Enviri Corp (NVRI) 2005 Q2 法說會逐字稿

Good afternoon. My name is Angela, and I will be your conference facilitator. At this time I would like to welcome everyone to the Harsco Corporation's second quarter earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. [OPERATOR INSTRUCTIONS]. Also, this telephone conference presentation and the 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 Mr. Derek Hathaway, Chairman, President, and CEO of Harsco Corporation. Mr. Hathaway, you may begin your call.

Thank you, Angela. Good afternoon, ladies and gentlemen. Welcome to this second quarter 2005 conference call. I have with me today Ken Julian, Gene Truett, Mark Kimmel and Sal Fazzolari, my usual accompanists, and without any further ado, I'm going to ask Mark Kimmel, our Chief Counsel, to read the Safe Harbor statement. Thank you, Mark.

Good afternoon. I'd just like to remind you that our discussions with you today, including our responses to your questions, are likely to contain forward-looking statements. These statements relate to future operations, results, expectations, and other aspects of our business. Our statements today are based on current information and the best expectations and beliefs of Management. While our statements today are based on best available information, future results could differ materially from what we tell you today. Possible reasons for these differences are listed in our periodic filings with the SEC, where we discuss them. You're invited to review them at your convenience.

I would also like to remind you that replays of this call and other related information is available at the Harsco website, www.harsco.com, and that you can access the telephone replays of this call by dialing the numbers provided in this morning's press release.

Derek?

Thank you, Mark.

As reported this morning, we're pleased with the second quarter performance. We achieved records in all of the key areas -- sales, income, diluted earnings per share from continuing operations, and cash flow from operations. It is especially pleasing to see that our three growth platforms, that is our Mill Services operations, Access Services, and Engineered Products and Services, all performed well in the second quarter. Particularly noteworthy was the strong performance of our Global Access Services businesses which demonstrated the improving quality of performance that we believe this business is capable of as we go forward.

We believe that the second quarter performance validates our strategy of globalizing the business and building a balanced portfolio with these three main growth platforms. The increasing contribution of the Access Services segment as well as the Engineered Products and Services businesses were evident in this quarter, and these two growth platforms compliment well our largest sector, which is our Mill Services group. Overall, Harsco margins improved 140 basis points to 10.7%. And as we stated at our annual analyst conference in December, a key strategic objective of 2005 is to improve the overall margins of the Company, and we are pleased with our progress for the first six months.

Sal Fazzolari will now give you more details on our earnings release and then we will take your questions followed by, if I feel it's appropriate, a few closing remarks. Thank you, Sal. Would you proceed, please?

Thank you, Derek. Good afternoon, everyone.

In addition to what Derek has just said, I would like to make several salient points relative to our second quarter performance, as well as the first six months' performance. Starting off with cash flows, cash flows from operating activities for the second quarter improved by $22 million or 34% to $86 million. For the six months, cash flow from operations improved by over $37 million, or approximately 39%, to over $134 million. This strong performance was achieved after a discretionary $9.4 million cash contribution that we made to the UK pension plan in the first quarter, as you may recall. This is an excellent first half, and it positions us well towards achieving our 2005 goal that we continue to state, and that is achieving $320 million in cash flow from operations, which certainly would be a record for us. We also made good progress on our asset sales goal of $20 million for 2005, with $14.5 million or 73% of this total being achieved in the first six months of the year. Our debt to capital ratio improved slightly to 40.3%, and that is from the March 31, 2005, as well as the December 31, 2004, levels of 40.6%. Overall, our debt levels remain virtually unchanged.

Return on invested capital, which again is a key strategic objective of ours as we pointed out at the December analyst conference, for the year so far has improved by 160 basis points to 10.2%. We're quite pleased with this. This is an excellent start towards our 2005 return on invested capital goal again, as you may recall, of 10 to 10.5%. EVA improved in 8 of our 9 business units, with the only decline in Gas Technologies. Total backlog for the Company was up 11% over December 31, and was up 37% over last June 30th. Just to remind you that this excludes contract backlogs for Mill Services, which are reported annually at December 31, and Access Services, which does not have a traditional backlog due to the rental nature of its business.

Our effective tax rate increased from 31% to 31.9% in the second quarter compared with last year. The increase in the rate was due principally to the expiration of tax holidays in certain international locations. The overall tax rate for 2005 is now expected to be in the area of about 33%.

Consistent with our growth initiatives, we invested $136 million in CapEx for the first six months of the year. This is an increase of approximately 37% and is consistent with what we've been stating all year long. Over $72 million, or 53% of this total -– of this CapEx was spent on growth initiatives. The $72 million was invested in our three main growth platforms, as Derek indicated earlier, with 44% going to Mill Services, 44% to Access Services, and the remaining 12% going primarily to our Railway contract services business. Again, this is consistent with our strategy of developing a balanced portfolio of global industrial services.

This balance is clearly evident from the first half operating income performance. Mill Services accounted for approximately 50% of the first half operating income, while Access Services and Engineered Products and Services businesses accounted for approximately 48%. We should see even better balance in the second half of the year with the Gas Technologies business expected to perform much better.

Finally, export sales for the quarter increased 21% over last year's second quarter.

Now I'd just like to make some brief comments on each of the segments. Mill Services sales grew a healthy 12% for the quarter with the majority of the growth coming from investments that we are making in this business. Approximately 8% of the sales growth was a result of these investments, with the remaining 4% coming from positive foreign currency translation. As I mentioned earlier, we invested $72 million in growth CapEx during the first half of the year, of which $32 million was invested in the Mill Services business. I would like to remind our participants that we do not spend this growth CapEx in Mill Services until we first have a signed contract.

We expect the positive organic growth momentum to continue for the remainder of 2005 and beyond for the Mill Services business. However, foreign currency translation should not be a factor in the second half of 2005 as it was in 2004. I'm sure you've noted that -- the big changes we've had, particularly in the Euro and the pound sterling. Just as a point of reference, at year-end, the Euro closed at about $1.36 and -- which I believe was a record high, and the sterling was at $1.93, and I think as of today, we're about $1.21 and $1.75, respectively. So we've had some pretty good movement in currencies.

Also affecting the second half, particularly the third quarter, we do expect some production cutbacks as recently been announced by some customers, and this will -- what this will do to the third quarter performance of the Mill Services is that we expect that business to perform -- approximate last year's results, but we do see fourth quarter improvement in that business. Thus, when you look at the total picture, the Mill Services growth in the second half of the year should come primarily from add-on services and investments, including possible bolt-on acquisitions.

One important achievement in the second quarter is that Mill Services operating margins improved 200 basis points to 12.3%. The improvement in the margins was positively affected, as was noted in the press release, by a net $2.8 million in pre-tax income resulting from a gain on disposal of assets, which was partially offset by some reorganization costs. Even without this net $2.8 million in income, margins improved by 100 basis points to 11.3%. This was achieved despite higher energy costs of approximately $3.7 million over last year's second quarter. Margins were positively affected by our on-going Six Sigma process improvement initiatives as well as new investments.

The resilience of our Mill Services business can be attributed to its on-going process improvement initiatives, that is, relentlessly examining ways to reduce costs and improve operating efficiencies. Moreover, new targeted investments driven by the EVA model and the global footprint of the business provide the necessary balance to achieve these consistent results.

The record second quarter performance of the Access Services business was broad-based. The 12.8% sales growth for the second quarter in Access Services was led by strong performance in the Middle East, Western Europe, as well as North America. Most of the growth, or approximately 11% for the quarter, was organic. Foreign currency translation was not much of a factor in this group, contributing only 2% to the sales growth.

Most noteworthy for the quarter was the margin improvement in the Access Services segment. Margins improved by 250 basis points to 10.3%. This is the first time since the fourth quarter of 2001 that this segment has achieved double-digit margins. For the first six months, margins have improved by 260 basis points to 7.8%. This puts us well ahead of our 2005 operating margins target of 7 to 7.5%. We expect margins to further improve beyond 2005. As we stated in December, we are focused on achieving on-going margin improvement in this business with an ultimate target of 10% or better by the 2006-2007 time frame.

The Engineered Products and Services group turned in a record performance in the second quarter. Sales increased by over 17%. The much-improved results were again broad-based, with all units posting higher sales and operating income, and 4 of the 5 posting higher margins. Operating income increased by approximately 39% and margins improved by 220 basis points. This strong performance is expected to continue for the second half of the year. Backlog for this group increased approximately 8% from December, but was up 34% over last June.

Moving on to Gas Technologies, the Gas Technologies segment's performance in the second quarter mirrored the first quarter; that is, mixed results. The Cryogenics, Cylinder, and Composite businesses posted improved revenue and earnings compared with last year's second quarter. Their good performance, however, was partially offset by the poor performance of the Valve business. The propane product line, as expected, posted lower results year-over-year due to the strong second quarter performance in 2004, which was driven by a rush of pre-buying as customers hedged against rising steel costs. The Gas Technologies business is expected to perform much better in the second half. The Cryogenics, Cylinder, and Composite businesses should continue to perform well for the remainder of the year. The propane business is also expected to perform well in the second half, as it returns to its more normal business cycle. The Valve business is getting very focused, top-level attention. This business will perform better in the second half. Finally, the overall business will be less affected by rising commodity costs in the second half of 2005 as compared with 2004. Backlogs for the Gas Technologies group are up 22% over December and 49% over last June.

One final comment on segments. I'm sure most of you noted that there was a $2.1 million expense under "general corporate" during the second quarter of 2005, and there was 0 in 2004. The $2.1 million relates to reorganization costs and due diligence expenses incurred on M&A activities.

That completes my comments. Derek.

Well, thank you, Sal. We'd now be pleased to take your questions.

[OPERATOR INSTRUCTIONS]. James Gentile, Sidoti & Company.

Looking at your Access business, I think everyone was kind of surprised to see the operating margin hit over 10% for the first time over the last three years or so. I know that underlying changes to cost structure, storage fields etc., have been made. Could you kind of give us an idea as we see the non-residential construction cycle move forward, where you think, on the expense side, changes will be driving that operating margin forward? Could we potentially see a 12 to 13% peak number here over time?

Well, James, I think we're rather pleased with getting above 10%.

Certainly.

And we are committed to trying to improve our margins. Clearly, control of our expenses and getting more equipment out on sites, which we are able to do because of our geographical diversity, and greater utilization -- and I suppose, really, margins will improve and continue to improve as the rental rates edge slowly but surely northward. We have a record amount of equipment out on site as of yesterday morning, particularly in our North American markets, which were affecting the overall Access equipment margins, and we have a record amount of equipment out enjoying slightly -- modestly better rental rates, and that does have, clearly, a significant impact. We've also introduced, through some of the capital expenditures that Sal has talked about, a new product line, which is going very, very well and is fully utilized and we're considering bringing more into the marketplace. So it's always a combination of new things, but keeping a control of our administration expenses and then building off as fixed a base as we can with higher volumes, slightly better pricing, and of course, this is no magic formula, I mean, this is the standard-type stuff, we're just going to continue to work on that in Access Equipment.

I guess just in terms of the non-residential cycle, in which it seems like we're still in the beginning stages that, I know --

James, excuse me. This is Sal. Just to remind you, the U.S. is only 20% of the Access Services business, so you've got to keep that in perspective.

Oh, right. That's true.

Again, it's a global balance. This quarter was a very good quarter because we had great performances across the board -- the Middle East, Europe, particularly the UK, Holland, France did extremely well, the U.S., North America -- that is, U.S. and Canada, very strong. So, it was broad-based, across the board activities. So I just want to put it all in perspective.

I got you. And then moving to Gas Technologies, you suggested several times in your comments, Sal, that the second half is going to be much stronger perhaps than the first half. Could you give us perhaps an order of magnitude? Is it more of a top-line pickup with lower raw materials cost? Will we see the margins touch the 7% level perhaps?

A lot of it is a margin issue.

We did take some pretty serious re-organization expenses in Valves. We made some serious management changes in the organization too, which were not a small expense. And as Sal has said, top-level attention is being given to that business, and as there were some serious non-recurring expenses in the first half, due to the reasons I've just given you, we do expect the second half to perform better, both from a volume standpoint, as the backlog has built up, and there seems to be better things on the horizon there, but also because of the non-recurring items. So we decided to take it on the chin, reorganize and do better. And that, I believe, is what's going to happen.

Would you say that then the $2 million of general corporate expenses recognized in the second quarter was mostly focused on the Gas --

No, that is independent of the GasServ stuffthat I've just talked about.

Okay, thank you.

Bill Fisher, Raymond James.

Derek, I think you mentioned in the press release potential new rail service contracts looking ahead or that you're looking at that. Can you just touch on what types of things -- would they be long-term contracts type -- if you have a different margin profile from your manufacturing type of business in that market?

Yes, we have been successful in the first six months, in fact, in signing up new long-term contracts, some of which we're allowed to publicize and some of which for customer reasons -- and very valid customer reasons -- we agree not to publicize. However, I can assure you that those contracts have been written and we're moving towards introducing equipment onto those sites and I guess they're going to have some impact at the end of quarter four, but certainly we're looking to them coming in 2006. So, the progress that we're making regarding the model change in that business is exciting, it's looking okay. The business has met its financial goals in the first six months. Margins have improved, because if you recall, we were spending a great deal of time and money on travel expense, placing engineers in various places, marketing expense, also development expense, et cetera, for the last -- in fact the last several years. While those costs are now receding and the top line is growing, which is -- again in simple terms, providing the improvement in margin, and I believe that HTT will begin to manifest the promise that it has made over these past several years, and again, it's pleasing to see that strategy working. Factories are busy, we're doing well in the United Kingdom. Our orders to China are being delivered on time and we're optimistic that that will come through with higher margins now for the foreseeable future.

And if I could just follow-up slightly for Sal. What was the growth CapEx number, the budget you had for the year on growth CapEx?

We'd said, Bill, that we were going to do for the year about, $120 million, roughly. And so we're well ahead of that, at $72 million for the first six months. We see that pretty much trending for the remainder of the year.

That number could be a little higher if you get projects --

I mean, our total CapEx budget is in excess of $250 million, which includes maintenance CapEx as well as the growth, and a lot of it as you all may know is timing. Some of these projects come on faster than others and so forth and so on, so that's why it's hard to give you an exact number. But certainly, given where we're trending for the first six months, a number of $130, $140 is very realistic.

Great, thank you.

[OPERATOR INSTRUCTIONS]. Curt Woodworth, J.P. Morgan.

Yes. Hi, good afternoon. Congratulations on a good quarter.

Thank you.

I just wanted to get a little bit more clarity around the third quarter outlook for Mills Services. What type of production cutbacks are you seeing? And your statement that you think the results are going to approximate last year's results, is that to imply that revenue and EBIT would be flat? Did I hear that right?

Yes, you did. That's correct. Don't forget, traditionally the summer months, and particularly in Europe, which is a strong market for us, are slow to begin with and a lot of the customers take an advantage to extend some of those shutdowns and so forth. Plus, given the global discipline to keep prices in check, what you're seeing now with the major players is a new focus on trying to control production.

Okay. The organic growth rate for Mill has been 8 to 9% this year on what's probably flat to maybe even down a little bit global production growth outside of Asia and your core markets, so clearly you guys are growing organically. So should I infer that 8% core number still holds, but the production cutbacks is going to offset that in the third quarter by say 7 to 8%?

Yes, you can do that.

Okay.

And quite frankly, we are students, as you may well imagine, with such a significant part of the corporation's earnings and sales in that sector, we are students of the behavioral habits of our customers, and we have not been surprised and we have planned for this phenomenon.

Great. And then in terms of the growth CapEx for the current run rate of $145 million, a lot of that is going to the Mill Services segment. Can you provide a little bit more detail on exactly where that is going? Is it to new contracts, is it add-on services at existing clients?

Yes. Yes, that's right. As you recall, I said about 45%'s going to Mill Services.

Okay.

45%, roughly -- in the range of 40 to 45% Mill Services, similar percent to Access Services, and then the remainder to the Rail Services business. It's broad-based. Again, it's not going in any particular concentration, any particular country, any particular service; it's a combination of new sites or more importantly, new add-ons and so forth at existing sites, but pretty much spread across the board throughout the world.

Okay. Do you have the growth CapEx number for the Mill Services segment in '04?

In '04 in total or for the six months?

In total.

In total for '04 it was probably around $70 million in total. Somewhere around there. $60 to $70 million. We can certainly get that for you, if you’d like.

Okay. And right now you're at $32 million, so the run rate's $64?

Yes. Yes, last year we spent a lot of money on growth CapEx in Mill Services and you're seeing the results of that, obviously, in the first six months of this year.

Okay. Do you think you'll end up kind of in that $70 million range this year?

Probably. I would think so, yes.

And then I just want to make sure I have this correct. I believe that roughly every $1 of capital invested in that business you hope to get about $1 of sales?

Right, that's correct.

Over a 7 or 10-year period.

Right, right. And then, any update on China in terms of some of the new contract wins you guys were targeting earlier in the year?

We have three contracts there presently. We expect to expand that to five within the next 12 months.

Okay. And then can you talk a little bit about Access Services, the trends you're seeing this quarter? I mean, obviously there's a lot of economic weakness in Europe, but your performance this quarter was phenomenal. Are you seeing any deceleration there? Do you think the performance is pretty sustainable looking out into the third quarter?

We presently believe that the performance of Access Services is sustainable. We do. I think our geographic diversity is a very important thing here. We work on the principle of mobility of equipment. We tightly control our utilization rates. Rental rates, as we've said previously, are a very important factor, but presently, our forecasts indicate to us that this is a sustainable situation.

Great. And then just a similar question with Track Technologies. Do you guys give backlog information for Harsco Track Technologies this quarter?

We don't give that, no. The balance is changing from pure manufacture and sale to a higher proportion of contracted services. We're watching that phenomenon take place and clearly we're pleased with that because it's part of our strategic thrust, and I guess that I'd like to wait until end of quarter three as this starts to unfold and will be very happy to and will be prepared to give you that kind of breakdown in quarter three.

Great, and then just one last question. Thank you for your time. Longer-term on the Propane business and the Valve business, do you view that as a strategic business? Would you think about divesting that business at any point in time?

May I answer you by saying this, that our portfolio is always under examination. We are exploring all of the time our options as to how we can grow or modify or improve the performance for the shareholders, and I just have to tell you that there's nothing sacrosanct. It's often a matter of timing and so on, and preparedness. There are lots of factors involved, but just let me say to you that you can be assured that I am mindful of the perceived underperformance. It hasn't kept pace with the rest of the organization, and be assured that we have those circumstances in mind.

Great. Thank you very much.

Steven McBoyle (ph), Lord Abbett.

Yes, thank you. Congratulations.

Thank you.

Maybe first just on Mill Services. Can you just elaborate as to what your expectation is through the back half? I recognize the comments you made on the third quarter, but to the extent that absent China you obviously had 9% organic Q1, 8% organic Q2. Is that the sort of organic growth rate you would expect in the fourth quarter?

Yes.

And the additional contract signings that you alluded to, I think you made the point there on China, are there other large meaningful contracts that you're anticipating?

It's really a combination of contracts where we've brought equipment on to site in late 2004, which was sort of unproductive in the sense that we weren't billing, we were installing. So that stuff comes on stream. There'll be some of that coming on stream in quarter three to compensate a little for some of the shutdowns, and then we expect to resume sort of normal business in quarter four, which would be the existing contracts coming back to some degree of normality plus the installations that we've been involved in because of the expenditures last year coming on stream. So yes, we expect to see the growth, and as I said in an earlier comment, the quarter three phenomenon is no surprise to us at all, and we planned for it and we expect it and that's why we've stated the case. The good news is, of course, and Sal has used the word a number of times in what he said, for good reason, the balance of this corporation is very important to me and very important to us, and that's certainly what's come through. We couldn't have timed the improvement in our Access equipment business, and our Engineered Products business better than quarter two and it'll continue in quarter three. So we are able not only to reaffirm our confidence for the back half of the year, but as we've said, the total result will be that we are able to perhaps improve our performance guidance just a little.

And also, just a reminder. I think -- if I'm not mistaken, I think we've signed over 20-some contracts over the last 12 months or so, and also remind you, that we do renew about over 90% plus, so there is some loss there of revenues. Despite all that, we're still running at about 8% organic growth. So I just wanted to give you all the in's and out's and the balance there, but certainly we're very focused on continuing that high single-digit growth rate, and you will get periods like the third quarter, for example, where you run into some of these issues.

Sure. No, clearly understand. The return-to-normal business in Q4, I presume your visibility into that, just given natural lead times at your customers, is fairly high. Is that a fair statement?

We are very close to the businesses, yes, and we are constantly monitoring that, and the present information we have on our customers' intentions would indicate to us that we'll be quite satisfied with quarter four.

And on the margin front, I think you've targeted 11 to 12% looking out over the next couple of years. Obviously, very strong margin profile this quarter. Should we anticipate that margins can continue to move up from this 11.3% base?

There has to be a limit to administering your way, and efficiency in your way, and cost-cutting your way to success. Clearly, the pricing element comes into that at some time, and we would not intend in our Mill Services business to presently be influenced by a desire to improve pricing to our long-term customers. We don't do that. What we do do is resolve and adjust because of the strength of the relationships. So any improvement in margins, given that quite a solid part of the pricing structure is not flexible. We don't see that as an avenue presently. We're sort of linked umbilically to the industry, and therefore, we do rely upon volumes. We rely upon our own efficiencies and consolidations of administration, et cetera, et cetera, to continue to maintain and manage those contracts around the world, and believe me, there are still opportunities there for us.

Sure.

As we said, on the Mill Services side, you're not going to see dramatic changes in margins on a year-by-year basis, either up or down. I mean, there'll be 10 basis points, 20 basis points. Like for example, 2003, I think our margins were 10.4%. 2004 they were 10.6%. That's the kind of movement you're going to see in this business. Certainly there'll be some movement within quarters because of the things we've just been talking about.

And just turning to Access and specifically pricing. You alluded to obviously very favorable pricing in the first half, 5.8% in the U.S. Just curious what that rate may be internationally, and I think in the past you had talked about pricing being low single digit, 3% or thereabouts in terms of what you may have been instituting, and yet, competitors may not be following you. Can you just talk about the market dynamics in the U.S.? Is that pricing sustainable? Can one assume that maybe we see even higher rates of pricing in the back half? And are you seeing your competitors follow at this point in time?

We are seeing competitors following, yes, and that's good news. There is also some consolidation in the industry outside of our own operations. One or two things have happened which give us cause for encouragement that the pricing structures will continue to advance. We don't expect that to be sort of a revolution. We think that's going to be a slow evolutionary process, but we're certainly more than happy to have a record amount of kit out on site, and pricing on rentals moving northward.

And the pricing issue is not as severe outside the U.S. Those severe reduction -- we had a 25% reduction in rental rates in the U.S. That was not the case internationally. So we continue to see some very strong markets, because we specialize in certain services to different parts of the world, where we really didn't see this kind of reduction in pricing. So that was really more of a U.S. phenomenon.

Yes, but just recognizing that you're working off a higher price umbrella internationally, just curious what sort of rate increases you may be seeing internationally. And maybe just a follow-up. To the extent you do have record equipment in the field, how much of that would be contracted at current prices as opposed to contracted prices? I mean, to what extent is current pricing baked into the equipment you have in the field today?

The length of contracts means that the shortness of the two-month, one-year or two-year deals, the ability, the flexibility to sort of add a few basis points to the pricing just depends on a month-by-month basis. We're not -- it is more flexible.

Okay. And the price rate increases you may be seeing internationally?

It is less active internationally than it is domestically.

In the Middle East, you've referenced -- are there particular large projects that you're working on there?

Yes, there are.

And what would those be?

Well, we're at the Dubai International Airport and we've been there for 18 months and we will continue to be there. I suppose that's the principle activity. We're in the Emirates. We are in Saudi Arabia. We're in Egypt and other places and we're doing quite well there now and assisting them in their major construction programs.

And the Dubai airport, that program length is what? When should that continue through to?

It will be, we think, another perhaps six months, but it may well be followed on by further developments.

And on the HTT side, just curious what the mix may be today, equipment versus services, and as you look out two years or so, whether there is a goal there in terms of mix expectations?

Well, I think to answer the last part of the question first, we'll take the mix between industrial services and manufacturing. We wish to accelerate that as quickly as opportunity allows us to do it. Presently, I guess, the mix is about 65/35. That is 65% is the manufacture and sale of equipment and about 35% of our revenues, at somewhat higher margins, is in the industrial services side of services.

Okay. And some of the contract signings that you alluded to there and talked about, can one assume that one or some of those contracts may be Class I Railway, North American based? Is that a generic question I can ask?

I don't think so. The U.S. railway industry is comprised of Class I's and Class II's and its undergrounds and subways and all that kind of stuff. So you can be assured that this phenomenon is taking place across a wide customer base.

Okay. Thank you very much.

You're welcome. Thanks.

Jeff Hammond, KeyBanc Capital Markets.

A question on the guidance. You came in in the second quarter versus the mid-point of the range $0.16 ahead. You raised your guidance for the full-year $0.07 to $0.12. I just want to understand the puts and takes, moving pieces within that forecast that maybe give you a little caution for the second half.

Well, as we indicated in the press release, Jeff, the second half, the guidance, again, we expect Access Services, as Derek indicated, to perform very well, but not just Access -- again, it's the balance, Engineered Products and Services, they're performing very well. We see no end in that through the remainder of the year, so you have both businesses going very strong, and that's the plus side. On the negative side, you have foreign exchange rates, you've got energy costs, you have production cut-backs, you have higher tax rate and so forth, but on a net/net basis, we feel that the strength of those two segments are going to overcome these negatives, and hence the reason for the guidance increase.

Okay. And then, back to Mill Services margins. Sal, you mentioned you're going to see small improvements there, and I know margin improvement has been a bit elusive over the last year or so, but this quarter you're up 100 basis points, ex that gain. I guess I'm wondering if there's anything within those results that was indeed unsustainable, or if we do see more of a trend like that going forward.

Again, it's the geographic diversity. We had good production at some key customers and so that helps, of course. The new investments are doing very well, other than one or two that are still in the startup phase and so forth. So there's really nothing really unusual, Jeff, that we can say, point to one thing.

Are your startup costs beginning to abate in any way?

Well, we have them all the time. It's just to what degree. If we have -- like we had that major contract in Australia that's been going on, which was a couple hundred thousand dollars here and there, but certainly, again, nothing to the magnitude that's going to have a huge impact on the margins. So there's really nothing that we can pinpoint and say, that's it. It's just, again, we're expanding services at existing sites, which gives you better leverage. We're also expanding the technology. That's why we did that acquisition in France last quarter. We're trying to go upstream in some of the technologies, so all those things. Our investments, and we're trying to gear them towards higher return on invested capital.

Okay. You mentioned higher energy costs in the second half and you quantified Mill Services this quarter, but if I recall second quarter, you had talked about perhaps revisiting with your customer base some revisions or adjustments to kind of mitigate some of that head wind. Have you had any success there of note?

Well, we quote $3.7 million because that's maybe $0.06 per share of absorption, but again, these matters are well-considered and planned and the answer is, I guess, a limited amount of success. But this is a question the answer to which is we have that matter under control, and we believe that -- at least I believe, that I'm not going to go in and beat the door down with a customer with whom we do $100 million a year, because he happens to be costing us a few tens of thousands of dollars a year in extra fuel costs. I mean, that's not a fight worth even thinking about. So we're just telling you for comparative purposes that it's $3.7 million more, and telling you that if fuel prices drop, then it could be $3.7 million less. It's information that we think is helpful to you in assessing, perhaps, some of the main influences on the margin performance, but clearly, I'm not losing sleep over $3.7 million. Neither do I intend to keep the customers awake nagging them about $3.7 million. I think it's information which we give you, which gives you some idea of the way our costs trend and what the influences are, and so on. It's information which I don't think should be turned into some kind of big deal.

Okay.

Just to close the loop on that. Again, just to remind you, these things are long-term in nature. You just don't turn on a dime and say, we want to increase, because under the contract you may not be entitled to it for another year, or another two years. It depends on the formulas and the CPI's and so forth within each contract. So there's a lot of variables there, and they certainly don't happen and turn on a dime. It's a longer-term issue.

But you are right, Jeff. You did raise the question in the last quarter and we did say that we do go back to our customers from time to time, so the question is a legitimate question, and I hope perhaps I've given you a bit more clarification on that with the answer this time.

No, no, that's helpful. I guess one quick clarification on Access. I think you stated in the press release that pension expense was lower by a million. I had anticipated going into the year that pension would be a neutral. Is that, on-going quarter-to-quarter we should start to see a million of lower pension expense?

Only on the Access Services side. Actually we have a net increase in pension expense for the whole company. When you look at net/net, when you take into consideration defined benefit plans that have been frozen but you still have, obviously, the on-going FAS 87 expense. The defined contribution plan, the multi employer plans. When you look at them on a net/net basis, they've gone up slightly, the overall pension expense, but within the segment, Access is the only one that's had lower year-over-year expense.

So that $1 million lower should continue 3Q, 4Q?

Right, but you'll see higher pension expense in the other segments, which we didn't talk about but certainly because of all the issues we've been -- the margins and the concentration of margins in this group, and the pensions have had such a profound effect on this group, that's why we point that out specifically. We don't really bring it out in the other segments as much. As you'll recall, Access Services was affected by 320 basis points in margins because of the higher pension cost.

But if you combine the three questions, Jeff, all of which are legitimate, pension expense a bit more, fuel costs a bit more, and the other issue we just talked about was –- remind me – the three issues you discussed, well those do add up to -- collectively, they add up to a bit. And mindful of the fact that in your professional capacity you're looking at models -- oh, income tax is up 0.9%, so those three issues, it is if you have got a model, they are important bits and pieces, I guess.

I appreciate it. Thanks.

Ted Wheeler, Buckingham Research.

Nice quarter. The comments you made referencing a corporate item or another income item of some M&A expense, does that reflect something that you decided you can't follow through on for whatever reason or does that reflect some activity levels that are still going on?

We don't comment on M&A activity, but you've certainly got the two possible options there.

I know. Do we expect -- is this a one-timer or do you think we'll have a little more of this?

We're a conservative accounting bunch here, and we just expense them until – we just expense them and that’s it as the expenses come in. We just feel more comfortable dealing with the expense as it goes along. So as I say, you've got two options there. To give you some encouragement, of course we're always looking at opportunities; and Sal mentioned smallish bolt-on acquisition prospects, et cetera. So there is an on-going expense which runs through the corporate office P&L account. This happened to be just perhaps a little more significant than most.

Well, obviously either way, it talks to an activity level that's a little greater than you've done in a while.

Yes.

Okay. Very helpful. Thank you.

Godfrey Birckhead, SBK Brooks.

Sal, my usual question, and as you know, it's always the first thing I look for is the other income expense item was a plus $593,000 in this most recent quarter, and last year is an expense of $1,953,000.

Right. It's real simple. It's the gain that we mentioned earlier in Mill Services offset partially by –- not fully offset obviously --reorganization costs, principally severance costs and to a lesser extent, other exit costs like lease costs and termination costs. Those kind of things. Last year we had no gain and that was -- as you recall, and I'm sure you've seen, we usually have about $1 to $2 million, seems like every quarter, of on-going reorganization costs. Given all the locations we're in and the dynamics of our business, we're always in and out of things. So we just happened -- this particular quarter we had a gain that offset those charges.

Okay. And in setting up our models for the year as a whole, what kind of a number should we use there, 2 to $3 million or plus?

Well, as you recall last year for the six months we had about $3.5 million, and I think for the year it was around, I don't know, 5, 6 million. So it's around 5, maybe. I don't remember, Godfrey, but certainly, I would say a number $3 to $5 million is certainly very realistic.

Okay. Thank you very much, Sal.

[OPERATOR INSTRUCTIONS]. There are no further questions at this time. Mr. Hathaway, do you have any closing remarks?

Well, thank you very much. We will continue with our strategic investment initiatives for the second half of the year and our cash flows will be used to fund an increasing level of growth projects, including selective bolt-on acquisitions and we'll also continue with our margin expansion initiatives. Sal talked about the increasing numbers as it related to the guidance we've given. Our outlook for the third quarter 2005 is in the range of $0.83 to $0.87 diluted earnings per share from continuing ops, and that would represent an approximate 12 to 18% compared with last year's $0.74 per share. And the last comment I'd like to make, that our confidence in 2005 is supported by the growth momentum in our Industrial Services businesses and the balance of our three growth platforms and our strong and growing cash flows. So clearly, we think that we're firing on nearly all of our cylinders at the moment and hope to maintain that progress. We do thank you for your time and attention today. Clearly, we are available for any further clarification that you might wish to ask us about. At this time, I'll wish you all a very good day and thank you once again for your attendance. Thank you.

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