Enviri Corp (NVRI) 2006 Q4 法說會逐字稿

Good afternoon. My name is Julianne, and I will be your conference facilitator. At this time I would like to welcome everyone to the Harsco Corporation fourth 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 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 recording or redistribution 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. Firstly, I would like to confirm the presence of Ken Julian who is Director of Corporate Communications; Eugene Truett who is Vice President of Investor Relations and Credit; Mark Kimmel, who is Chief Counsel and Corporate Secretary; and Sal Fazzolari who is President, Chief Financial Officer and Treasurer of the Corporation. Before we move any further I will ask Mr. Kimmel if he will kindly read the Safe Harbor statement to us.

Thank you, Derek. As we always do at the beginning of our conference calls, I would like to remind you that our comments to you today, including our responses to your questions, are likely to contain forward-looking statements. These statements relate to the future of our business and may address operations, results, expectations or other aspects of our business. Our statements made today are based on the best information available. Future results could differ from these statements. Possible reasons for any difference between our statements today and actual results may be because of the occurrence of one or more of the risk factors or uncertainties which we have listed and discussed in our periodic filings with the Securities and Exchange Commission. We invite you to review this information at your convenience. I would also like to remind you that replays of and other information related 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.

Thank you, Mark. As reported this morning, we achieved another record yearly performance. We are particularly encouraged by the strong operating results for the fourth quarter and particularly pleasing was the performance of our two flagship businesses, Mill Services and Access Services, which both set new records for sales and operating income. The significant contributions that the Huennebeck and Brambles acquisitions made to the overall performance of the company in their first full year of ownership under Harsco is noteworthy, and also worthy of mention is the 80 basis point improvement in overall Harsco operating margins to 10.5% from 9.7% last year. Margin improvement has been and continues to be a primary management objective.

Our overall strong performance, I believe, continues to validate our growth strategy that is based on constructing a well-balanced global portfolio of mainly industrial services businesses. And Sal Fazzolari will now give you more details on our performance, and then we will take your questions followed by some closing comments from myself. So thank you, Sal.

Thank you, Derek, good afternoon, ladies and gentlemen. It is a pleasure to be here with you today. I would like to first begin and comment on the performance for 2006. Sales of the company for the year grew by a strong 24%. Organic growth contributed 8% to the growth while acquisitions net of divestitures contributed 15%, and foreign currency translation accounted for the remaining 1%.

For the year, our industrial services portfolio accounted for 74% of total sales, while international sales accounted for approximately 62% of total sales, both were records. We achieved record cash flow from operations for 2006 of $409 million. That is an increase of 30% over last year. This strong performance underpins our expectations for 2007, and as you may recall, we did set a 2007 target at the December analyst meeting of $445 million.

We also met our 2006 asset sales goal of $15 million. In addition to these accomplishments, one of the most pleasing aspects of our performance in 2006 is that again we exceeded our EVA target for the year and also noteworthy, is that EVA improved in all business groups. Another pleasing aspect of 2006 was the operating balance that was achieved in the Corporation. Our two flagship businesses, as Derek indicated, Mill Services and Access Services, accounted for 71% of total sales. And more importantly, 75% of total operating income. Mill Services accounted for approximately 41% of total operating income while Access Services contributed approximately 34%. We are quite pleased with the balance of these two business platforms, and it does validate what Derek mentioned earlier. That is, our strategy of developing a well-balanced portfolio of global businesses. And finally, Engineered Products and Services accounted for approximately 22% of the remaining 25% of total operating income.

Consistent with our growth initiatives we invested a record $340 million in CapEx in 2006. This is an increase of approximately 17% over last year's $290 million. Approximately 45% of the CapEx or $153 million was allocated to growth initiatives or growth projects, again principally in our two growth platforms, Access and Mill Services. While the remaining $187 million was invested in what we call maintenance CapEx. That is sustaining the current revenue stream. Thus if you look at it from a free cash flow standpoint the way we define it, that is cash from operations minus or less maintenance CapEx, our free cash flow for the year was $222 million.

Finally, we also achieved an improvement in the debt to capital ratio. Our debt to capital ratio improved to 48.1% from 50.4% at December 31, 2005. And that is quite a significant decrease of 230 basis points. In summary, we are obviously very pleased with the excellent 2006 performance. Sales increased 24%, income from continuing operations up 25%, diluted earnings per share from continuing operations up 25%, cash flow from operating activities up 30%, and also again as Derek indicated, operating margins overall for the company improved by 80 basis points.

Let's now turn briefly to the fourth quarter and the performance of each of our business units or groups. For the quarter again, overall sales of the company grew a very healthy 25%. Internal growth contributed approximately 5% while acquisitions net of divestitures contributed 16%, and the remaining 4% was a result of positive foreign currency translation. Diluted earnings per share from continuing operations for the fourth quarter of 2006 increased approximately 15% after taking into consideration the $0.15 per share onetime tax benefit that was realized in the fourth quarter of 2005. Our cash flow from operations in the fourth quarter, again a record $130 million and that compares with $83 million in last year's fourth quarter. That is an improvement of about 58%.

Moving onto our segments starting with Mill Services, the strong fourth quarter performance of the Mill Services business continued to validate our strategy of prudent, targeted, global investments increasingly in higher technology services. Augmented by our ongoing cost reduction program using Six Sigma process improvement initiatives. These actions help insulate the portfolio from regional cutbacks in steel production, as well as from other market risks. Fourth quarter margins in the Mill Services segment approximated last year's fourth quarter margins after taking into consideration a $3.4 million reorganization charge that occurred in the fourth quarter of 2005, for severance costs associated with the realignment of the business. Without the reorganization expenses, operating margins in the fourth quarter of 2005 were comparable to this year's fourth quarter margins of 11%. As we stated previously, margin maintenance and possibly improvement in Mills Services will only come mostly from our ongoing cost reduction and efficiency initiatives, volume increases, and our partnering for savings initiatives with our customers.

For the full-year 2006, Mill Services operating margins improved 50 basis points. As I just stated, the margin improvement in Mill Services is the result of a lot of hard work on our part to reduce costs, and it comes in small increments. For example, taking you back a little bit, in 2003 margins were 10.4%. They increased to 10.6% in 2004, then in 2005 they dropped to 10.3%, and now in 2006 they increased to 10.8%. Thus margins have essentially improved 50 basis points over a four-year period using the low of 10.3% and the high of 10.8%. This four-year record demonstrates the point that any future margin improvements will be incremental and achieved only through, again, relentless cost cutting and efficiency initiatives, sustained volume increases, and partnering for savings with our customers. We believe that the Mill Services business continues to provide an excellent global growth platform as evidenced by the recently announced Mill Services acquisition, Excell Materials.

Access Services, the fourth quarter record performance of Access Services was again broad-based. Fourth quarter margins in Access Services improved by approximately 60 basis points after taking into consideration a $3.6 million pre-tax gain in the fourth quarter of 2005 from the sale of the Youngman light-access manufacturing business. Excluding this gain, margins improved 10.3% in the 2006 fourth quarter compared with 9.7% in 2005. For the full-year 2006, margins improved by 160 basis points to 11.1%. That is up from 9.5% last year.

The industry outlook for nonresidential construction and industrial maintenance in many of our key markets continues to be very favorable. We do believe that the Access Services business, just like Mill Services, provides an excellent vehicle for growth. Engineered Products and Services group performed as expected in the fourth quarter with sales, income and margins declining due to the reasons outlined very well in today's press release. The outlook for this group, however, is favorable. And we do expect year-over-year improvement particularly in income and margins.

Gas Technologies, again consistent with our expectations. This segment improved performance year-over-year. This improved performance was achieved despite higher commodity costs which increased LIFO cost of sales and thus decreased operating income and margins. We do expect that the Gas Technologies group will perform much better in 2007.

In light of our recently announced acquisition of Excell Materials and the expected divestiture of the Gas Technologies segment there are several important points that we would like to make regarding the outlook for 2007. Beginning with the first quarter of 2007 the results of the Gas Technologies segment will be reported as discontinued operations. However, as we stated in the press release this morning, the announced sale of Gas Technologies is not expected to be dilutive to 2007 earnings from continuing operations. Let me explain why. There are three primary reasons for this. First, the outlook for our global markets, particularly Access Services and Mill Services, is favorable. Secondly, several new projects including small bolt-on acquisitions that are expected to come on stream during the year will contribute positively to earnings. And finally, the expected accretive results from the recently announced Excell Materials acquisition will also contribute to earnings. The Excell acquisition and several other projects that will come on stream later this year will be fully funded by the proceeds from the sale of the Gas Technologies business. Thus, we are reaffirming our EPS guidance from continuing operations for 2007 of $5.05 to $5.15.

Again, to be clear, this guidance excludes the results of Gas Technologies because they will be reported separately on the income statement under discontinued operations. Gas Technologies earnings under discontinued operations for 2007 up to the date of sale will be in addition to the guidance from continuing operations, to arrive at a consolidated net income and consolidated diluted earnings per share number.

Our outlook for the first quarter of 2007 from continuing operations is in a range of $0.81 to $0.85, and that compares with an estimated $0.77 last year. The reason last year's number is an estimate is because a separate tax rate and other allocations must be made in the first quarter as a result of the discontinued operations treatment of Gas Technologies. The first quarter 2007 guidance also takes into consideration that the Excell acquisition has not yet closed and that several other growth initiatives or projects will not come on stream until the second and third quarter of the year. As we stated in the press release, the decision to divest our Gas Technologies business better positions the company to accelerate its effort to grow the global industrial services businesses.

The divestiture of Gas Technologies greatly improves the profile of Harsco. For example, using the 2006 results on a pro forma basis, Harsco's profile improves as follows. 2006 pro forma services revenues increase to 84% from 74% as just reported. Just as important, operating margins of the company increase by 90 basis points to 11.4% from 10.5%. We believe that this profile makes the company easier to understand and a more attractive investment. And that completes my comments. I thank you. Derek.

Thank you, Sal. Being somewhat of an insider here that was very clear to me. And I know that the detail and the complications clearly are evident, but we would be interested to receive your questions now and hopefully clarify for you any issues that you may have. So we will take the questions, if we may.

(OPERATOR INSTRUCTIONS) Jeff Hammond, KeyBanc Capital Markets.

Good afternoon, gentlemen. I guess a couple questions. First on the moving pieces within the outlook. Sal, you mentioned three moving pieces. I was wondering if I just take your guidance per your December meeting Gas Technologies would have contributed somewhere along the lines of $0.45 to $0.60. Obviously you're replacing that with some other things. Can you just give us a little more color in terms of those three drivers as to maybe order of magnitude or individually, how those three things make up that piece of the earnings that is moving into discontinued operations?

I think, Jeff, that the order of magnitude has been already expressed in the guidance we've given. We've said that we are not altering the guidance and you've identified what the previous contribution was, and so that is the kind of [basic math] that we can do. What is important, I think, to note here is that it is the chronology and the timing which are the most important issues here. And clearly, the sooner we can get deals done and they are contributing, that is what we are focusing on. Their potential, as Sal has said, to modify the profile of the company and clearly it's earnings capability with higher margin opportunity and what we are focusing on, and so timing is important. The imminency of the closing of Excell is an important matter to us, and the length of time it takes clearly to dispose of the GasServ group are also important. And so I think on this one the impact is more about timing than the mathematical replacement of one contribution to the other, and I think in Sal's discussion he did make the point that the guidance does exclude the discontinued operations section of the P&L account, and clearly that in itself is I think an encouragement. But that is an accounting matter, and I think that intuitive observers will understand that the overall, as Sal said, the overall pretax consolidated results should show significant improvement over last year, particularly in the early part of the year.

Jeff, just real quick, all three are equally important, okay?

Okay. And then you stated a range of margin targets for each of the businesses at your December meeting, and then you also laid out growth rates for '07 for Mill Services and Access. And I am wondering just in light of some of the moving pieces maybe what has come in as a stronger fourth quarter, what you're seeing on the current outlook and then taking into account Excell. How should we look at those margin targets, the same or differently?

I think what we are going to have to do is come out with new guidance and update all the charts, and I don't think we are prepared to give that guidance right now, Jeff, because I think we need to relook at those and do those in an orderly fashion like we did at the December conference.

I think, Jeff, if you use last year as a pattern, you'll notice that every quarter we modified our guidance, and it was up. Because it pays attention to the dynamic nature of a business that is in the process of some degree of transformation and the fact that we are actively engaged in doing things. And I think that you can expect, as I said in New York, what you can expect is hard work of execution and accomplishment, quarter by quarter. And then a realistic view as best we can of the next quarter, and guidance for the rest of the year. That has been our traditional pattern, and I don't think that we are going to change that. I will confess to you that to be a little ahead of even our own thinking in the fourth quarter was, as we could see the quarter developing, not so much as a surprise to us, but we were very pleased with the results. And certain things did come on and perform better. And frankly, better than we had considered ourselves in fourth quarter. But I am pleased to say that that momentum is continuing, and as I say, if you use 2006 as the model and pattern for the kind of way we treat guidance, then that will stand you in good stead.

And then one final housekeeping. Tax rate for '07, is that still 33 or does that change in light of --

We'd say, Jeff, in the area of 33%. For example we ended up the year -- we thought we would be in the area of 33%; we ended up at exactly at 32.3%. It was a little lower than we expected. We thought it would be like 32.8 or something like that. I don't see that changing materially for '07. So if I had to give you a number I would say closer to 33% than to 32%.

Okay, perfect. Thanks, guys.

Curt Woodworth, JPMorgan.

Good afternoon. In looking at the Access business and thinking about the margin profile there going forward it seems like you have had pretty high incremental margins every quarter, then they started to slow down a little bit this quarter which on pretty good top line growth. I am wondering, are you seeing any change in the margin progression there as you look out over the next year, either from mix shift or reasonable variances in margins? And also can you comment on regionally what you're seeing in the construction market? We've been hearing that's been a little bit softer in the U.S., very strong in Europe; just wanted to know what your insight is to that.

There is a bit of seasonal impact obviously in fourth quarter which does affect the margins. It tends to be a lower quarter because of the season. We were, however, helped a little by a rather friendly seasonal impact of the weather. And regarding the other part of your question, I will be addressing our view in my closing comments of the worldwide nonresidential construction sector and our participation in it. If I can hold my response to that at the end, because I think you've asked an important question concerning margins and outlook. And I had proposed to do that. So if you will indulge me until the question time is over I will make some comments about that, Curt.

If you look at -- I am not quite sure I understand your question. If you look at 2003 as a base, which was our low number, 6% for the year. And if you look at every quarter starting from 2003 out, we increased margins basically every quarter. Like for example if you use the fourth quarter '03 was 6.9%, '04, 7%, '05, 9.7%, '06, 10.3%. In this business the third and second quarters are by far the best quarters because of obvious reasons, construction and maintenance and because of the weather. And again if you look at the second and third quarters starting again with '03, 6.8%, 7.8%, 10.3%, 13.6% -- that was the second quarter and so forth and so on. So when you look at each quarter we've progressively improved margins, and it has been a constant pattern for the last three years using '03 as a base. Now certainly at some point it's got to start leveling off.

I was just referring to the fact that your year-on-year delta, your annual improvement per quarter has been running anywhere from about 200 to 300 basis points this year. And in this quarter you were up 60 basis points with an organic growth level that was among the best you've had all year in the segments. I was just wondering if you are seeing a little bit of more moderate margin because you obviously can't go up 200 basis points per quarter. But also I don't know if there was any mix or shift there. I understand the sequential movement for seasonality.

We do have some mix. For example, we bought that Cleton Industrial Services multicraft business in Holland in the middle of the year. That business tends to have higher revenues but lower margins. That was like a $60 million a year business. So that, I mean to your point, that certainly had some impact on the quarter margins. Modestly, but it had some impact, no question about it.

And I guess in terms of the Mill Services business, Derek, with thinking about globalization and you have Tata now buying Corus and Corus is your number two largest customer. Do you see any implications there? And also what is your view on the steel industry has had a pretty big up cycle the last three years; probably the most prosperous time for the industry in 20 years. Does that in your conversations with these executives, are they more willing to outsource in this environment, or less willing because maybe they are -- the cost structure isn't as hard to improve as it was say three years ago?

Consolidation of the industry has been friendly towards us and not otherwise. Of course, you are doing a lot more business with the consolidated group whereas you were doing business with, let's say with Mittal independently of Arcelor, you are now doing business with the same company. I would remind you that we do have long-term agreements with these people, which the successor of companies inherit and because they have good knowledge of us and we treat our customers without favor or fear. We do not, there is no preference given and we act on a confidential basis. And we form close working relationships with them. And so that is a matter of ongoing confidence. And it has been good rather than bad for us generally speaking in most cases. As far as the Tata acquisition of Corus is concerned, we have witnessed doing business with British Steel Corporation, as they were known then, and at the same time doing business with Hoogovens. British Steel merged with Hoogovens and formed Corus. Corus has gone on to become a strong corporation, and now is the subject of this bid if it goes to closing. Tata of course are clearly a different animal and breed of cat to CSN. CSN happen to be a large customer of ours in Brazil where we have a strong presence, and Tata presently are not a customer of ours. But if you look at the profiles of the company and what Tata actually have taken on here, it is very much a kind of a reverse takeover of smaller steel interests with larger steel interests. And our guess is that Tata are going to need the technology, the people and everything else that goes with this kind of acquisition. And from that standpoint, of course, with our long-standing relationship it might open up other opportunities for us with someone with whom we don't enjoy serving at the moment. So we are not -- we are really not concerned, and again regarding the last part of your question, competitiveness etc., I think we make it rather clear that -- and as Sal did on a couple of times in what he said and what I said, we are not about to put our prices up with our customers. These are long-term relationships and partnerships where both of us, we and our customers, work in these partnering for savings concepts. We are cutting our costs. We are all of the time investing, as well, in new ways that we can become more efficient, we can be competitive with our customers in order to discourage any thoughts in their minds of reducing the amount of outsourcing they do. And to date we've been very successful in that. In that the tendency is to outsource more and more and for them to focus on their core interest which is to make steel and to sell steel. And it is an industry which I have backed and we as a corporation have backed and are proud to be associated with because a great deal is going on in the steel industry at the moment, and all of these companies are making enormous efforts in a highly competitive environment to serve their shareholders well and to create greater value. And we have a good and solid position in that industry. We are not complacent. We will remain competitive, and we will serve them to the best of our ability. The attraction for us is the fact that where you've got a predictable, long-term business with a backlog, if that's the word, of contracts exceeding $4 billion dollars and if we show up seven days a week, 24 hours a day we do not become complacent, but we serve them to the best of our ability. And they get the savings they are looking for to make them competitive. We feel good about that. And I assure you and we have assured our customers that that is what we'll do. And I think I will address the outlook to the question on Mill Services the same time that I address the Access equipment business, if I may, Curt.

Thanks for your comments.

James Gentile, BB&T Capital Market.

Good afternoon, guys. In reviewing your guidance I was wondering if -- and you mentioned the aspect of timing and the effect of this guidance. Is there any inclusion of cash proceeds from the expected divesture of GasServ and subsequent -- I don't know, perhaps use of that, included in the guidance?

Yes, I don't know if you picked up one of the comments I made in my opening remarks is that the proceeds from the sale will be used for paying off the Excell acquisition, as well as several projects that we have underway, particularly in Access and Mill Services that will come on stream later this year.

So the cash proceeds from the GasServ sale are technically included in this guidance here. Okay. And then you basically threw out those charts from your December analyst day with regard to some of your growth expectations, particularly for your two key businesses Mill and Access. If I were to review the '07 forecast and make the appropriate adjustments for the GasServ divestiture, where in your opinion of those two businesses would see the greater margin expansion potential?

I think we just said ad nauseum that the Mill Services margin expansion comes through a lot of hard work and cost reduction. You are not going to see significant changes in the margins of Mill Services. I think if you read carefully the comments that we made in our opening remarks I think it is clear that it comes from cost reduction initiatives, partnering with our customers and so forth and so on. So the best opportunity really lies in the Access Services business as we continue to globalize the business. Even though we believe we are the most global of all Access Services companies on the planet, it is still a very, very fragmented industry. There are still a lot of geographies that we have not penetrated. We are focusing right now on topline growth. And we are investing our money prudently. There are a lot of opportunities to do that.

Sal, could you remind me and remind us of the growth track of the company, let's say in the last four years? I know it has gone from something really quite modest and small, and I do know we went through the billion dollar mark in 2006. What is the record of growth?

You have the chart there from December -- I don't have them with me, but you saw clearly the growth, the revenue growth levels of both Mill and Access have just been extraordinary.

There's no question about your past performance, certainly. Just one more clarification, then. If I were to -- because Excell Materials will be included in the Mill Services segment, correct?

That's correct.

So from an absolute margin perspective, aside from the fact that Mill Services, obviously slow and steady cost-cutting, with the blend in Access, will the absolute number compared to your December guidance in Mill be substantially higher than perhaps the margin expansion potential driven by the organic growth being seen in Access?

No, no, it shouldn't be.

Okay. That's all I wanted to know. Thank you.

Yvonne Varano, Jefferies.

Can you give me a little idea of why you haven't been a customer for Tata in the past? Is that because they had somebody else doing your services or if they have just done that in-house?

Tata is an Indian company and you may recall -- those with a little more gray hair like myself remember the problems that I had in India and how we dealt -- we had a joint venture arrangement with the Indian government, the Steel Authority of India Ltd. It was nothing but pain and agony. And eventually I persuaded them to buy us out at a very heavily discounted price and walked away from India. And so we did not do anything privately in India simply because we were dealing with the Indian government as a partner. And I guess Tata didn't feel they wanted us as it was called then FSNL, Ferro Scrap Nigam Ltd. to deal -- they didn't want to deal with the Indian government. Or us. That agreement, that was over five years ago, and there was in fact a noncompete agreement between us and FSNL when we left. That agreement is expired, and I guess we are now open to reentering the Indian market, but perhaps a different strategy.

India is not much different than some of the other countries like Japan and South Korea and so forth, where they tend not to outsource. But that is all changing. It is changing across the globe, and I think you're going to see, particularly given the rapid consolidation of the steel industry, the globalization of the steel industry, I think you are going to see a mindset change here and we're starting to see it. And I think you're going to see more outsourcing across the globe instead of less.

Okay, and then I know you've talked about deploying some of the proceeds from Gas into new projects. Should we assume that that is in the acquisition pipeline or are they organic growth opportunities that you can talk about?

I said both in my comments. I said that the three things that are going to make up the loss of the earnings from Gas, one of the three is both bolt-on small acquisitions and organic growth projects in both Mill and Access Services.

Are there any organic projects that you can talk about in more specifics?

No, I mean we are in new markets, existing markets, you name it. It is just there is a lot of stuff going on out there that we are looking at very closely, and we are starting to invest or will be investing during the course of the year.

Okay, just similar like we've seen in the past. It just sounded like you might have some larger projects lined up.

No, no. It is just a series of projects that when you add them all together, it is going to make quite a contribution. Again, one-third of the puzzle that we talked about.

All right, great. And then, last thing. You had mentioned in Engineered Products that the quarter had a negative impact from commodity costs. And I was wondering if you could give a little more specifics there, because I thought the trend for steel prices particularly was down during the quarter.

Believe it or not actually steel prices were up quite a bit, at least as they were in our portfolio, if you will, of inventory. That is, the way you do the commodity prices, not to make it too complicated, under LIFO accounting, you have to measure the inflation year-over-year. It just happened that the inventory --that the steel that was in inventory on December 31, '06 was much higher than it was December 31 '05. And hence the significantly higher inflation which results in higher LIFO cost of sales and so forth and so on.

Okay, so that was more a LIFO issue than it was specific change in prices during the quarter?

That's correct.

Okay, perfect. Thanks very much.

Bill Fisher, Raymond James.

Just following up on a couple things. One on the GasServ side, I know on the process you'd like to have the proceeds and divestiture done sometime in Q3 or what not. But just kind of curious if the marketing of it was already underway, if you had any expressions of interest, or if that process is still a month or so away from starting.

The process has started, Bill.

And you do plan to sell it as all one entity?

That is our present position.

And then totally separate, Sal, you were real clear on the detail of the Mill Service margins and cost reductions would be the driver of any improvement there, but just one thing on the energy cost. I know in Q3 you thought there might not be any benefit from that. But it seems like they have fallen further, and I'm just wondering if big picture, you might have a little tailwind there in '07 versus '06, because I know that has been a big headwind in the last two or three years.

It is possible, Bill, sure. If they stay at these levels for the next twelve months -- don't forget it takes a long time for these things to work their way through the system, if you will. But if they were to stay at these levels for the next twelve months, certainly there would have to be some positive affect.

Okay, great. That's perfect. Thank you.

Ted Wheeler, Buckingham Research.

I wanted to just if I could get a little more commentary on Excell. Is this an industry where again much of the work that they do is done in-house? Is it a market that is -- how does it scope in market size relative to the steel mill services that you perform. I guess there are some additional products to add to the portfolio to penetrate existing customers? Is that part of the story as well?

I think if you look at again the press release that we issued on Excell, I think it pretty clearly says what they do. They are specialists. They provide on-site services.

Do their customers though tend to do it in-house, and therefore you've got --.

It is no different, it depends on where you are at. It depends on where you are at. There is a need for some of the higher value metals that they extract throughout the world, particularly in certain parts of the world. And I think there are opportunities to grow this business. For example in places like Asia and so forth and parts of Europe. And so, that is where we are going to use Excell to accelerate their growth by taking them to those markets on the back of our MultiServ business.

Will you be supplanting other people doing this or will you be adding a service to --.

We'll be adding a service that is needed by the mill.

And it is now being done by somebody else or not being done by themselves or not being done at all?

Being done by the mill themselves or it is not being done at all by the mill. And they have an urgent need because environmental regulations and so forth and so on. So it is something that really not a lot of people are doing other than the mills themselves. And like I said in some cases they are not doing it at all and they need to do it.

How is this market size relative to just the steel mill services you are doing that MultiServ is doing?

It is not just the ferro side. It is a non ferro as well. So they do titanium, ferro chrome, stainless, you name it. Every kind of metal you can think of. So the market is vast.

It sounds like you are excited. I was trying to get just a little more detail on it.

One of the attractions, too, is that it is obviously a very green-friendly environmental business. Some of these minerals and byproducts in the processing of certain exotic metals do have serious issues environmentally. And what attracts us I think is the green emphasis here, that this is a business which clearly will make -- has the potential to make very significant contribution to solving some of the environmental issues, which mills face.

It does sound very exciting. Congratulations on getting it. One other quick question. On maintenance CapEx how do we track that? Should we just think of that as growing in line with revenues?

Yes, you do. That is exactly right. And right now we seem to be running at about 45%, 55% growth versus maintenance. That has not changed much over the last couple of years, so we don't expect it to change in '07. And you are right, obviously as revenues grow, you need more maintenance CapEx to sustain that revenue level.

But you'll get a slug of cash from the divestiture, one-third of which is going to go in I guess to CapEx, so that ratio should change this year, though, wouldn't it? The growth versus maintenance ratio?

Yes, it was low.

No, he's saying that the proceeds -- we are going to use part of the proceeds from Gas for some of these organic projects, which is true. But what that means, though, if you look at our free cash flow -- when I was saying everything we just said, we are still going to have positive free cash flow, which can be used for debt reduction, more than likely will be used for some debt reduction. So you will see debt reduction this year, as well as -- the percentages can stay the same but you can invest say $400 million in CapEx and so forth. We are reloading the balance sheet. We are getting the balance sheet to an acceptable debt to cap ratio, and that gives us the opportunity to continue to grow particularly these two global platforms.

Thanks. Great quarter.

Steven McBoyle, Lord Abbett.

I actually also wanted to try to get a better appreciation as to the opportunity set in terms of scale at Excell. Maybe you can just first refresh me in terms of what the '06 sales were and what you are anticipating for '07.

'06 was $100 million, roughly, and we do expect to do a little bit better in '07. But again, when you think of that puzzle we just talked about the three pieces that's going to fill the gap for Gas. As we said we'll have organic projects in there. Some of those will be in Excell as well because as we just talked, there are opportunities throughout the globe. So some of that money will go in there, as well. I don't want to give you an exact revenue number, but certainly it is going to be better than $100 million.

And you would anticipate doing that out of, I guess the nine locations you currently have and --.

New locations, globally. They were just starting this process. There is, as I mentioned there are opportunities in Asia, opportunities in Europe particularly. Those are the two markets we are focusing on.

And asked another way, if you were to execute the opportunity as you see it over the next couple of years, what could Excell represent, and what could the market represent if there are other Excell's that you could fold in?

I think it is premature to comment on that right now.

Our goal obviously to make it as growth oriented and as big and as profitable as we can within our financial resources. And given the opportunities. So all I can do is tell you that we've demonstrated historically that we are very prudent in our acquisition strategy. We have to be confident that there are growth opportunities, and we will apply all of our management expertise and the resources available to maximize the opportunity with the property. And it will be as big as it will be, and it will be as profitable as it will be, if we successfully execute our strategies. All I will say to you is this, that we are not short of opportunity, and so it is up to us, I think.

Very well. Sal, if you could just clarify or just repeat a comment I thought you had made with regards to if you were to pro forma 2006 for Excell, could you just give those numbers again, please?

It was not Excell. It was Gas. I said if you take Gas out, Harsco's profile changes as follows. We did 74% services in '06, that jumps to 84%. Margins go from 10.5 to 11.4. And also, it reminded me of one thing I failed to mention -- this gives me an opportunity to complete this -- our international profile changes quite a bit as well. In '06 we did 62% of our revenues were outside the U.S. Taking Gas Technologies out of the equation that goes to 68%. So almost 70/30 there. So the profile of the Company does change quite a bit with the divestiture of the Gas business, and we think all for the better.

That's helpful. Masterful execution, gentlemen.

(OPERATOR INSTRUCTIONS) There are no further questions at this time.

Thank you very much. We've much appreciated obviously the intuitive questions, and we hope we have been able to give you some better insight. Clearly we are pleased with our fourth quarter and full-year 2006 performance, and again as we've tried to indicate to you we will continue to focus on executing our strategic objectives. We are going to continue with our margin expansion initiatives, and we believe that 2007 is another year of opportunity for us. And given the many concerns influencing the equity markets today, I feel somewhat compelled to spend just a minute or two on how they affect Harsco's operations.

With regard to the kind of vacillation of economist's opinions on the U.S. economy, I'd just remind you that over 60% of Harsco's sales and over 70% of its earnings are generated outside of the United States, and as I have mentioned to you many times before, this is no accident. The company has worked very hard to ensure a global balance of its operations, thus giving it protection from the downturn of any country's economy or actions of any one central banker. Much has also been written about the downturn of the residential housing sector in the United States. One only has to look at the results from Harsco's Access Services segment to realize that not only is a significant portion of the revenues of this segment generated outside of the United States, in fact over 80%, but that we have little domestic or global exposure to the single-family residential housing sector. And we are, as a matter of record, and you've seen the press releases, we are participating in numerous long-term significant projects around the world.

Lastly, I would like to comment on steel production, or perhaps more appropriately, what seems to be an unwarranted fixation with weekly estimates of domestic steel production and performance of steel companies in that particular sector. Over 80% of our Mill Services revenues are generated outside of the United States, from 160 mill sites in some 33 countries, which signifies balance and a manageable risk profile. Here again, our global balance continues to serve us well as evidenced by the results reported today for Mill Services. Further, when mill production is cut, we often continue working, managing raw materials, enhancing finished product and reducing environmental impact for the mills we serve.

And while Harsco is clearly focused on running our global business and increasing -- and let me emphasize this word -- those of you that have been with us for a long time know that the Board of this company give me and my colleagues enormous support in growing this business with long-term benefits in mind. And I would emphasize that. It is long-term and it is shareholder value. And I thought it important to spend a minute reminding everyone of the balance, and the consistency of earnings, that the successful implementation of that industrial services strategy has given to Harsco's operations.

With much experience in running public corporations from my early business career, the greatest pleasure it gives me is to see people come in and invest in the company, go out when they think it is appropriate and make money. And other people come in and go out and make money. That is our job. The creation of shareholder long-term value and encourage people to invest in this business. I liken the company to being a ship. You have a management team that is on the bridge and in the engine room, and it is your pleasure to get on the ship and get off the ship when you like. But we will continue to run this business with the long-term in mind and executing on what we believe to be appropriate strategies. We deeply appreciate, I can assure you, your interest in us. And I can also reiterate as I have done previously, our commitment to continuing with the progress that we are making. And we look forward to seeing many of you during the year and talking with you, if you would like any further clarification on the issues that we are dealing with.

So thank you for your attendance today. It is a very substantial attendance. There were I think a record number of people in on the call, which obviously is a demonstration of interest. And we thank you for that, and we hope that we can continue satisfying your requirements. Thank you.

Thank you for participating in today's Harsco Corporation fourth quarter earnings release conference call. You may now disconnect.