Enviri Corp (NVRI) 2005 Q3 法說會逐字稿

Good afternoon. My name is Tonya and I will be your conference facilitator. At this time, I would like to welcome everyone to the Harsco Corporation's third quarter release conference call. All lines have been placed on mute to avoid any background noise. After the speaker's 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 Mr. Derek Hathaway, Chairman, President and CEO of Harsco Corporation. Mr. Derek Hathaway, you may begin your call.

Thank you very much, Tonya. Good afternoon, ladies and gentlemen. It is a pleasure for me to welcome you to this third quarter conference call. I have with me today Ken Julian, Eugene Truett, Mark Kimmel, Sal Fazzolari. And I'm going to ask Mark Kimmel if he would read the Safe Harbor statement to us, please.

Thank you, Derek. During our meeting today we will make statements which would be deemed forward-looking statements under the Private Securities Litigation Reform Act. These statements will relate to future operations, results, or expectations or other aspects of our business. These statements will be based on current information, expectations, and beliefs.

While they are based on the best available information currently, future results could differ materially from the statements we make today. Possible reasons for these differences between today's statements and actual results could be the result of risk factors which are discussed in our periodic filings with the SEC. We invite you to review them at your convenience.

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

Thank you, Mark. As reported this morning, we are pleased with the third quarter performance. We achieved record sales, record income, and diluted earnings per share from continuing operations. And we're particularly pleased with the strong performance of our global Access Services business, which has demonstrated for three consecutive quarters the improving quality performance that we believe this business is capable of sustaining over the longer term. The results of the third quarter and first nine months, we believe, continue to validate our strategy of globalizing the business and building a well-balanced portfolio underpinned by three main growth platforms; Mill Services, Access Services, and Engineered Product and Services.

Overall, Harsco's margins improved by 120 basis points to 10% for the quarter. And as you may know from our previous discussions, a key strategic objective of 2005 is to improve the overall margins of the Company. We are therefore pleased with our progress to date for the nine months.

Sal Fazzolari will now give you more details on our performance. We will then take your questions, followed, if appropriate, by some closing comments. So Sal, would you please make your remarks? Thank you.

Thank you, Derek. It is my pleasure to be with you this afternoon. As demonstrated by the results announced today, we have executed well in achieving our major strategic financial goals for 2005. And if I may, we would hope that your take-away message from today's conference call is, we would like you to remember two things, execution and balance. Execution and balance. The salient points that I'm about to make will underpin these two words. So please listen carefully.

As Derek stated, we achieved record sales, record income, and record diluted earnings per share. We are exceeding our EVA, return on invested capital, and operating margin goals for 2005. And we expect to do that for the full year as well.

We also achieved record cash flows for the first nine months. Our net cash flow from operating activities improved 40% to a record $233 million. This strong performance was achieved even after a discretionary $9.4 million cash contribution that we made to the U.K. pension plan, as you may recall, in the first quarter.

This excellent cash flow performance positions us well towards meeting our 2005 goal of a record $320 million in cash flow from operations. With $233 million already realized, that leaves less than $90 million to go to accomplish our goal for the year. I would like to remind you that last year in the fourth quarter we realized about $105 million in cash flow from operations.

We are also well on our way to exceeding our asset sales goal of $20 million for 2005. In the first nine months, we realized $17 million in cash from asset sales. With the additional cash realized on the sale of the Youngman Access Services equipment manufacturing business in the U.K. on October 1, we will greatly exceed our goal for 2005.

In addition to these accomplishments, one of the most pleasing aspects of our performance so far this year is the improvement in EVA and return on invested capital. Our annualized return on invested capital has improved by 160 basis points to 10.8%. That's up from 9.2% last year. We believe this is an excellent result, especially considering that our return on invested capital goal for the year was in the range of 10% to 10.5%.

EVA has improved in eight of our nine business units with only one, Gas Technologies, showing a decline in EVA. Again, our EVA performance is well ahead of our goal for the year.

Moving on to other key metrics; our debt to capital ratio, 38.9%, improved from June 30, 2005, and December 31, 2004 levels of 40.3% and 40.6% respectively. It is important to note that this is the lowest debt to capital ratio since 1999. Along with our strong cash flow, such levels of debt continue to give us financial flexibilities to grow our services business both organically and through acquisitions.

Our net debt to capital ratio stood at 34.1%. This is due to high levels of cash on our balance sheet, which I would like to take a minute to comment on. The $113 million in cash on our balance sheet at September 30th is due primarily to the build-up of cash in subsidiaries, some of which will be repatriated in the fourth quarter under the American Jobs Creation Act. The exact amount of cash to be repatriated and the net tax effect of this action is still being determined. And we hope to have a final answer on this and disclose it in our 10-Q that will be filed in early November.

Consistent with our growth initiatives, we invested a record $209 million in CapEx for the first nine months of the year. This is an increase of 36% over last year. Approximately $106 million, or 51%, of this CapEx has been invested in growth projects in our three major growth platforms that Derek mentioned earlier. Approximately $45 million went to Mill Services, $45 to Access Services, and the remaining $16 million to Railway Contract Services. Again, this is consistent with what Derek said of developing a balanced portfolio of global industrial services.

This operating balance is clearly evident from our performance in the third quarter. Mill Services accounted for 33% of the operating income, while the Access Services and Engineered Products and Services businesses each accounted for approximately 30%. The Gas Technologies business, as expected, performed somewhat better than in the prior year, and accounted for the remaining 7% of the operating income. Again, I'm sure you heard throughout all these points is execution, execution, execution, balance, balance, balance.

The final point I would like to make is a general comment, is our export sales of about $100 million for the nine months increased 40% over last year. Now, let's turn specifically to each of the business segments and groups starting with Mill Services. Mill Services business performance in the third quarter was negatively affected by some production cut backs at mills across the globe, in order for them to shore up prices and show discipline in the marketplace. And as expected, and we had mentioned that this was going to happen in the last quarter, so there was no surprise to us. Performance was also negatively affected in the quarter by the tune of about $3.4 million due to much higher energy costs. And also $600,000 due to higher severance costs to exit certain contracts.

Overall, Mill Services operating margins for the nine months of 2005 are still up 10 basis points. And this despite these headwinds that we just mentioned, the production cut backs, and particularly the higher energy costs. In fact, energy costs are up over $10 million, or $0.17 a share for the first nine months of the year, compared to last year.

And I would also like to remind that you the industry outlook for steel demand continues to show growth. In fact, they're predicting 4% to 5% growth next year. And also given the fundamental strength of this industry, and with our targeted investments that we're making and plan to make, we believe that this business offers excellent long-term prospects for growing revenues, earnings, cash flows, and EVA.

In the third quarter performance for Access Services, we are again very pleased to say that it was very broad-based, led by the Middle East, Western Europe and North America. Foreign currency translation was not a factor. As a matter of fact, it was negative somewhat to sales to the tune of about a million dollars. Contributing to the operating income and margins for the third quarter, was a one-time $1.6 million pre-tax gain on the sale of some assets from the North American operations.

Most noteworthy, however, for the quarter was the margin improvement. Margins improved by 310 basis points, to 10.7%. This is the third consecutive quarter that margins improved in Access Services and the second time this year that double-digit margins were achieved. For the nine months, margins have improved by 280 basis points to 8.8%. This puts us well ahead of our 2005 operating margins target, as you may recall from December, where we targeted 7% to 7.5% for this year. So we're obviously very pleased with this.

Moving on to our Engineered Products and Services, the strong performance of this group was led by Harsco Track Technologies. In fact, the Engineered Products and Services group turned in a record performance for the quarter. HTT's performance specifically was a record. Part of the strong performance included approximately $0.01 a share in deliveries that were initially planned for the fourth quarter, but were shipped in the third quarter. This is due to the equipment being completed, accepted, and shipped out to our customers.

Some analysts in reports that were issued today, we believe, used some very bad terminology, using the words “pull forward.” We don't quite agree with that terminology. We operate a business that we're very focused on execution and balance. And again, I use the word execution. When equipment is completed, we ship it out, and we recognize the revenue accordingly. So I just wanted to clarify that point for you.

The much-improved results in this group were also very broad-based, with four of the five units posting higher sales, higher operating income, and higher margins. In fact, operating income increased by approximately 53% and margins improved by 180 basis points to 14%, the highest margins in the Company. This strong performance, we believe, will continue.

And finally, the Gas Technologies segment performance, as expected, improved over last year's third quarter, due principally to lower commodity costs. We do believe that this business will continue to perform better in the fourth quarter. That completes my comments, Derek.

Well, thank you, Sal. And thank you for all of those points of clarification. We'll now be very happy to take your questions, please.

[OPERATOR INSTRUCTIONS] The first question comes from the line of Yvonne Varano with Jeffries & Company.

Good afternoon. Sal, I'm wondering if you could go into just a little more detail on the Engineered Products side and the improvement in the operating margins there. What the drivers are?

The drivers are just everything we have been talking about for years. Good management, our EVA discipline, Six Sigma, good markets; just all the basics. The blocking, tackling, we're doing everything extremely well and we have some very good managers in those businesses and they are performing extremely well. And the Track Technologies business is starting to perform much better than it has in the past, as evidenced by the fact that they turned in a record third quarter. They still would have had a record third quarter even without some of the orders that that I mentioned earlier. So it is just all the basic fundamentals.

In Track, is part of that moving more towards a service business there?

No, it is not. Not at the moment. Although we are signing up orders for services. You will recall from previous quarters that I have discussed with you an enormous investment in previous years which impacted on the margin, which are expensed in the research and development and the investment side, on the marketing side. Putting teams of engineers and marketing people in various countries to persuade nationalized industries to take your product and use it -- it has been a very expensive process, and it affected margins of HTT, considerably. However, we pursued that policy knowing that we would be rewarded.

We are now benefiting from that in terms of the orders that we got, and the execution of those orders, without the same kind of marketing support expenses. And the result is is that margins have improved. The company, clearly, is now producing more equipment and delivering it, as Sal has said. And Sal has said also, and I would like to emphasize that, we don't hold things back. What we do is we make what we have to, we deliver it to our customers, and get it into operation, and get paid. And who is to know what is going to happen in the fourth quarter? We will continue with that strategy.

At Air-X-Changers, we have reorganized that company, we changed the management team about a year ago. We revitalized our relationship with the marketing aspect and the marketing arm of that business. And all of those have stood us in very, very good stead. Backlogs are very strong, indeed. And we have secured a much stronger marketing position, and margins have improved there.

You will recall the difficulties we had with IKG. Again, management changes, a different approach to the markets. And there, not only margins have improved but operating performance has improved dramatically.

And so this is as a result of the work that we have put in during the last 18 months and which is now bearing fruit. As Sal has said, it is not -- there is no special thing that we can point to, but it is the sum total of an enormous amount of work and execution on the part of some committed managers.

The backlog also is up about 30-plus percent for this group, Yvonne, just from June 30th. So again, it is all the basics, all the fundamentals, they're just performing very well. And we expect this performance to continue in the fourth quarter, and we expect this performance to continue next year.

When you look at that backlog number, is there any way to look at that more on a component basis within Engineered Products?

We don't do that, Yvonne. They're all hitting what we consider to be our internal targets. And we're very happy with the performance of the Engineered Products group at the moment.

I would have to say that across the board [indiscernible - speakers talking simultaneously] their backlog has. Every single business unit in there.

Sure. And that speaks to the balance of the Company, again. We believe we've got a portfolio here which offers a really sound platform for future growth in businesses which are either in niche positions in small markets; i.e., most of the Engineered Products Group would qualify under that kind of criteria; or significant market share, on a global basis, as per our Mill Services Business and our Access Business.

Can you just elaborate a little bit on the Reed Minerals discussion, I know you said you're having difficulty obtaining rail cars. What is making that difficult? And is that expected to change and why?

Well, what's making it difficult is there aren’t enough rail cars. And Reed is is still performing at record levels because of the volumes, and the customer relationships, but there are logistical issues, which you may have heard about, in the railway industry, and we are part of that. Of course, we struggle to overcome that by various means. And we believe that we're making the maximum effort, and doing as well as we might in some difficult circumstances. But rail cars aren't only the problem of Reed Minerals. There is a general industrial issue relating to transportation, its cost, and logistics in general, I think are causing lots of people lots of problems.

Yvonne, Katrina was also a big factor there. It disrupted rail movement and so forth quite a bit. And so we had to -- like Derek said, we had to use other means of transportation to get product to our customers and so forth.

Is rail primarily the means that Reed uses -- and do you think that other customers moving away from higher energy-related transportation modes to rail could be an issue?

I haven't given it a moment's thought.

Okay. Thank you.

Your next question comes from the line of John Ptak with Credit Suisse First Boston.

Hi, thanks. As far as the Mill Services business, any changes on the length of Mill's contracts signed? And then a dollar renewal rate on those contracts?

No. No, those are fairly standard pattern, there's been no modification of the pattern there, no.

Okay. And then the dollar renewal rate on those contracts?

Yes, we are still performing at the expected level, 95% renewal rate is par for the course. And I've not heard anything in the last quarter which has led me to believe that we've lost anything. In fact, we're gaining contracts, so we're pleased with -- we're still very pleased with the progress we're making in Mill services.

Great. And then the average is six or seven bundled services at each site. Where can that go?

Well, we offer a range of 28 services in total, presently. And we've always said that our greatest source of future revenues is our existing customers. And there is always an intense effort to provide more services at existing sites. The principle being that we leverage off the existing cost structure, and by improving the volumes and by gaining the leverage off the fixed structure, we hope for long-term margin improvement. Without in fact, in any way compromising the competitive pricing nature of each service that we offer to the customer.

The relationship with the customer is the most important aspect here, and as it is a long-term relationship, the pricing is fundamentally important. And the whole principal is is that we need to offer a value proposition to our steel mill services customers that provides us with an adequate cover of our cost of capital. And then, with the opportunity to realize a deal, which clearly saves them money, and enhances their process, deals with environmental issues, or adds value in some other way to what they do. And I think that's been our success in the rapid growth of this business, is that our customers realize that for a very, very competitive price, they get very serious advantages by outsourcing this work to us.

Great. And lastly, can you talk a little bit about the acquisition pipeline and what you're seeing on the pricing front there? Thanks.

The pricing front has been very difficult for the last couple of years. There is is a boom at the moment in M&A activity, led I guess by financial buyers rather than strategic buyers. And we've seen the EBITDA multiples rise, and the prices have gone up. We have kept our cool on that.

And you saw the recent announcement of Hünnebeck,which we believe we acquired at a fair price and gives us opportunity. And our posture will be that we will pay what we believe to be a fair price for both parties, and obviously one that gives us the opportunity to give accretion to our earnings levels, and give us other strategic advantages. So we're not going to go and pay too much. We're very patient. And I can tell you that the acquisition pipeline at the moment is healthy, as far as we're concerned. And we are examining and will continue to examine a number of opportunities.

Your next question comes from the line of Ted Wheeler with Buckingham Research.

Thanks. Hi, everyone.

Hi.

On the energy cost issue in Mill Services, I think I recall -- and this obviously cropped up all year, and I think there was a point in time when you might have recovered some in pricing. And I'm just wondering if you expect, over time, to be able to pass these costs on to the customers?

In our guidance and in our forecast, I think you will realize that we weren't unaware of this possibility. And again, if I refer you to my previous remarks, it is is something that was known by us to be a possibility. And it is something that we internally agreed that what we would do, we would manage. And therefore, evidence to what I'm saying is the guidance we've given, and the performance. We have increased our margins in that business. And we're doing exactly what we thought we would do internally. And we have absorbed, as I think it was $0.17, Sal, you said, $0.17 in the first nine months. But that didn't come as a surprise to us, therefore we don't make a fuss about that.

And what we believe is important to do is to continue to support our customers and that's what we're about. Clearly, in return, when energy prices fall, as they may well do, then I'm sure the customers won't be coming back to us asking for price revisions. So that's been our attitude that we've adopted. Because we have seen significant growth in the business, and our ability to manage that and cope with it has in fact expanded.

So a gradual sort of negotiating of these costs into the pricing, I guess you've decided to try to just make it up elsewhere. And when prices calibrate the other way, you will maybe get some benefit. Is that the way I should -- ?

Yes, and also what will happen is that as contracts come up for renewal, and if the prices -- the price of energy hasn't changed, then of course, one sits down with them and says okay, we seem to be in a state here and not a circumstance, and it is the state that -- of a position, which causes us to want to negotiate increases in. At the moment, we don't believe that to be true, and we will deal with this circumstance, and still deliver for them the best service. And we will deliver for our stockholders the best results.

Okay. Just one other on Mill Services. You've talked about the outlook for steel production, perhaps next year being up a little bit higher at 4% or so from this year. Do you expect that to be fairly linear as you look out? Or do you think there is any particular timing, quarterly, during the year we should be aware of?

Well, we know that October will probably continue along the lines of, let's say quarter three, but we then believe that November, December, and quarter one, and into quarter two of next year, we are expecting to see everybody pretty busy.

And Ted, according to the International Steel Institute, it is pretty broad-based what they're expecting for next year. It is not centered around just China. It's -- Europe is supposed to be up 3% and NAFTA 3% and South America 7%, Middle East, 7%, Asia-Pacific -- so it is well -- it is broad-based. Again, it is balanced. And that's why we invest in almost 40 countries at 160-plus sites -- again, it is the balance issue that we're trying to emphasize.

That's very helpful.

Thank you.

Your next question comes from the line of Jeff Hammond with KeyBanc Capital Markets.

Hi, good afternoon, guys.

Good afternoon.

I guess to go back to Ted's steel production question, can you give us -- if you look at the industry reports, looking for 3% growth this year, what would that imply for the fourth quarter on a year-over-year basis? And relative to what you've experienced in 3Q?

I've not done the sensitivity analysis as such, but we do know basically what we are going to be expected to deal with -- in the fourth quarter. And given that the utilization rates at the moment are up around the 86%, 87% mark, according to the latest Institute information, the American Iron and Steel Association, and other information, as I've just said we expect a ramping up to go on a little further in October. And then we expect November and December to be decent months. So that's where we are at the moment, Jeff.

Jeff, on a macro basis, '04-'05 -- Europe was down 1%, and NAFTA is down 4%, and South America is up 1%, and Middle East is up 3%, and that's pretty much what we're seeing across our businesses, as well. But again, it is is the balance issue. It is why we're at 160 mills et cetera, et cetera.

Just to clarify, that what you're seeing in October and then the ramp up in November and December, that's what is reflected in your fourth quarter guidance?

Mill Services will have a record year, and it will meet our internal goals, and have no fear about quarter four.

Okay. Great. And then Hünnebeck, if you could just give us a sense of, on a valuation basis, what you would have paid for that. I don't know if you have that on EBITDA or --

No, we have not disclosed that.

The deal has not yet been closed. It will be closed when, Sal? Early November, I guess, when certain regulatory -- international countries have been consulted and they will stamp their approval on this and that's when the closing will come. But that will become public information in ere too long.

And then at your December meeting, would you expect to give some further guidance in terms of accretion on that deal?

Yes.

Yes, I think what you will get at the December meeting is the usual comprehensive overview of how we see 2006, and going forward. And clearly we will give you the usual guidance and we will also, as you're aware, promise to execute.

Great. And then finally, can you give us a sense of what rental rates in the U.S. look like in 3Q? And directionally where you is see that going?

Those have continued to improve modestly. And we do have, as I understand it, a record amount of kit out there, presently, and we're quite pleased with some of the progress that the North American side of our business has made. There is is still plenty to do there. And I think that some of the things that we're trying to implement will, again, contribute to higher margins. One of them is just a modest uplift, as interest rates rise, generally speaking, in the economy, so we expect rental rates to appreciate modestly as well. And the combination of the utilization rate, the amount of kit we have out, and the increase in -- it will be modest in rental rates I'm sure, we’ll just continue the improvement of that business.

Okay, great. Thanks, guys.

Thanks, Jeffrey.

Your next question comes from the line of James Gentile with Sidoti & Company.

Good afternoon. How are you doing?

Good afternoon. Thank you. We're doing well.

Good. We’ve seen a few quarters of above average guidance performance, and a good job on executing on your business strategy and growth strategy, et cetera. But with the fourth quarter coming on, and I know we're coming on a difficult comp with the Track Technologies deliveries from 4Q '04 -- could you give us a sense of what we can expect in terms of revenue from Track Technologies? I had already forecasted a 15% decline in the fourth quarter in revenue there. And I'm still having a tough time finding the mid range of your guidance, given the margin trends in some of your other businesses. So help me put together -- it seems like there is a missing puzzle piece. Am I over-forecasting margins, perhaps in Mill Services? Or perhaps getting a little bit cute with the declines in the Engineered segment?

Two big items, as you just said -- one is obviously HTT. They had an all-time record. The fourth quarter was just an all-time record compared to any quarter. So they just had a phenomenal fourth quarter last year, for all the reasons we've articulated previously.

Also, you have to remember the tax rate last year was significantly lower than this year's fourth quarter tax rate. We had that American Jobs Creation Act, a one-time benefit and some other items. So there was a huge difference between the tax rate, HTT, and so forth. So those are some of the major moving parts there.

As far as Track Technologies specifically -- yes, as we mentioned, that the comp is very difficult, fourth quarter-over-fourth quarter. There is is a tremendous disparity between the two.

To the tune of $20 million, $25 million or -- ?

In revenues?

Yes.

Probably more like $10 million plus. But don't forget, it is mix. The mix issue -- a lot of those machines went to China, and India. The international units have very reasonable margins, okay? We’d like them to be better, but they're very reasonable margins.

The margins, sure. But I was just talking about the top line.

Why don't I just say this. I preach here, you sweat the small stuff and the big stuff will take care of itself. Could I just reverse that on this occasion?

The way to look at Harsco at the moment is look at the big picture. We've given the guidance. We know what is going on internally and what is affecting it. And at the moment, my advice is don't sweat the small stuff and look for vulnerabilities. HTT is a $200 million business in a $2.7 billion business that is going to have a record year, and that's the important thing, as far as I'm concerned. That's the big picture. And we stick to the big picture. And I'm not a bit concerned that a penny went from quarter four into quarter three. Not in a Company that's earning $3 and whatever it is going to be this year. Frankly, I think all of that energies might be used in analysis and execution somewhere differently.

Understood. Frankly, I just want to be the guy who says you beat numbers by a dime again. But take care.

Thanks, James.

Your next question comes from the line of Curt Woodworth with J.P. Morgan.

Hi, good afternoon. Congratulations on a nice quarter.

Thank you.

A question on the growth CapEx, which at $106 million is almost near your initial target of $110 million this year. And I guess I was a little surprised of the amount of money that is being invested in the Access Business of about $45 million. Can you just talk a little bit about what investments are being made? And how as analysts trying to model the impact of that, how we can think about every dollar invested, what type of sales should that generate over what time period? I know we kind of talked about those dynamics at the Mill business but I personally have not gone through it on Access so any color on that would be helpful.

Okay. A large proportion of that was expended on the acquisition of a special product line, which we are doing rather well with, a special kind of product that enables floors to be cast and so on. We announced it as the Pro-Shore line and we acquired that which is is doing very well, indeed.

We did buy, this year, an Australian operation which cost us about $9 million. And in saying that, you've talked about $20 plus million dollars in those two areas of CapEx. And then every year, there is renewal of equipment and you send new equipment to various places. And so apart from the special item there, CapEx in Access Equipment has really been quite modest.

Yes, we just expanded in a few new countries -- Eastern Europe particularly, that we just recently announced, Ukraine, and some of the Baltic states and so forth. So some money has gone into that. Also, the Middle East -- the Middle East is booming. And so a little bit of investment is going in there, in addition to all the things Derek said.

So again, though, it is the balance issue, where these investments are being disbursed in many, many geographies, different types of markets as well, nonresidential construction, industrial, and so forth.

I did also -- it just came to mind here, we haven't really mentioned Katrina in this call, neither did we in our report. It is is not something that we want to dwell on, either as an excuse for not hitting our numbers, but there is a Katrina factor in these numbers for the quarter. Our numbers would have been better. And what reminded me was your question.

I did approve and the Board approved a $3 million extra expenditure for rapid deployment of equipment into that region. That was over and above what we had already thought we would spend in a year, to meet some emergency requirements. The benefits of which may accrue towards the end of quarter four, or will move into quarter one of next year. So that also is, I guess, included in that number.

It is in the $45 million investment --

I hope that puts some color on the situation for you.

It does. Can you talk about or quantify the sales benefit from the product line you acquired and the acquisition?

Well, [Refrea] in Australia was about $9 million, and it probably adds something like that on an annual basis, so that's what we paid there. The Pro-Shore line -- actually that will bring in about $15 to $20 million per year in the first full year of it's activities, so it is a fairly -- a fairly -- it is going to make a very healthy contribution.

One other point, too, just like we do in the Mill Services and just like we do -- not quite exactly in the Mill Services, we obviously don't spend a penny until we have a contract fully signed, but a similar situation happens with Access Services. We don't just arbitrarily make speculative investments. We either have a purchase order in hand, we have a contract in hand, there is a need, there is a strategy, and so forth. So for the most part, the orders are there to underpin the investment.

Okay. Great. On Gas Technologies, with the performance there suddenly improving a lot on a year-over-year basis this quarter. I guess the first question is, how much more room for improvement do you see in this business? And the business doesn't fit your service orientation -- or kind of where you're taking the Company. Can you talk at all about strategic alternatives for this business, and a sense of timing around that?

Well, how much room is is there for improvement? There is is really considerable room for improvement. The drag on the performance of that business essentially vests in the Sherwood Valve Division. You will recall that this that is a multi-product operation. And the valve company has been the drag.

We have a propane business, American Welding and Tank; we have Structural Composites Industries over on the West Coast, that makes special high-tech gas containers. We have a cryogenics division, which is basically operating from Theodore, Alabama, and that has international operations in Beijing and Slovakia, and also in Malaysia. Those are performing well. And we have the Taylor-Wharton Cylinder Division as well, which has also performed quite well. So there is considerable room for improvement.

The Sherwood Valve Division has not had a good year. In fact, it’s been the worst year that I can remember in the history of that business. I have made just recently, having tolerated that for some time, maybe too long, some senior management changes there. I am personally involved in helping to manage that business with the new acting general manager and other colleagues. And already, we're making some headway. So yes, there is considerable opportunity for improvement, and I think it will be a better performer in 2006 than it has been in 2005.

As to the last question, we're always looking at the portfolio and its strategic fit. Over the last several years, the significance of Gas Technologies has dropped from being about 30%, down to about 7% of our total, and we will just see where the future takes us. And I think that's all I would like to say at the moment.

Great. And then if I may, just one final question on the contracts in China. I think you were -- you talked about three contracts you were targeting for Chinese Mill Services business, you talked about in your last investor day, last December. Any update on that, in terms of completion? Have those fallen off the screen, if you will? Just an update. Thanks.

No, we are very interested in pursuing our opportunities in China. In fact, after this is finished, and we've dealt with one or two of the other phone calls, I am leaving for Hong Kong and on to Beijing. And will be, I hope, taking care of business for our cryogenics business with our joint venture partner there. We are about to move our factory, which is doing well, and very busy, to another location.

I am also going to continue to pursue our export business with the railways and discuss the next five-year plan with the Minister of Railways there. And you will be seeing some announcements on that in the not too distant future.

And also, I will be visiting our Mill Services operations and discussing with senior steel industry people there the expansion of our Mill Services operations.

So we're taking our time as far as the China strategy is concerned, but I will be there and out of the country for several days now, with colleagues, dealing with those issues. And I think that you're going to see us actively now, having satisfied ourselves that we can do business, we can do it effectively, and we're not surrendering our intellectual property rights. We've got good business relationships and I think now is the time for -- we have always been very serious, but to get a little more serious and take advantage of some of the opportunities which are presenting themselves.

Great. Thank you very much.

Your next question comes from the line of Steven McBoyle with Lord Abbett.

Yes, thank you. First, maybe the acquisition of Hünnebeck, recognizing that the acquisition is is not closed. But perhaps it would be helpful just to hear, Derek, your strategy behind the acquisition. And specifically any synergies that may come out of that deal, if you can speak to them today.

Yes. Hünnebeck is probably one of the three best known names in the world in the access equipment side. We actually own the other two, which are Patent and SGB. And Hünnebeck will be very complementary -- they're an old long-established business with a good track record on engineering. Their specialty is forms and formwork. And that's where we were and are a little bit light. And we looked at this for some time. It became available. And obviously, got serious about it.

We think it will, first of all, complement our product offering. It also, I hope, will provide us with some, also very competent management, which is is a key factor in this situation. We have a lot of respect for the management team there. And that will supplement our management team. And we believe they are going to be able to execute the strategy, which is is to -- they have a different geographical footprint to us. It gives us access to six new countries, and gives us an opportunity. They're strong in formwork. So we will take their technology and help them build it and grow that elsewhere. And they will take on our other product lines, so we will be swapping our complementary strengths, hopefully. And we are optimistic that that will work out for us very well.

It will mean that next year, given this year's projected sales numbers, we will have grown that business, Access equipment worldwide, to well over a billion dollars next year. And again, formed the foundation for an international global spread, a wide range of products and coverage, and we're optimistic about that really being quite accretive in 2006.

And have you discussed how accretive it potentially could be?

Well, we've done, obviously, our internal analysis. There's still work to do on that because as yet -- we've yet to agree clearly with the company and the management team that we're acquiring, exactly what that strategy will be. But if we can come to an agreement, we do expect it to do quite well. I would rather not disclose those numbers because I will give the courtesy of that option to my colleagues first.

And just given the comments that you made with regards to their product mix, are they operating at a lower price level per product? Or lower margins in other words?

No, the products really aren't that similar to ours. The formwork, as I say, is their big strength. And to compare their prices to ours is probably -- is not the real measure. I think, generally speaking, they are competitively placed in the marketplaces in which they operate.

Okay. Fair enough. And with regards to the Mill Services -- obviously, this question has been asked a number of ways, but I will also try. I think back in the second quarter, obviously you gave us good indications and the marketplace did as well, that there would be some moderation in product levels in the third quarter from your customers. And yet at that time, you were fairly optimistic in terms of fourth quarter production levels coming back to a normal level. And I'm just trying to interpret what may be normal in the fourth quarter and maybe the first couple of quarters of '06? You've talked about 4% to 5% production growth next year. What would you anticipate you could organically grow off that?

I think that we will be -- we've given the indications about the overall growth -- organic growth potential, but we would look for sort of 7% or 8% realistic growth in that business next year. This year, it is going to be a billion and $40, $50 million, give or take, and some change, at the end of 2005, I think that is about the number. And we will expect to see some growth on that in 2006.

Great. So, and also targeting 11% to 12% through kind of '05, '07 time period in terms of margins?

The margin is very, very important. In fact, as I have tried to indicate before, growth and margin growth, growth on the top line, because of the leveraging principle that we operate on, without in fact charging our customers any more, it is is up to us to make a decent profit out of what they outsource to us. And therefore, that principal of leverage is very, very important. Without even -- not only the appearance, but the reality, that the deal for them has got to be a very stable deal, one of them which they can rely and depend. And yes, if we grow the top line sufficiently, then you will see a continuing incremental -- hopefully increasing margins, as we move along.

Okay. And just switching to Engineered Products. Have you broken out what Track Technologies may do in revenue?

I think we did last year at the December conference, if I'm not mistaken. It is in excess of $200 million.

And recognizing some of the contracts that have been signed recently, can you just size the opportunity for that business over the next one, two years? In terms of what you're expecting?

Yes, what we're trying to do is to -- not only trying, but succeeding, is we're trying to emphasize the fact that HTT would like to own, maintain, and operate the equipment on the available rail from the large railways. So it is own, maintain and operate. Now we won't do that in China. We will export to China. We won't do that to India. We will export to India. But we are making progress in the United Kingdom along those lines. And certainly we're making progress in the United States along those lines. And we have signed deals.

So frankly, as we control the sale of the equipment, and continue to own it, what you may see is in fact a static top line, but in fact improving margins. And as we convert this business from being a manufacturing and sale company -- to being a manufacturing and sale company, some domestic, but mainly export, and also a service company. Where we continue to own, we will operate, we will maintain, and we will bill the railways for the services we offer. So I wouldn't look for the large increase in top line growth, although that may happen if we are successful with big export orders. But what I would see is improving margins out of the service business.

And if you look at our method of operation in our Mill Services business; our stockholder's money, in equipment, on other people's locations, billing them for the outsourced services. Own, manage, operate, and bill. In the Access Equipment, we're largely a rental company. So we own, send the equipment out, send a bill, bring the equipment back and reallocate it. The railway business, own, operate, maintain, and service. That's the business model that we are pushing.

In addition to that, we have our Gas Tech group, which we sometimes talk negatively about that, and that's a shame, because they're doing really quite well. Not well enough, but quite well. And then we have the Engineered Products Group, which are niche businesses in not rapidly growing markets, but have a special place. And are highly desirable businesses to own in the portfolio because of their cash generation capability. And so they qualify, too. They don't have the same business model as the own, manage and operate, but presently, they are an important component of our portfolio.

Great. And just to maybe drill one level deeper, on the Track Tech's margin opportunity -- just trying to get a sense as to whether this could potentially move the dial next year? I've got notes here saying maybe the equipment-to-services mix is 65% to 35%. Is that something that could flip next year? And it did, what sort of incremental margins could be made on that revenue base?

You will see from the information -- and margins have been around the 5% mark. Because as I said earlier in the conversation, there has been about a 2% kind of depression of margins because of the expensed investment in those businesses. This year, I think what you will find at the end of the year is that margins are going to be in the 8% range, reflecting a diminution of some of those costs, et cetera.

And as we get through the transition piece -- it is a difficult trick, from a manufacturing standpoint, because of overhead absorption to outsource stuff that we do. Make more space, in fact, for manufacturing -- for more manufacturing, through assembly, rather than manufacturing everything you sell. And then putting it out to service rather than selling it. It is is a transition period which is a little bit expensive to pull off which has to be figured into the time scales, but we are, I believe, mostly through that now.

I think the major surgery has been accomplished. And we are very, very heavy on the manufacturing side into information technology, how to improve our efficiencies, and to start to extricate some of the benefits that this transition will be. So the margins will move up, and I would suspect that 2006 will also see a further improvement over the, perhaps, 8% that we're experiencing this year.

Okay. Great. And maybe just a last question for me. Also somewhat struggling with the fourth quarter guidance, and without getting into the specifics -- in order to get to your fourth quarter guidance, I'm effectively having to have margins in Engineering Product goes from some 14 to high single digits. Is that realistic?

Well, you’ve got to remember, the fourth quarter, some of the businesses do trail off in the Engineered Products. So for example, last year in the fourth quarter, margins were, I believe, a little over 9%. We think we're going to do better than that in the fourth quarter this year margin-wise.

But for example, Reed Mineral is business really trails off in the fourth quarter. Track is obviously going to be down, because last year, again, it had a record fourth quarter sales, margins, income -- it just had an unbelievable quarter because of all the things that we talked about this whole conference. So naturally, that margin, that's part of your reconciliation or your bridge, if you will, from quarter-over-quarter.

[OPERATOR INSTRUCTIONS] Your next question comes from the line of Godfrey Birckhead with SBK Brooks.

It's been a long wait guys, and I don't know whether you want to have me talk to Gene, because you've been going an hour and five minutes. And I have been watching the Weather Channel here, and listening to you at the same time. And we're hoping that Wilma will not hit us, but we may have to move very, very soon. Do you want me to call Gene? Because you've been going a long time, guys?

Sure, Godfrey. Obviously, Gene is always pleased to hear from you. And we appreciate that.

Because I think -- I mean it is is fascinating to me when you're doing badly -- I can remember I used to think of questions, because you weren't doing so well, so at least someone would ask a question. And I've been sitting here now an hour and a half, and finally I get my turn but I don't want to take advantage of it. So why don't you have Gene call me and I will go over my questions with him. And thank you very much, guys.

We hope you stay safe as well, down there.

Thank you, sir.

Thank you. Is that the last question?

At this time there are no further questions.

Well in summary, we are pleased with our third quarter performance. And we're glad that this was an extended conference, because clearly, there were some legitimate questions to address, and we hope we've been able to bring clarity to it.

We will continue with our strategic investment initiatives for the remainder of the year. Our cash flows will be used to fund an increasing level of growth projects, including selected bolt-on and acquisitions such as the Hünnebeck access services business. We will also continue with our margin expansion initiatives.

As discussed in today's press release, we have increased our earnings guidance for 2005. Our range has been increased from $3.17 to $3.27, to $3.27 to $3.32. So we've moved the top end of the range up a little. And I would remind that you that is an increase of approximately 20% to 22% over the $2.73 posted in 2004. And we are talking about operating income here. We don't talk about the specials. We try to distinguish, as you know, in this. And we think that's a pretty good increase year-on-year.

Therefore, as we've discussed, the outlook for the fourth quarter is in the range of $0.79 cents to $0.84. And who knows, we will see what quarter four brings. You can appreciate that, as we're already one month into quarter four, that we're very confident that those are realistic kind of numbers.

So thank you for attending this conference today. And we look forward to talking with you again in January, when we do announce another record year in sales, earnings per share, and value creation. And again, we thank you you for your attention.

Thank you. This concludes today's conference call. [OPERATOR INSTRUCTIONS]