Enviri Corp (NVRI) 2005 Q4 法說會逐字稿

At this time, I would like to welcome everyone to the Harsco Corporation's fourth-quarter 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 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 and CEO of Harsco Corporation. Mr. Hathaway, you may begin your call.

Thank you very much. Good afternoon, ladies and gentlemen, and welcome to this fourth-quarter conference call. Before we begin the proceedings, I am going to ask Mr. Kimmel, who is here with me, in addition to Gene Truett, Ken Julian, and Sal Fazzolari, now President, Chief Financial Officer, and Treasurer. Mark, would you read the Safe Harbor statement, please?

Thank you, Derek. 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 are based on current information, expectations, and beliefs. Our statements are based on the best information currently available. Future results could differ materially from the statements made to you today.

Possible reasons for any differences between our statements today and actual results could be because of risk factors and uncertainties which we have listed and discussed in our periodic filings with the Securities and Exchange Commission. We invite you to review these filings at your convenience.

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

Thank you, Mark. The year was concluded with a record fourth-quarter performance. Record sales, income, and diluted earnings per share from continuing operations; and particularly pleasing was the strong performance of our global Access Services business, which has done well for four consecutive quarters. I am also happy to report that our Huennebeck acquisition was accretive in its first 41 days under Harsco ownership.

Also noteworthy for the quarter is the 200 basis point improvement in overall Harsco margins to 10.6%. The results of the fourth quarter and for 2005 combined continue to validate our strategy of building a global and well-balanced portfolio of businesses underpinned by three main growth platforms -- Mill Services, Access Services, and Engineered Products and Services.

I am going to call upon Sal Fazzolari now to give you the detail; and then we will take your questions and perhaps follow-up with some closing comments. Thank you. Sal?

Thank you, Derek. Good afternoon everyone. As demonstrated by the record results announced today, this management team is focused on executing its strategic financial goals. In addition to the record results that Derek mentioned, we exceeded our EVA target for the year and achieved the high end of our range for operating margins. Overall, in fact, operating margins for the Company improved by 130 basis points in 2005 to 9.7%. I will comment later on EVA.

As discussed also in this morning's press release -- I just wanted to reiterate this -- due to the late fourth-quarter acquisitions, we were unable to attach a consolidated balance sheet and cash-flow statement. We do plan, however, to release those statements as soon as possible; and we do believe they should be available sometime next week.

However, despite that, we can say with confidence that we do expect to achieve record cash flows from operating activities for the year. In fact this expected record cash flow for 2005 will underpin our expectations for 2006.

As you may recall, we set a target of $360 million at our December analysts meeting in New York. Now, with the additional cash flow contribution from our December 29 Mill Services acquisition, as well as the expected improved performance of the overall business, we are raising our cash-flow target for 2006 to $400 million from $360 million. This is an increase of approximately 11% over the initial target. Our strong cash flows should continue to provide the necessary flexibility to grow the Company while at the same time reduce debt.

With respect to other cash-flow matters, we did exceed our asset sales goal of $20 million for 2005. In fact, we doubled it. For the year, we realized approximately $40 million in cash from asset sales.

In addition to these accomplishments, one of the most pleasing aspects of our performance for 2005 is our improvement in EVA. EVA did improve in eight of our nine business units, with only one, Gas Technologies, showing a decline. Our EVA performance for 2005 was well ahead of the target for the year.

Our debt-to-capital ratio ended up the year at 50.4%. That is an increase from the September 30, 2005, and December 31, 2004 levels of 38.9% and 40.6%, respectively. The increase, of course, is due to our fourth-quarter acquisitions which cost approximately $400 million. However, on a net debt to capital ratio, the number is 47.2%; and this is due to $121 million in cash at December 31. Of this total, $25 million can be attributed to the two acquisitions.

Another pleasing aspect of 2005 was the operating balance that we achieved. For the year, Mill Services accounted for approximately 40% of the total operating income of the Company; while Access Services contributed a strong 27%; and, right behind, Engineered Products and Services added 26%. The Gas Technologies business accounted for the remaining 7% of the total operating income.

This performance for the year validates our strategy of developing a well-balanced portfolio as Derek mentioned in his opening remarks.

Finally, during the fourth quarter, we repatriated under the American Jobs Creation Act approximately $24 million in qualified dividends. Of course our dividends that we repatriated were much greater than that; but $24 million qualified under the program. Now let's turn to the performance of each business group, starting with the Mill Services business. As we stated in the press release, the Mill Services business performance in the fourth quarter was unfavorably affected by several items, including reorganization costs, much higher energy costs, negative foreign currency translation, and production cutbacks at certain mills that we serve.

A $3.4 million reorganization charge was taken in the fourth quarter for severance costs associated with a global realignment of the business. Fourth-quarter operating performance was also unfavorably affected by approximately $3.1 million in higher energy costs and $600,000 in negative foreign currency translation.

Additionally, certain mill customers throughout the world scaled back production in order to maintain price discipline in the marketplace; and this was also reported in the third quarter as well.

Without the reorganization expenses, operating margins in the fourth quarter for Mill Services were comparable to last year's. For the full-year 2005, Mill Services' operating margins were down slightly, despite the headwinds from the production cutbacks and the significantly higher energy costs. Energy costs were up approximately $12.9 million for 2005 compared with 2004.

As we have stated previously, the industry outlook for steel demand is favorable. Given the fundamental strength of this industry, along with our global footprint and ongoing targeted investments, such as the recent Mill Services acquisitions, we continue to believe that the Mill Services business provides an excellent global platform for continued growth.

On Access Services, the fourth-quarter record performance of this business was broad-based and was again led by the Middle East, Western Europe, and North America. Contributing to operating income and margins in the quarter was a $3.6 million pretax gain in Europe for the sale of the Youngman light access manufacturing business.

Most noteworthy for the quarter was the margin improvement in this segment and the positive contribution from the Huennebeck acquisition. Fourth-quarter margins improved by 440 basis points to 11.4%; that is up from 7% last year. This is the fourth consecutive quarter the margins have improved in Access Services, and the third quarter this year that double-digit margins were achieved.

Even without the $3.6 million gain from the Youngman sale, operating income would have been up a strong 48% and margins up 270 basis points to 9.7% in the quarter.

For the full-year 2005, margins improved by 320 basis points to 9.5%. Again without the aforementioned gain, also net of reorganization costs that were taken during the year, margins would have been up 270 basis points to 9%.

As Derek indicated, Huennebeck has performed well since we acquired the company on November 21, 2005. The acquisition was accretive for the period, and we are pleased with the initial performance and contribution.

The industry outlook for nonresidential construction and industrial maintenance in many of our key markets continues to be favorable. Given our global footprint and the fragmented nature of the Access Services market, we believe that the Access Services business also provides an excellent global platform for Harsco's growth.

The Engineered Products and Services group turned in a record performance in the fourth quarter. The much-improved results in this group were also broad-based, with three of the five units posting higher sales, higher operating income and margins. Operating income increased by approximately 53%, and margins improved by a healthy 400 basis points to 13.1%.

Fourth-quarter results benefited from our efforts to lower commodity costs, which lowered cost of sales and thus increased the operating income and widened margins. You may recall that in 2004 we experienced substantial inflation in commodity prices, which resulted in much higher LIFO cost of sales. The majority of this year's improvement resulted principally from better inventory management practices and, to a lesser extent, moderating prices.

One final point on Engineered Products and Services. One of the business units in this group, our IKG grading business specifically, benefited significantly from the post-Katrina rebuilding during the fourth quarter. The outlook for this group also continues to be very positive.

Consistent with our expectations, the Gas Technologies segment performance improved over last year's fourth quarter due principally, again, to our initiatives to lower commodity costs, which lowered LIFO cost of sales, and thus increased operating income and widened margins. The same comments that I just made under the Engineered Products and Services group regarding the LIFO cost of sales apply to the Gas Technologies group as well.

The Gas Technologies group is expected to perform much better in 2006 due to a revitalized management team, significant operational improvements, and good demand across most product lines. That completes my comments, and thank you. Derek?

Thank you, Sal. We will now be very happy to take any questions you may have.

(OPERATOR INSTRUCTIONS) Curt Woodworth with JPMorgan.

A question on the margin outlook for Mill Services. At the analysts' meeting, you provided a range. Has your thinking on that range -- has it changed at all with the acquisition, which is going to add roughly 20%, which I assume is probably going to be a little bit lower margin to your base business there?

No, as you recall, the outlook we stated at the conference was a range of 10.8 to 11.3 for the period 2006 to 2007, and we certainly believe that is achievable. If you look at the last year, for example, we did 10.6, which is -- that is in '04. We did 10.6. We certainly believe the range of 10.8 - 11.3 is very achievable.

As you recall, also, that we mentioned in the press release that we took a $3-plus million reorganization charge to better realign the business and lower overall costs. Plus with our ongoing Six Sigma program and other cost-reduction initiatives, we do believe those margins are achievable over that two-year period.

Great, and when you look at the acquisition of Brambles, do you have a good feel for the penetration rate of services? Where are they relative to where you are? Do you think that -- are you further ahead of the curve, and maybe the organic growth potential with that acquisition is higher? Or how should we think about that?

Yes, we think that the organic growth potential with that business obviously is available to us. The main thrust of that acquisition was that it actually enables us to do more business with basically the same customers.

We believe that we are very welcome service providers to these major customers. Brambles, as you are probably aware, had expressed an interest to get out of that business and made public statements to that effect. We worked with them to acquire that business, and our understanding is that our customers are pleased with that.

I think we are recognized as the world leader, and competent to take on a workload of that size and seamlessly, as it were. So that was a major, as it were -- well, that was an acquisition, really, that is an organic growth issue as well. It's a kind of hybrid.

And we're looking forward to the extra volume. As you know, Mill Services is an economy of scale business. By maintaining a parallel fixed-cost base and increasing the workload on each site, we believe that it makes us more competitive. It is certainly to the advantage of the customer, in terms of the benefits that they enjoy. And it is good for us too.

So that acquisition, I think, is certainly a win for the customers because of the competitive position that it puts us in, to maintain a healthy relationship with them on an increasing volume basis. So that is really the strategy there with that acquisition.

Okay, great, just one last question. Derek, how do you view globalization of the steel industry impacting you? Obviously if Arcelor and Mittal got together, you would have one very, very large customer in the Mill Services business; maybe 27% exposure. Can you just talk about your thoughts relating to that trend?

Yes, if you examine both of those companies, each of them is operating in a multiplicity of product lines, a multiplicity of sites, in a multiplicity of geographies. Frankly, each contract is kind of negotiated locally. We view that consolidation just benignly, quite frankly, in the sense that our contracts are of varying lengths; their commencement dates and their -- they are not coterminous and they do not commence on the same date. They are of varying lengths in varying geographies.

And it's a local management, obviously managed by oversight from our people and ourselves that manage those Mill Services businesses. So we are not at all afraid of that. In fact what we have appreciated, presently, with the rationalization of the macro steel industry, clearly there is a tendency on the bigger customers to start to rationalize their supplier base. That was the aforementioned that I was alluding to previously.

We believe that with the economy of scale we can serve our customers very, very competitively with expertise in any geography that they would like to nominate. We have some good partnership arrangements, so we don't expect presently any fallout at all from the rationalization of the business.

Okay, thank you; and congratulations on a great quarter.

Jeff Hammond with KeyBanc Capital Markets.

I just wanted to focus on Mill Services a little bit. If you look at the margin performance throughout the year, there was pretty good variability quarter-to-quarter. I think at the low end 9%, high end 12%. I guess as we go forward -- do you see that margin variability becoming less volatile? Or help me understand kind of the puts and takes and what kind of drives that variability?

The main variability, Jeff, as you recall in the third quarter -- it was the third quarter which was 9.1%, and that had to do with a lot of things, including the production cutbacks was a big factors?

The fourth-quarter margins if you take out the reorg charge, they're pretty much consistent with the rest of the year and with prior years as well. So really if you look -- in fact, if you look at the last eight quarters, they're pretty consistent. We ranged from about 10.2% to about 11% -- 10.1% to about 12.3%, other than this one anomaly here in the third quarter. If you assume the fourth quarter you adjust for that reorg charge. So we're right in that band of roughly between 10% and 11-plus%.

Okay, then just quickly on energy. Into '06, energy costs, do you think that is a material incremental headwind?

Well, no more than -- I mean, year-over-year we are pretty much where we were last year right now, based on current oil prices. We did put in, as you will recall at the December conference, a sensitivity analysis. I believe it was in Geoff's presentation if I recall correctly. That gave you a sensitivity of what happens, I think, for every $5 movement in the barrel of oil, as to what happens to our profitability in that business.

And you saw obviously, the effect of that with the '05 results. It was a considerable amount of money.

Sure. Then if I look at production in your key markets, and overlay that with kind of your geographic exposure with Mill Services, what my analysis shows is that over the last four or five quarters, up through 3Q, you had been outgrowing production by kind of a high single digit growth rate.

This quarter you kind of grew more in line with kind of key market production levels. I just wanted to understand that better. I think you mentioned even in the release, timing of new contracts. So how should we look at that going forward?

Well, I think one of the assumptions you may make is that we do deal with the leaders in the industry in the markets that we serve. The margins on what we do, and clearly the volumes that are produced in the various locations in which we operate, do affect the phenomena that you are talking about.

But we think that the diversity of our spread, geographically, our customer base, and the local mills that we serve, is in fact a good security to some consistency of margins.

Unfortunately, it is not -- no business is perfect. On a daily basis we hear about this happening at that mill; or that happening at the other mill, and that is not a good thing; and then there is a good thing happening somewhere else; and a better thing happening somewhere else.

We are in 160-odd steel mills around the world, and there are good and bad things happening everywhere. That is a good and a bad thing, obviously. We would like everything to be perfect and everything to be swinging along; but it doesn't happen like that.

If you study the comments of the chairmen and chief executives of the mills around the world, they will give you a better clue to that. We, for our part, are happy that the swings and roundabouts and our relationships with our customers are such that, generally speaking, it is a wash.

The other thing, I don't know if you mentioned this in your comments, there are two other things. One is the foreign exchange impact, which was negative in the quarter; so that reduced revenues. And secondly, which we don't talk much about, but it's implied in the press release, that is timing of contracts start-up. But also we do have this 5% that we don't renew. So timing of those.

There are a lot of variables like Derek said, and there's a lot of pieces to this. So it could be timing, the timing of the contracts, foreign exchange, and the production cutbacks would be the three items I would give you.

I guess if I ask it another way, if you look at '06 and you just assumed a flat -- I guess what would be the incremental impact of your contract signings, less the contracts that you don't renew on '06?

Well I think, if I remember right, again, in the conference I think we gave you some numbers on Mill Services, I believe. I think we were expecting, if I remember right, about 5%, 6% growth.

That is assuming what level of production within your markets?

That was more normalized, which we are expecting for '06.

Okay, so kind of a 3% production growth environment, you grow a little bit above that as you sign new contracts?

Yes.

Okay, great. I will get back in queue.

James Gentile with Sidoti & Company.

Wondering if you can kind of give us a little bit more detail with regard to the fourth-quarter results coming out of Harsco Track Technologies; and the relative comparison moving forward as you move further in the service model.

Again, we were fortunate enough to be able to deliver what was required for the whole of 2005, and particularly in the month of December Harsco Track Technologies did hit its own financial forecast for the year. That was also a pleasing outcome.

And with what we're dealing with at the moment in terms of backlog and order book, we believe the prospects are for an improving year in 2006.

Could you give us a number in terms of the expectation in '06 of revenue coming out of Track?

It will be less than 2005 as the business model changes a little more to rental and less to sale. That is my present view.

However, that does not take into account the walk-on items which are shorter-lead sales that come in, and which are always very welcome, of course, which do augment the performance of the business. So excluding walk-on items which always happen, we expect the balance of sales and rentals to be somewhat modified.

And we expect probably a drop in sales of something like $25 to $30 million, but in terms of income, we expect the contrary to occur. We expect the margins to improve and we expect the operating performance of the company to continue to improve.

Okay. So I guess -- then, Sal in your comments with regard to IKG, the Katrina contribution, just out of curiosity, which end markets are you supplying the industrial grading and the stairwells and walkways?

That would have been the oil platforms.

Oil refineries mostly?

The platforms around the Gulf and those kinds of things, yes.

Okay, I was just curious. Thanks.

Yvonne Varano with Jefferies.

Sal, I didn't know if you could quantify the LIFO impact for us on the two segments in the quarter?

Well, the year-over-year changing cost of sales, you've got to remember that it's complicated from the standpoint there's a lot of drivers to that. But in round numbers it was about $10 million; and with about 70% of it in the Engineered Products group.

That is due to -- I think we did a very good job of managing our inventory levels this year, as well as trying to moderate the levels of prices and so forth. A lot of it came through just very good inventory management practices.

What kind of visibility do you have now on steel prices? Directionally, which way do you think they are heading?

We don't expect a major change from '05 to '06. So you should be -- we are expecting very manageable change year-over-year. You will recall and as I mentioned in my comments at the beginning there, that in '04 it was an extraordinary year. In fact, I never in my 26 years never saw a year quite like that one, with respect to inflation and commodity prices and so forth.

So as you recall, under LIFO you have to match those recent costs to your revenues. So therefore you charge up the cost of goods sold. So when you have a period of significant rising prices, your costs under LIFO would generally be much, much higher than you would under the FIFO method of accounting.

So like I said, we never saw a year quite like 2004. In 2005 we got back to, quote unquote, more normal; and we see that continuing in '06. One of the levers you do have to manage this are the inventory levels. So I think we did a very good job in '05 of managing those inventory levels that were impacted by LIFO.

Where are your inventory levels now? Do you measure them on a turns basis or a month's supply?

Well, it varies. I can't give a general answer because it varies by business unit. Also there's seasonality issues and there is a lot to that. I don't know if that is for this conference call.

Okay, I know you talked about IKG being impacted positively in 4Q. Anything in particular on the Air-X-Changers business or Patterson-Kelley that were drivers there?

No, I think the reorganization of the Air-X-Changers business was the key to it. They have had a very successful year. I guess revenues went from $60 to $90 million in one year's time, and principally due to, I believe, frankly, the change of management and just a much more switched-on and geared-up sales and marketing effort. And income in that company responded accordingly.

Air-X-Changers is a good example of the kind of things that we have got going on at the moment, in the total look at our management structures and the way we function.

Shouldn't that business benefit from the drilling and the pipelines?

Sure, that is a given. I think that is clearly understood, that the energy sector, particularly there, things are buoyant and have been buoyant for some time. Hence the sales increase. We expect that, frankly, to continue. If backlogs are any indicator, that company will have at least as good a year, if not a better year, this year.

Can you talk about how much your backlogs are up?

I can't give you that, not that I don't wish to, but I don't exactly have that piece of information in front of me. But I know we are five, six months out.

Then lastly on the Access side can you talk about any further potential price increases that we might see there?

Well, I would not like to announce; those in front of telling our customers quite frankly. We run very competitive businesses. And frankly, it is not on our horizon to at the moment put prices up injudiciously.

Clearly in our Mill Services business, our Access equipment business, our Engineered Products business, with the fluctuation as you see it in commodity prices, all of our customers clearly are sensitive and are waiting like, I guess, cats about to pounce on any sign that they see of reduced material costs. We obviously work with them on that, because our competitors do too.

So we will -- we study the markets conscientiously and we do our best to pass on increases that we hope we might be able to pass on. But as most, I think, people, CEOs and others will tell you, increasing prices in a low inflationary period is extraordinarily difficult because of the competitive nature of the business that we are in.

So our skill, I think, is to deal with this by looking at our other expenses -- Sal has already said our Six Sigma programs -- to try to increase our margins without in fact increasing our prices. That is something that we're doing all of the time.

Terrific, thanks very much.

Bill Fisher with Raymond James.

Derek, on China, I think in December, Geoff indicated you guys were pursuing some contracts in that market on the Mill Services side. Do you still feel good about prospects of getting a contract there sometime during '06?

We do, Bill, yes. Yes, we do. Something I haven't announced is that we have opened a small representative office in Beijing. It will be staffed by three people. And a very low-budget deal, not an incorporated company, but a representative office; and those two are distinct and separate issues.

That office will look after the affairs of our manufacturing plant in Beijing. It will oversee the continuing growth and development of our Mill Services business, obviously working with the presidents of each of the divisions, but will have people on site.

It will, again, locally liaise with our major customer in China regarding our maintenance of way railroad equipment program, which we have discussed previously. Also we do buy, not enormous amounts, but some product from China, which we use particularly in our Access equipment business. It will oversee the purchasing, and the quality control, and the expediting of those product lines.

So without getting in above our sort of knees administratively, I thought it necessary that local control in what is a growing business, it was necessary. So I really am quite optimistic that from an administrative and control standpoint, that will be good.

We will just look forward to continuing to grow such businesses as we think have potential, which are our Gas business, which is obviously our railway business with their massive investment program, and our Mill Services business. I mean, they’re the world's larger producer of steel. So we're taking a very slow and studied and measured approach to all of that.

Thanks. Just somewhat related on your growth CapEx in '06, I know it is early, but do you have a rough feel on how the mix of that might fall out? A little more on Mill Services or on the rail maintenance side, any color there?

I think you'll see a little less on the railway maintenance side, Bill, in '06 than '05. '05 we had a huge investment in that part. In fact, consistent with what we have been saying all year, for '05, about 51% of our CapEx went to growth. And in '05, I would say that probably about 20-some% would have gone to HTT.

Just kind of a similar thing on the contracts, when you get them, how that would fall this year?

I am sorry, what was that?

On Mill Services, it will just depend on -- the mix will depend on the contracts.

Right, that's correct.

Just one last thing. I know it sounds like you're finalizing this; but Sal, do you have any rough range on where G&A might be this year?

Yes, we did give guidance back in December on that, Bill, if I remember right. Or are you talking about a revised number?

Brambles in it, I guess.

No, we have not given that out, no. But we certainly will do that. We gave guidance of $225 million for '06 in G&A; and that was of course prior to Brambles. It did include the Huennebeck acquisition, but it did exclude the Brambles.

Okay, all right. Thank you.

Godfrey Birckhead with SBK Brooks.

Within the Access Services business, you benefited, number one, from Huennebeck Group from November 21 on, which you mentioned in your comments earlier. Sal did. Then you also mentioned that Katrina was helpful. Is it possible to give us some help on what kind of a contribution in terms of dollars those two things had?

The Huennebeck acquisition, I think the word is accretive, not so much the materiality of it, but it was a couple of pennies.

Oh, here it is right here, $7 million, right. Okay, I have that.

No, no.

No, no, what do you mean, 7 million?

Let's see. The acquisition of Huennebeck on November contributed $7 million or 4%.

No, that's -- you're talking -- are you in the press release?

Yes, I am reading directly from the press release.

No, we didn't say it quite that way. We didn't say that there was $7 million, certainly not $7 million in income.

Well, something. The sale of SGB's light access products manufacturing business, UK-based Youngman on October 3 --

Okay, the net.

-- and the acquisition of Huennebeck Group GmbH on November 21, 2005, contributed $7 million or 4%.

Right. That is sales, first of all; and second of all --

That's what I wanted, was the sales.

Yes, I'm sorry. That is the net number, that is the acquisition minus the divestiture and currency.

That is the net number of all of those three? (multiple speakers) Okay. And Katrina, any help there?

Katrina helped a little as we said in our IKG business, and a little down in Louisiana. Yes, with our Patent Construction Services business, yes.

Okay, okay. Then Sal, the tax rate this year?

We are expecting about 33%.

33%? Okay, and you can't help us in line with the last questioner on the capital expenditures yet for the total year?

For '06 you're talking about?

Yes.

No, other than what we gave you at the conference.

Which was what?

At the conference we said we were going to spend about $280 million for '06; and we are going to spend about $140 for growth and about $140 for sustaining the business, what we call sustaining the business.

Okay, the maintenance in other words.

Yes, maintenance. Right.

So it is about 50-50?

Roughly about 50-50. That is what we have been running. The '05 numbers came out roughly 50-50.

Okay, how much was depreciation and amortization last year?

Well, we said about a little over $200 million in '05 and $225 for '06.

So $225; but that is probably going to go up a little bit, hm?

Yes, it will go up.

But start, that is a good place to start.

Good place to start, yes.

Okay. Now, there is an item, Sal, on the profit and loss statement for the quarter. I always ask this question. Other expense was $1.6 million versus $400,000 last year. What is that all about?

That is where we put all the reorganization actions including asset gains and losses. So any severance costs, gains on asset sales, or losses on asset sales, any of those kinds of items are there. So that is the net cost.

Okay, the net cost. Yes, okay. And your conference in December which I am sorry I didn't make, but I probably would have broken my neck, so it's just as well I didn't get there -- in '06, did you give some direction at your meeting in December on what asset sales might be this year versus the $40 million for 2005?

I think we gave a modest $15 million target.

Okay, we're going to start with $15.

We're going to start with a low $15 million. As you recall, if you add up the last five years now, I think we generated in excess of $200 million in cash.

Oh yes, you have been -- that has certainly benefited your --.

So we have been quietly that doing that. So we are always looking at things that don't meet our criteria to divest.

Okay. Now, an earlier questioner asked you about inventory turn in a particular division. I am more interested in the Company as a whole and the EVA discipline. Is inventory turn one of the objectives that you want to increase over time as a part of the EVA discipline?

Absolutely.

Balance sheet management is obviously a critical part of the -- and the working capital in the business -- critical items. That is the beauty of the EVA system. It causes management to address every detail of the business.

And yes, we are onto that, and obviously that is something that Sal has been overseeing with his financial team, and with some degree of success. There are times, you must remember though, that inventory can be used as a marketing and selling tool in close relationships with customers. That is also something that we are beginning to expand.

Obviously what you do is you look at the cost of capital. What does it cost to keep the inventory? What are the benefits to the customer and ourselves? And if it's EVA positive then you take that step. So yes, all of that comes into our balance sheet management and our selling and marketing efforts. Yes.

Okay. Final question, in terms of the -- I haven't done the numbers, but I assume there is going to be some positive cash flow this year of whatever. Using that assumption, you made two rather large acquisitions which you are going to digest and work on.

So my working thesis would be that acquisitions are probably not going to be a part of the Company in 2006. If I am wrong on that, tell me. So that leaves debt repayment and stock buyback. So could you talk about that?

I can, I wouldn't -- I never say no, Godfrey. We're very fortunate to have a strong balance sheet. Clearly if you look at our behavior in prior years, that is the best measure.

Will there be anything really significant? I think your assumption may be appropriate. But there are still opportunities out there for these rather nice bolt-on deals which -- and we have plenty of armaments available to be able to do that.

However, as you know, Sal and I share the same view, and I think it's been supported by our stockholders. We are incrementalists, and we think that it's very important for this Company to keep its debt-to-cap well, well, well, well under control.

If I saw a raised eyebrow, I would be concerned, frankly. And our goal is not to raise any eyebrows but to run this business in a financially responsible fashion with the appropriate debt to capital base, an appropriate A rating, and just keep building this thing organically. So I think your basic assumptions are fairly accurate there, Godfrey.

At what debt to capital ratio do you feel comfortable with? What range would you use over time that you could --?

We are comfortable where we are now.

Okay, so you are comfortable at 50%?

We are comfortable where we are now, yes.

(multiple speakers) 50% is what you said.

Yes, yes.

But getting back to my prior question and the use of funds. If there are some excess cash this year, would it be appropriate to think that you are not going to do any more share back? You haven't done that for some period of time. But you are going to then, if you don't make the acquisitions, or even if you do and you have excess cash flow, that you will probably pay down debt.

You have watched me over the years and you have watched Sal over the years. We are just going to continue to do what we have always done. That is to leave our options open, not commit to any one strategy, but look at all of the options; and then use our resources to the best advantage of the stockholders as we see it at the time.

Okay, so there is a possibility you could do some stock buyback at some point in time?

I didn't say that, Godfrey, no. I just said we would look at -- you are being a little more positive than me. I am saying that all of the options are open. If we thought it was appropriate to do that, then certainly we might do it.

Okay, thank you very much, Derek.

You're welcome, and it's good to hear your voice.

Curt Woodworth with JPMorgan.

Yes, just a follow-up on Track Technologies. Derek, what percent of the business today is services? Where do you want that to get to, looking out maybe the next five years? Can you help us get a sense for the margin difference between the service business and the equipment business?

It's about a third of our business, but I don't wish to sort of discuss margins on this conference if I may. But it is about a third and growing. Clearly, it is a more attractive proposition for us, the service business, than the retail of equipment.

Okay. In terms of the changing guidance relative to what was discussed at the analysts' meeting, is it fair to say that the majority of the delta is associated with the Brambles acquisition?

Yes, it is. Yes.

Would that be all of it?

No, no, I think we said in the press release due to two things. We said due to improved business conditions as well as the acquisitions.

Okay, and on the improved business conditions, is it mainly Access where you have become more constructive relative to where you were?

No, I think it is the balance. In fact, again, I think it was in my comments as well, we expect a very strong year from the Gas Technologies business this year. We expect to continue strong performance in both Access and Engineered Products. And Mill Services back to, quote unquote, more normal levels. So it's a combination of all those things.

Right, again, I am just trying to get a sense for what has changed. Because you said all those things at the analysts' meeting as well. So I just was wondering if one business was maybe looking a little bit better. And it seems like maybe it's just a combination of all three looking better.

No, I think that we try to be accurate, in what we say and think. Clearly we got the fourth quarter of this year a bit kind of underestimated, and obviously we are thrilled to do that. I am sure that stockholders don't mind us making that mistake occasionally.

It's the other way that we are concerned with, and we just presently feel -- we just feel good about the business, and our backlogs support that. Therefore, as Sal has said, in a balanced kind of way, we look at all of that stuff, and we say -- well, what does that mean?

What that means is, in a perfect world, and these things happening, then it is appropriate to say what we have said.

Right, yes, I understand. Thank you.

(OPERATOR INSTRUCTIONS) Jeff Hammond with KeyBanc Capital Markets.

Sal, I was wondering if you could quantify what the accretion is for Huennebeck and the Brambles acquisition inherent in your '06 guidance.

Jeff, we don't give that kind of guidance out. Suffice it to say that they are both going to be accretive, as we stated in the press release and we stated previously at the -- particularly with Huennebeck -- at the conference.

Okay, than I guess along the same lines, would you expect those acquisitions to be, respectively, dilutive to the segment operating margin, accretive to segment operating margin, or margins are generally in line with your base businesses?

I think in a broad sense, generally in line, Jeff.

Generally in line?

Yes.

Okay, great. Thanks.

At this time, there are no further questions. Mr. Hathaway, are there any closing remarks?

Thank you very much. As you gather, in summary, we are very pleased with our fourth-quarter and full-year 2005 performance.

In 2006, as Sal has indicated and I tried to indicate, we are just going to continue to focus on executing our strategic objectives. That has stood us in good stead these past several years, and we're not about to change the formula.

As Sal stated also, our cash flow will continue to be used to fund a strong portfolio of growth projects. We will consider, as I said to Godfrey, selective bolt-on acquisitions and reduced debt, and consider other options if they become obvious to us.

We're not going to relent on the margin expansion initiatives that we have started, and we have continued. So that really Curt I guess it was, was the basis for upping the range to now $3.90 to $4.00. Clearly we would love to see a $4 earnings deal. And clearly having given you that range, it would be better to end up at the top end rather than the bottom end. We are going to be, as a management team, committed to doing our very best to accomplish that.

Our outlook for the first quarter of 2006 is in the range of $0.62 to $0.65, which would represent 13% to 18% improvement over 2005's first quarter, which traditionally is kind of our slowest quarter for seasonal reasons and so one.

So we begin the year on a very strong footing, we believe, and we're going to be working very, very hard to accomplish the goals that we enunciated in December, and which have been basically confirmed by the year-end results. And we have good indications and good vibes about 2006.

So if there are no other questions, I just want to thank you for your support of this Company. It is much appreciated. We are available. Gene Truett, Sal, and myself are active in terms of our investor relations activities. Don't hesitate to call either to talk to us; or if you wish to see us for any reason, then we will be happy to accommodate that. Let's look forward to going together onwards and upwards. Thank you very much for your attention today. It is much appreciated.

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