute Project Orion, specifically underperforming contracts, but that would be roughly the size of the opportunity if nickel prices remain where they are.

[Nick Grasberger:]

Yes, Jeff, what we said in the past is that $0.20 delta per pound in nickel translates to about 1% operating income, that analysis still holds today.

[Jeff Hammond:]

Okay, great. And then, are you actually seeing better order rates in your Industrial business from higher steel, higher natural gas, or is that just in a more something you would expect going forward?

[Dave Everitt:]

Yes. Certainly in the Air-X-Changer business, we have been pleased with the order trends in terms of the impact of steel. It’s really on the IKG grading process and that’s more margin opportunities opposed to volume opportunity. So we did have a good first quarter in IKG. We had quite strong shipments. Some of that I think was timing, but the outlook is from a volume standpoint remains attractive for IKG.

[Jeff Hammond:]

Okay, great. I will get back in queue.

[Operator:]

Your next question comes from the line of Glenn Wortman with Sidoti & Company. Your line is open.

[Glenn Wortman:]

Yes, good morning, guys.

[Dave Everitt:]

Hi, Glenn.

[Glenn Wortman:]

So there are a lot of variables in target savings resulting from the Metals & Minerals improvement plan. Can you perhaps provide any maybe upside or downside risk to your targets say over the next several years?

[Dave Everitt:]

Sure. I think we feel that the upside and the downside risks are pretty balanced around that kind of $30 million to $40 million figure. You could say that there is additional opportunity as we roll out the Harsco way at the sites, given what we’ve seen so far which has been very encouraging, but we are certainly starting with the sites that have the most room to improve. So we simply can’t take those benefits and extrapolate them across all the underperforming sites. Nonetheless, I think there hopefully is some upside there. At the same time, we’ve assumed in Phase 2 that we will get the benefits from applying some technology that will enable some further efficiencies as well as the impact of some ongoing training and development. So those costs, although we’re comfortable with them, don’t have the degree of confidence around them that let’s say the Phase 1 benefits do. But I think that $30 million to $40 million range is a pretty good range and I would say one that we have a lot of confidence in.

[Glenn Wortman:]

Okay. And then just moving on to your revenue targets for Metals & Minerals through 2017, the range band between 1.3 billion, 1.4 billion, can you just kind of maybe break that down a little bit on some of your market assumptions? Has anything changed since your Analyst Day back in December? And then does that still exclude the potential benefit from any new contract wins?

[Dave Everitt:]

Yes. So we do believe that the business will -- the revenues will be in that range over the next three years or so, and that’s really the net of contracts that we exit, contracts that we renew and then some new contracts. We don’t have -- we really haven’t assumed much of a change in volume on existing contracts and business. We’ve not assumed any uplift or a very modest uplift I guess I should say in nickel prices. So the revenue gains from manufactured products are fairly modest in our projections, but it’s really -- what you are really seeing in that range is just the impact of this term of improving the mix in the contracts over time.

[Nick Grasberger:]

I think it’s fair to say that our focus is improving the business, not growing the business right now, obviously, I would use the term, we have to earn to right to grow. I mean, we have a lot of process improvements to make and so we are driving the organization for process improvements and more discipline in capital allocations, etcetera. And so that really says you are going to get some churn, but it’s not a focus on growth until we get to a point where we can deliver this stuff on a regular basis.

[Dave Everitt:]

Just to be clear in our somewhat reduced capital spending outlook for the business, we still have growth, we still have capital allocated to new contracts. So we are more disciplined.

[Glenn Wortman:]

All right. Thank you. And then just on corporate expense, what should we be modeling there for the second quarter and then what do you think the run rate will be in 3Q and beyond?

[Dave Everitt:]

Well, I think for the full year, we are looking at, I don’t know, 4-ish in terms of corporate costs. I think they were the higher in the first half than they are in the second. So maybe that split is maybe 4 million, 5 million lower in the second half of the year than the first half, something to that magnitude.

[Glenn Wortman:]

Could you just remind us what your weighted average cost of capital?

[Nick Grasberger:]

I think we just continue to assume it’s around 10%.

[Glenn Wortman:]

Okay. Thanks a lot for taking my questions.

[Operator:]

Your next question comes from the line of Scott Graham with Jefferies. Your line is open.

[Scott Graham:]

Hey, good morning.

[Dave Everitt:]

Hey, Scott, well done.

[Scott Graham:]

Can you tell us Nick what the LST volumes were in the quarter?

[Nick Grasberger:]

Yeah, I have that here. They were up about 5% versus Q1 of last year.

[Scott Graham:]

That’s all I needed, Nick. That was fine.

[Nick Grasberger:]

5%, yeah.

[Scott Graham:]

Okay. Now on the Rail, I got to tell you, maybe, I think I just modeled this a little bit wrong. When did the real comps -- so what do you face in the next two quarters in the China Rail?

[Nick Grasberger:]

Yeah. This is the last quarter, this current second quarter. So moving into Q3, we don’t have that headwind year-over-year.

[Scott Graham:]

Okay. So look by quarter now, all right. So the Brand business, what is the business leaders over there said kind of after you made your divestiture announcement that and this is I think per your fourth quarter conference call that the year could be a sort of a transition year for Brand as well. And I’m just kind of wondering what you feel that moves for their prior EBITDA assumption. It sound lower obviously, but, I mean, maybe how much low is you’re thinking?

[Nick Grasberger:]

Actually the projection for the year for EBITDA is up, okay. Certainly, they are incurring restructuring cost and most of those benefits will certainly be realized in 2015 and beyond. But on a like-for-like basis from operations let’s say, the expectation is and the projection and the plan for the business and they’re tracking to it is for EBITDA to be up this year. It’s a transition year, of course, because they’re integrating two sizable rather desperate businesses and so there’s an awful lot of work going on at Brand right now. But I think that I’m recently on the board. We have a board meeting next week and on the audit committee and fairly close to the situation there. And I think there continues to be a very high degree of confidence in the management team than they are planning to execute it. So it is a bit frustrating that the visibility for net income is poor. But at the end of the day, that’s not the value driver, right at EBITDA and cash flow and that continues to be on track.

[Scott Graham:]

And the EBITDA up comments that you guys are making, that is part of pro forma basis for Brand or is that because of the acquisition of the infrastructure business?

[Nick Grasberger:]

No, that’s on a pro forma basis. So pro forma basis EBITDA was about $300 million, a little more than $300 million on a consolidated basis between the two companies.

[Scott Graham:]

Right.

[Nick Grasberger:]

Of that base, it will be up this year.

[Scott Graham:]

Got it. And my last question is, do you may have the dollars or the contracts that either exited or let sort of expire in the Metals & Minerals for the first quarter?

[Nick Grasberger:]

We do, I think Dave have them.

[Dave Everitt:]

So I’m sorry Scott, what are you looking for?

[Scott Graham:]

I am sorry, I got it.

[Dave Everitt:]

Revenues of the exited loss contracts?

[Scott Graham:]

That’s correct. Yes.

[Dave Everitt:]

It was about $15 million.

[Scott Graham:]

$15 million. Okay. Thank you.

[Dave Everitt:]

Welcome.

[Operator:]

(Operator Instructions) Your next question comes from the line of Jeff Hammond with KeyBanc Capital Markets. Your line is open.

[Jeff Hammond:]

Hey, guys. Just a few follow-ups here. On the Rail side, you put that in the challenge bucket. Is that kind of a timing discussion or is that you’re still filling and finding orders to kind of fill that $30 million gap from China? And maybe just address, how you’re thinking about the margin performance there and if some of this favorable mix continues?

[Dave Everitt:]

Yeah. It’s really the ladder, which is, the plan for the year was to fill that gap created by expiration of the China contract. We think they will. But to be fair, I think it is a challenge. I mean, that is their plan for the year and that’s why I indicated that I putted it in the challenge bucket. In terms of margins, the aftermarket parts business, which is accretive to margins has been growing somewhat faster than the volume and the equipment business, even though its much smaller, so that has been accretive to margins. But I think, we still look at this business overtime, its kind of a mid-teen, low to mid-teens kind of EBIT business.

[Jeff Hammond:]

Okay. Great. And then, can you give us the acquisition impact on the revenues in Industrial?

[Dave Everitt:]

Yeah. I know the, in terms of operating income it was $0.5 million to $1 million revenues. I’m going to say probably $4 million, $5 million, obviously, maybe $5 to say, the revenues are, yeah, talk….

[Nick Grasberger:]

$5 million to $6 million.

[Dave Everitt:]

Yeah. $5 million to $6 million, yeah.

[Jeff Hammond:]

Okay. And that’s a pretty good run rate indicator of how to think about what that business going to contribute?

[Dave Everitt:]

Yeah. Yeah.

[Jeff Hammond:]

Okay. And…

[Dave Everitt:]

I guess, the only thing I add is the integration in the first quarter has been going very well and we’re pleased with the business model and I thinks its going to turn out to be a great add for us.

[Jeff Hammond:]

Okay. And CapEx, you said there were some deferral but is $240 still the right number to think about?

[Dave Everitt:]

Yes. Yes. Jeff, it is.

[Jeff Hammond:]

Okay. And then, finally, can you just give us an update on your Metals & Minerals, JVs in China and some of the new contracts that maybe in the startup mode and how they’re ramping relative to expectations?

[Dave Everitt:]

Yeah. The largest one joint venture TISCO at this year has been performing quite well and we had assumed that it would, but it was still to difficult ramp where they had been performing. So we’re actually quite pleased with the performance there. The others are still in ramp up mode and as we look over the next two or three years in our modeling. We expect a pretty significant improvement in the business from those contracts and it’s really no reason now to believe that won’t happen. I would say they are consistent with expectations at this point.

[Jeff Hammond:]

Perfect. Thanks guys.

[Dave Everitt:]

Thank you.

[Operator:]

Your next question comes from the line of Scott Graham with Jefferies. Your line is open.

[Scott Graham:]

Hey. I wanted to ask a broader question about Orion and the focused on the current sites is obviously very deep, very detailed, no question about it. I guess, the question that I would have is that with and Nick and I have talked about this with the so much of the steel complex having moved to Asia. How did -- what are your consultants telling you about that versus your offices being in North American and particularly in Europe?

[Nick Grasberger:]

Well, we certainly have a strong direct presence in Asia. We have a sizable team there. We certainly would agree with you in terms of where the markets going. And we just talked about the very sizable wins that we’ve had in contracts for past few years in China and India and so forth in the Middle-East. So, yes, I think, our infrastructure is shifting increasingly to those regions to support their broader customer base.

[Dave Everitt:]

I think the piece I would add to it is, that there’s new organization structure. I think is going to enable us to take the good practices we have elsewhere in the world and get them embedded in these new operations faster and in a more consistent way, which in the past would provide more add hawk to the focus. So, I think it’s a right time -- from the Asian business, it’s the right time for this because, as we’re starting up, we are starting up right way and we parse a way conversation. We talked about, as Nick mentioned, really allows us to embed proper management of those contracts early in the phase rather than later. So, I think it’s a win-win from that standpoint.

[Nick Grasberger:]

And just to be clear, the shift from a regional to a more centralized structure doesn’t mean that we are pulling people out of the regions. We’re certainly not.

[Scott Graham:]

Okay. Let me just ask a quick piggyback question onto that if I may. So the rise in EBIT margin that you’re expecting in the business versus the rise in ROICs you’re expecting, it’s a little bit of a lag on the ROIC side and that was the like, maybe some of the thrust of my question is that maybe, are you guys thinking that you need offices, you need to be on the ground more in Asia and that’s the reason why maybe you’ve got a little bit more capital dollars, whether it’s this year or next year or what have you to spent to get there?

[Nick Grasberger:]

Well, we agree, we need a larger presence but we really don’t have any capital in this plan allocated to building that out. The issue on why it appears to be a lag is something that we have a $0.5 billion of goodwill in this business and so it’s a very sticky number. It takes a while to move that figure. You need a lot of higher earnings to really move that north. Perhaps, the better metric, the one that I like to look at is the EBITDA minus CapEx margin, right and that’s growing significantly, if you think about EBITDA minus CapEx, say in 2014, the margins probably 3%. If we achieve this plan in 2016, that margin will be about 10%. So I think over time, we should focus perhaps more on EBITDA minus CapEx as a margin and how we’re going to drive it as opposed to simply EBIT margin.

[Scott Graham:]

Understood. Thank you all.

[Operator:]

And we have no further questions in queue. I will turn the call back over to the presenters.

[Dave Martin:]

Good. Well, thank you for joining us today. If you have any further questions, feel free to reach out to us via the email or on the phone now this afternoon. Thank you.

[Operator:]

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