Enviri Corp (NVRI) 2006 Q1 法說會逐字稿

Good afternoon. My name is Lori and I will be your conference facilitator. At this time, I would like to welcome everyone to the Harsco Corporation first-quarter earnings release conference call. All lines have been placed on mute to avoid any background noise. After the speakers' remarks, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS). Also, this telephone conference presentation and the Company 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, Lori. Yes, Derek Hathaway, Chairman and Chief Executive Officer of the Harsco Corporation introducing Ken Julian, Gene Truett, Mark Kimmel and Sal Fazzolari, our President and Chief Financial Officer. We welcome you to this first-quarter 2006 conference call.

Before we start, I would like to ask Mark Kimmel if he'll just briefly read to us the Safe Harbor statement.

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. While 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 certain 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 that information at your convenience.

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

Thank you, Mark. Well, as reported this morning, we begin 2006 with a record and strong fourth-quarter performance. Particularly pleasing again was the performance of our global Access Services business, which has done well now for eight consecutive quarters.

I'm happy to report that our Huennebeck acquisition was accretive in the first quarter and made a very solid contribution to the overall performance of the Access Services group.

We also received a positive contribution from the Brambles northern hemisphere Mill Services acquisition. So it is good news for us as a management team and I think good news for the stockholders that both of these late-term 2005 investments got off to a good start.

Also noteworthy for the quarter is the 140 basis point improvement in overall Harsco operating margins, to 8.8% from 7.4% last year. This is traditionally our weakest quarter as you are aware, and it was good to see the margin improvement in this quarter. I am sure that as volumes increase in the ensuing three quarters, then those margins will further expand.

I am going to ask Sal Fazzolari, our President and Chief Financial Officer and Treasurer, to give you more details on this performance and then we will take your questions followed by a few closing comments from me. Thank you, Sal.

Thank you, Derek. Good afternoon, everyone. There were some notable achievements in the first-quarter performance that I would like to comment on. All four operating groups posted higher sales, higher income and higher margins for the quarter. I believe that this is the first time that this has happened.

As stated in the press release, sales grew 20% in the first quarter. What is pleasing about that is that half of the growth or about 10% was organic and of course this is after adjusting for acquisitions, divestitures and foreign exchange.

We achieved record cash flow from operations in the first quarter. The $70 million generated is a good start to achieving our 2006 goal of at least $400 million in cash from operating activities. Historically, as you'll recall, our first quarter tends to be our slowest cash generator. The fact that we are already off to a very good start of $70 million does give us solid optimism for the year. We are also expecting to realize a modest $15 million in asset sales in 2006. The expected cash flow for the year will provide the necessary capital to properly sustain the current base of business and to fund additional growth initiatives.

Consistent with our growth initiatives, we invested a record $67 million in CapEx during the first quarter. This is an increase of 15% over 2005's first quarter. Also approximately 41% of the CapEx or over $27 million was allocated to growth projects. This growth CapEx was invested principally in our three primary growth platforms: Mill Services, Access Services and to a lesser extent, Railway Services.

Also noteworthy for the first quarter is the improvement in the debt to capital ratio. Our debt to cap ratio improved to 49.2% from 50.4% at December 31, 2005, a decrease of 120 basis points. The first-quarter performance shows the considerable balance that has been established within Harsco, which gives us both the capacity and the flexibility to concurrently invest in growth projects, pay a dividend and reduce debt.

Let's turn briefly to the performance of each business group starting with Mill Services. The Mill Services business performance in the first quarter was again very solid despite the continued unfavorable net effect of higher energy costs of approximately $3 million in the first quarter compared with last year.

For the first quarter, Mill Services' operating margins improved by 20 basis points. Again, this is a good start to improving margins for 2006. To remind you, our operating margin goal for Mill Services for the 2006-2007 time frame is in the range of 10.8% to 11.3%. This compares with the 10.3% achieved in 2005 and the 10.6% achieved in 2004. The margin improvement continues to be driven by our process improvement initiatives.

The Brambles northern hemisphere steel mill services acquisition, as Derek indicated, performed well in the quarter and was accretive from day one. Targeted investments, such as our recent Mill Services acquisition and new contract signings at existing mills as well as new mills, should continue to propel this business forward. We, the management team, continue to believe that the Mill Services business provides us with an excellent global growth platform.

The first-quarter record performance of the Access Services business was broad-based and was again led by three regions; the Middle East, Europe and North America. All three divisions; SGB, Patent and Huennebeck, contributed to improved operating income and margins in the quarter.

First-quarter margins improved by 230 basis points to 7.4% from 5.1% last year. As Derek indicated, this is the eighth consecutive quarter that margins improved in Access Services and it is one of the best first-quarter performances ever for this segment.

Huennebeck has performed well since we acquired the company, on November 21, 2005 to be exact. The acquisition has been accretive since day one. The industry outlook for nonresidential construction and industrial maintenance in many of our key markets continues to be favorable. A strong market coupled with targeted investments should continue to provide the momentum to move our Access Services business forward.

Given our global footprint and broad range of services, this management team believes that the Access Services business, just like the Mill Services business, provides an excellent global growth platform.

The Engineered Products and Services group posted another record performance in the quarter. All businesses posted higher sales and income for the quarter. Also, all units other than Reed Minerals posted higher operating margins. While HTT's margins continue to be the lowest in the group, initiatives continue to move these margins upward, which should further increase overall margins for the group.

First-quarter margins improved by 340 basis points to 11.9% from 8.5% last year. This is the best ever first-quarter performance for this group. The outlook for this group continues to be positive as we expect it again to be our best margin performer in 2006. We are targeting margins for 2006 to be in the area of 13%.

Consistent with our expectations, the Gas Technologies segment performance improved slightly over last year's first quarter. Operating margins improved by 10 basis points to 2.7% for the first quarter. Gas Technologies' business accounted for only 3% of total Harsco first-quarter operating income. This group's performance, however, should show greater improvement over the next three quarters.

The Gas Technologies group expected improved performance in 2006 is due to a revitalized management team, continuing operational improvements and solid demand across several of its product lines. That completes my comments.

Thank you, Sal. We would now be happy to take any questions or observations that you may have.

(OPERATOR INSTRUCTIONS). Jeff Hammond, KeyBanc Capital Markets.

I just wanted to go at the guidance a little bit. You raised your guidance at both ends by a dime. You beat the top end of your guidance for the first quarter by $0.16. I just wanted to get a better sense of were there any anomalies in the quarter or anything to suggest that the 1Q operating environment doesn't persist or you see some moderation? I just wanted to get a sense of the level of conservatism there?

There is an underlying level of conservatism and it is a quarter-by-quarter experience and we did have, as you observed, a very strong first quarter. As all other businesses throughout the world, we are facing some uncertainties. There is bound to be some continuing volatility in commodity prices, etc., etc. and whilst we are optimistic and hopeful that this trend will continue, we think it is prudent for us to be at this time conservative, and if necessity arises then we can take a further view of that in June, July and then perhaps in September and October.

But I think that guidance, as you know, is, at the moment, is under some discussion and given the penalties that stockholders pay and management teams pay for lack of conservatism, I think that that is what is tempering our judgment at the moment. But by not increasing the guidance according to how your mathematical calculations might come out should not be read in any other light than conservatism and prudence rather than pessimism.

Jeff, there were no unusual items in the quarter at all and don't forget I am sure you have been watching the energy costs, just to mention one of a few of the risks that are out there right now.

Okay. No, that's helpful. On Engineered Products, I guess that was the biggest surprise versus my model. Very good top line and then great bottom-line improvement. Can you give us some better granularity on maybe order of magnitude, what contributed most to the year-on-year improvement, both top line and on the margin side?

It is volumes, Jeff. Particularly strong in our Air-X-Changers business where we've been giving some intensive therapy for the last couple of years from the marketing standpoint. The same applies to IKG. Intensive therapy there, strong management performance, people need to be given credit for that. HTT is on the pickup now with its new business model. Reed Minerals continues to perform as we have said, not having great growth opportunities, but its margin opportunities in that market still remain strong and firm.

So the overall performance has been helped by the therapy in terms of cost reductions, Six Sigma efforts, revitalized marketing approach and of course the volumes that have come there on a cost base, which has decreased. So higher volumes, and a competitive cost base are enabling us to maintain our margins there.

Curt Woodworth, JPMorgan.

Great quarter. A question on the margin performance in Access. Was there any accretion on the margins from the Huennebeck acquisition or maybe your ability to take some of their higher margin shoring and forming product and put it through your channel? Just in terms of thinking is there any kind of structural change going on there or was it more just an operating leverage story this quarter?

Leverage. It's operating leverage. The margins are pretty consistent across all the business units and it is simply two things; operating leverage and our continuing efforts to optimize the business from an efficiency standpoint. So those are the key drivers.

Okay. So in terms of the delta of about 230 basis points, is it fair to assume that if the organic growth continues at a double-digit level then those would be the type of margin variances you would see the remainder of the year? Is there anything that would suggest that maybe you're running up against a harder comp?

Yes, don't forget you're going to get a harder comp because that's eight consecutive quarters now of improved performance there. Margins have continued to steadily increase. We have been talking about that for quite a while. As you recall in the fourth quarter, we had some very strong margins there and, well actually look back all last year, we had starting with the second quarter, we had some very good margin performance. So it is about a year now where we have demonstrated, four consecutive quarters particularly, where we have had very strong margin growth there.

Okay. And then a similar question on the Mill Services segment with the margins up about 25 basis points this year, which is pretty good in light of the energy headwind. Did you feel that, in terms of the oil costs and some of the other pressures you're seeing, that you're going to be able to more than offset that as you did this quarter going forward, or are there any other drivers there that we should be aware of?

Again, the main driver there is the efficiencies. We are working very, very hard at again optimizing every site that we have and trying to recover as much of that through efficiencies and anything else.

There is also an aspect of utilization, as Sal mentioned, through the efficiency side of it, utilization and in fact we are rapidly investing in new products and reinforcing the product offering, particularly in the United States. The acquisition of Pro-Shore equipment for flooring last year is doing well and we are improving that business both from a top-line and an efficiency standpoint.

And just one final question if I may. In terms of the acquisition pipeline, Derek, it seems like the Access business is pretty -- the macro trends here seem pretty favorable looking out the next couple of years. Are you guys devoting more resources to looking at asset purchases in that space or do you feel it is similarly kind of broad-based among all your businesses in terms of acquisition opportunity?

We believe it will be broad based focusing mainly, from an acquisition standpoint, in Access and Mill Services, but broad-based. There are -- as we have said earlier, the balance of growth will be between -- we have lots of organic growth opportunities in both of our main runners that are -- there are a number of other opportunities that we are looking at in terms of both runners as well. So we are not short of growth opportunities organically. We have to be patient however and somewhat prudent. Clearly, prices presently are running away with themselves, particularly with competition from the private equity groups and so on, but we have been successful in the short-term past and I'm sure we will be continuing to be successful in the future.

As a company, we have a lot to offer with the companies that we would acquire in terms of the kind of company we are and the way we run businesses and how we treat people and so on. We are strategic buyers; we're not financial buyers and therefore whilst we may not be able to offer as close to what the vendor might like, I think certainly we have clearly been able to persuade one or two operations, if not more, that we are an attractive home and a good family to join.

Yvonne Varano, Jefferies & Company.

Just going back to Engineered Products quickly on the margin side. Is there anything to suggest in what you're seeing any outlook that your margins in the back half of the year wouldn't be at least on par with what they were last year?

I think we said that the margins are going to be in the 13% range this year and last year, we ended up, if I remember right, a little bit below that. 12.7 actually was the number.

It's just you're starting the quarter in a much --

Much stronger. Yes, much stronger.

Much stronger first quarter, so does that mean that there is something we are seeing in the business that might suggest that the margins could come down?

Again, you've got to keep these energy costs -- they're having quite an effect on some of these businesses. You have got to keep that in mind, as well as again the comps get a little harder as you move out with some of the other quarters as well. So on balance, we said in the area of 13%. So that is our best estimate right now.

Like everybody else, we hope we're like everybody else if everybody else is like we are, we do sit down and we do think about those volatilities and those variables that might impact the numbers -- might impact and we to take sort of a pessimistic view of that, as I addressed the question to Mr. Hammond earlier. And we'll see. We will see.

But we don't -- when we give guidance, we do take into account our present view of those matters. If our present view changes optimistically, then we will feed that factor in the next time we talk with you. If the contrary is the case, then I'm sure the alternative view will be taken. But margins presently that we are forecasting do take into account what we can see through our crystal ball.

The good news on the margins is that we are tracking very well with what we told you in December. As you recall, we set targets out there at the conference for '06/'07. In some cases, we’re a little ahead and in some cases, maybe we're a little bit behind or right on. But if you go back and look at those targets that we have set, I think we are tracking very well to those in all the businesses.

You are close. We have one quarter; it's tough to tell. But on the energy cost side in Engineered Products, how can we think of that in terms of its magnitude?

Well, Reed Minerals for example -- their business runs on natural gas and also the transportation costs that they have to pay to transport their product and you see that across -- all of our businesses have to transport product. Those costs keep rising everyday as shippers keep passing on, not only the railroads, but also the trucking companies. So they keep passing on these energy surcharges.

Okay. Is that the biggest component is in Reed?

The biggest component of our costs you mean?

Of energy as a cost in that business segment.

No. They are in raw material and labor, but it is a major component.

Rob Norfleet, Davenport & Company.

Hi, everyone. This is Alan Bach. Great quarter. Just a couple of quick questions. Looking at Gas Technologies, you have stated before that your target for margins in '06 and '07 would be in the 8% to 9% range. Aside from cost reduction initiatives, how are we going to expand margins in some of the underperforming business lines in order to get there?

Well, volumes are up. That is the good news. The backlogs are building and are solid and building. So a combination of higher revenues, controlled expenses, again very simple 101 formula here and the recovery, particularly in our valve business, which is happening, all of those will contribute to a better performance. The first quarter is much stronger this year than the first quarter last year and, as Sal has indicated, we have I believe a stronger management team on the field attacking the issues, which that particular group has faced and is facing, and quarter two looks to us presently that it will continue to improve its performance and start to show strong signs in fact of returning strength. That is what we're looking for.

And lastly if I can get back to the Mill Services side, you have discussed in the past expanding margins at existing contracts using process improvement initiatives. First, has this been achieved and if so, can you give us an example and second, is the margin that we're getting today reflective of this endeavor or can we expect further upside?

I think the margins in the Mill Services business as we've already said are really perhaps where they ought to be, and I am not expecting margin improvement, as you know, but these are long-term contracts and the ability or the desirability of pricing renegotiations on a five or ten-year deal even aren't in the cards. There has to be that strong relationship between us and our customers, which is built upon confidence and trust and our ability to deliver for them the services at a very competitive rate. So from that standpoint, there is no pricing leverage.

Where we work hard is in the areas that we have said in improving our approaches, reducing our expenses on the site without in any way impairing the kind of service, even by investing more money in more modern and the latest equipment where the EVA calculations indicate that by investment we can improve our margins, give better service to the customer and add value to what we are doing. So it is always a wide range of operating initiatives that enable us to maintain our margins in that business.

Of course, we are looking also at improving the overall volumes. I think we have taken this business now from $700 million to $900 million plus. It will be $1.25 billion, $1.3 billion this year and of course the head office costs don't increase and all that kind of fixed cost element as far as administration doesn't increase. So that also is potentially a margin widening-area. But it is never one thing. It is the ongoing process of running the business in detail in a hands-on style and delivering the best we can for our customers.

A good example of that is the -- you had asked for an example. Well, a good example of that is we had $3 million in incremental energy costs in the quarter and that was pretty much all eaten away by the energy, but that came through efficiencies in the business. So we improved the business by roughly $3 million. That was all eaten away by the energy costs. So we are making a lot of progress on improving the efficiencies of the business.

Bill Fisher, Raymond James.

Just on the Mill Services again, I guess China is now pushing 25% or 30% of global production and I know you have been working on expanding there for a while. Just wanted to see if you had any updates on how that is progressing?

It is progressing satisfactorily at I guess the pace that we would like it to progress. I am due to visit there in the next week or two for a few days and hopefully there will be more news later on. But certainly we are engaged with the Chinese steel industry and we are continuing to negotiate with them long-term arrangements on the back of very two successful investments we have there at the moment.

And just kind of unrelated, on Engineered, I think you signed several decent size rail maintenance contracts the second half last year. Are there some start-up costs on those, or how quickly can you get contracts like that to a normalized run rate?

There are start-up costs, but I guess that we are invoicing even as we speak now. We just started to invoice and expect that to accelerate through quarter two and pick up as we go along. Yes, so you are right. There are start-up costs, which we eat and absorb, but bills are going out and the deals are coming online or on track if you will pardon the pun.

Do you think by Q3 those type of contracts will be up to where you would like to see them? Run rate?

A lot of variables, Bill. You know track time. There are all kinds of variables there. But generally speaking, they will continue quarter-by-quarter. There are certainly start-up costs.

Edward Wheeler, Buckingham Research.

On the fuel costs in the Mill Services area, are the costs that you incurred in the quarter consistent with current market prices? I guess they are, of fuel, and because of the extraordinary nature of what is going on in the energy markets, is there any opportunity to get some fuel surcharges or some other way of perhaps recovering fuel costs in the future? Or do you have to just continue to take it out of other efficiencies?

Believe us, we try to take all of those things into account when we are dealing with our customers, and where we can and where we believe there is a legitimate case, then we take it to our customers. It's that simple. Like everybody else, I mean we --.

I would think given the nature of --

They are long-term contracts. You just can't put a surcharge on. There are mechanisms in the contract that do allow for a certain relief over a certain period of time and certain indices and so forth and so on, but you just can't simply put on an energy surcharge.

Well, just maybe more generally, if conditions -- let's say we hold energy prices roughly where they are, do you think over some period of time, a year or so, you might be able to invoke some of those conversations and get some relief on the escalation that you have seen so far?

I think if oil continues at $75 a barrel, then certainly that might be the case. But what we have witnessed of course in the last year is volatility there. It has been $75 and has been $70 and has been $67 and back up to $70, back up to $72, $73. It is all over the place. So I think observers of the world scene and what is happening in the world at large is the greatest predictor of that and U.S. energy policy and we watch all of those things and just see where we are going. So it is a minute-by-minute, day-by-day matter as far as we are concerned.

Well, you are doing a very good job with it. It just seems with the rapid escalation we have seen, there might be something more to come if you could work with your customers going down the road. That was all. Just wondering if that could --

I was in a store actually on Saturday, pouring down with rain, standing in a store and I watched across the street as the guy put the price up with these special tools from $3.10 to $3.15 and the guy told me the day before it was $3.05. I went to fill my car up shortly after that outside a supermarket and I paid $3.19. Now at some time that has got to grab everybody's attention. I'm sure it is at the moment, but all of us, all of us, you, me and our businesses, are presently having to bear the brunt of this particular issue and we are all very sensitive to it and we are doing what we think is necessary to manage it. It is something that everyone on the telephone here on this conference call understands and appreciates.

Well, to date, you have done a great job.

Thank you very much. We appreciate your comment.

(OPERATOR INSTRUCTIONS). Jeff Hammond, Keybanc Capital Markets.

You mentioned that relative to your targets you had a business or two exceeding your margin targets and maybe one or two falling short. Can you just give us a little color there?

No. I think it is pretty clear that Access is tracking a little ahead and Gas is tracking behind.

Okay, perfect.

Mills Services is pretty much on and Engineered Product is pretty much on.

And then on Access, for a long time, when things were a lot weaker domestically you had talked about rental rates being off 25% from peak levels. Where do you think we are today off of trough levels that you had experienced a couple of years ago?

Just remember, Jeff, those are U.S. rates only, which again is less than 20% of our global Access Services business now with Huennebeck in the fold. So again, it is just a small part of the Access Services business. They have recovered some, but generally we have not recovered the full 20 plus percent.

Are you closer to peak levels or still closer to --?

It's maybe perhaps half.

Directionally, do the markets seem to be -- given that demand is firming up domestically, does that seem to be -- is there more room for rental rates to go up?

It's hard to say. It is hard to say at this point, Jeff. We are taking it day by day, quarter by quarter, but the market is fairly strong, but again -- it depends on which part of the market, the industrial part or the nonresidential construction. Then you have got to look at the type of service. Is it forming, shoring, scaffolding. So there is all kind of -- again, there's a lot of variables involved here and it is hard to give you just generalities across the board.

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

Well, thank you very much. Yes, I would like to say that this conference call almost coincides with the annual meeting of stockholders tomorrow and customarily I do address the meeting and make one or two observations and, as most of you would not have the opportunity of hearing this, I just thought what I'd do is give you a brief summary of what I propose to say tomorrow and subsequently there will be another sort of press release, which you will be able to review at your leisure.

But what we are concentrating on trying to do here is to reaffirm the predictability and the consistency and the stability of earnings that I believe Harsco is becoming noted for. We have a balance within our operating units. We have broad geographical balance and I think we have a well-balanced financial profile. And it is this balance that the senior management team and the Harsco employees worldwide have worked so diligently over these past few years to achieve. And I believe that it gives me and us the confidence for Harsco's consistent, predictable growth in the future.

We are balanced across a number of key business lines. We have geographic balance with over 60% of our revenues generated outside the United States. Our growth opportunities are balanced within organic growth funded by our significant internal cash flows and the disciplined approach to value-creating acquisitions within our current business portfolio.

Our strong cash flows and sound balance sheet allow us the financial flexibility to consider bolt-on acquisitions in the three primary areas that we have already identified for you. And we remain confident in Harsco's ability to achieve continued growth into 2006 and beyond. The question as I visit people on the investor relations scene is, can you keep this going? Does it have legs, in other words? Let me assure you that with the opportunities before us and our financial flexibility, we do believe that this business does have legs and I believe that we will continue to demonstrate growth in the ranges that we have already identified publicly, as Sal reminded you, last December, and now reaffirmed by the first quarter.

We will continue to execute our strategic growth and margin enhancement initiatives. We understand your interest in margins. We understand why the questions are directed there and of course it wouldn't have escaped you that we also focus on that as well. Those margin enhancement initiatives are encouraging as far as we are concerned presently, and I think the outlook for each of our businesses in that direction is very positive.

Our strong cash flows I think, as Sal constantly reminds me and constantly reminds you, they do support meaningful, very meaningful, long-term operational growth in the fundamentals of that, but they also allow for an immediate return to our shareholders in the form of long-standing cash dividend history. And it is the focused execution of our growth strategies which will ensure a continuation of our successful shareholder value-creation efforts. Sal didn't mentioned that in his report, but I can tell you that the numbers in terms of economic value created in the first quarter were far superior than we had anticipated, and earnings and value creation of course are the watchword of Harsco's endeavors and I can report that we've been successful there, too.

So we will keep it up here from our end and we thank you for your continued support and interest and look forward to perhaps reviewing again with you in July, the results of the next quarter. So on that, I wish you all a good afternoon and thank you for attending this conference call. Thank you.

Thank you. This concludes today's Harsco Corporation first-quarter earnings release conference call. You may now disconnect.