Enviri Corp (NVRI) 2007 Q1 法說會逐字稿

Good afternoon. My name is Tracy, and I will be your conference facilitator. At this time I would like to welcome everyone to the Harsco Corporation first quarter 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 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.

Good afternoon, ladies and gentlemen. It is a pleasure to welcome you to this conference call for the first quarter of 2007. I have with me today the usual team that participates in this event. Mark Kimmel who is our chief legal counsel; Ken Julian, Gene Truett, and Sal Fazzolari who is our President and Chief Financial Officer. Mark, would you read to us the Safe Harbor statement please?

Thank you, Derek. Our comments with you today including our prepared remarks, as well as our responses to your questions, will likely contain forward-looking statements. These statements relate to the future of our business and may address operations, results, economic expectations and other topics dealing with future performance. Our statements made today are based on the best information currently available. Future results could differ and differ materially from what we tell you today. Possible reasons for any differences between our statements today and actual results may be because of the occurrence of one or more of the risk factors and uncertainties which we have listed and discussed in our periodic SEC filings.

We invite you to review those 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.

Thank you, Mark. As reported this morning we achieved another record quarterly performance in the first quarter and clearly we're very pleased with the strong start to 2007. Of particular encouragement was the continuing strong and growing operating results of our global Access Services business, which set new first quarter records for sales, operating income and margins. The contribution in the first quarter of our new growth platform, Excell Minerals, was beneficial. Sal Fazzolari will now give you more details on our performance, and then we will take your questions and followed by any appropriate closing comments that I think are necessary. Thank you, Sal.

Thank you, Derek. Good afternoon, ladies and gentlemen. I would like to start by reminding you that for the first quarter, our Gas Technologies segment has now been classified as a discontinued operation. Also it is worth mentioning that the operating results for Gas Technologies improved 57% for the first quarter, so that business certainly is on track as we have promised. Their operating performance improved from $2.3 million last year to $3.6 million this year in the first quarter.

I would also like to remind you that all per-share amounts obviously reflect the two-for-one stock split that was effective March 27th. Let's move on to the results.

We continue to make very good progress on our strategic objectives as we've indicated repeatedly, that is for margin expansion and EVA improvement. First quarter operating margins for the Company improved 80 basis points to 10.3%, and that compares with 9.5% last year. In addition to the margin expansion, one of the most pleasing aspects for us is really the performance in the first quarter relative to EVA. We exceeded our EVA target once again for the quarter, and we are certainly well on our way for another strong performance for the year.

As we stated previously, the continuing overall strong performance of the Company is underpinned by a well-constructed and well-balanced global portfolio of industrial services businesses, and I think that was clearly evident in today's results. Sales for the Company for the first quarter grew by a strong 23%. Organic growth contributed 12%, while acquisitions net of divestitures contributed 6% and foreign currency translation accounted for 5%. Again this shows the balance of the Company that we can grow in many, many ways.

For the quarter our industrial services portfolio accounted for 86% of total sales. That is a very important number for us; while international sales accounted for almost 70% of total sales. Obviously both are records. Cash flow from operations for the first quarter was $42 million, and that compares with $70 million in last year's first quarter. The main reasons for the first quarter decline are working capital buildup in some of our businesses to meet very strong near-term demand, as well as timing differences in cash receipts. We do remain quite confident of hitting our cash flow target for the year.

I would like to now however take a few moments to further explain what caused the decline in the first quarter. As we stated in the press release, Gas Technologies, although being classified as a discontinued operation for U.S. GAAP purposes, has to be reported under cash flow from operating activities. Year-over-year, the Gas Technologies business had a negative operating cash flow of approximately $15 million. Again, that is due to very strong business activity particularly in the cryogenic side of the business. So this is a good thing. Similarly, Track Technologies also had a negative cash flow of $13 million, which was due principally to one item. Last year's first quarter had a $20 million cash receipt from a Chinese order where that was not repeated in the first quarter this year. Timing differences were also other major contributors to the decline in cash flow. For example, in excess of $30 million in key customer cash payments were received very early in April that were really expected to be received in late March.

Moving on, a particularly pleasing aspect of our first quarter performance was the operating balance that we achieved in the three growth platforms. Access Services contributed approximately 40% of total operating income while Mill Services contributed 37% with the remaining 23% coming from Minerals and Rail Technologies. We are also pleased with this operating balance because it validates again our strategy for developing a well-diversified and balanced global portfolio of businesses.

Consistent with our growth initiatives we invested a record $83 million in CapEx in the first quarter. This is an increase of approximately 24% over last year's $67 million. Out of this 45% - which again it seems to be running pretty consistent the last two, three years - 45% of total CapEx goes to growth initiatives; with the remaining invested obviously to sustain the current revenue stream or maintenance CapEx.

Finally, our debt to capital ratio increased during the quarter to 52.6% from 48.1% at December 31, 2006. This was due principally to the Excell Minerals acquisition. With our expected strong free cash flow for the year and the anticipated proceeds from the sale of our Gas Technologies business, our debt to capital ratio will improve during the year and return to more normal levels, while at the same time we should be able to continue funding our global growth initiatives.

Now let's turn briefly to the first quarter performance of each segment. Starting with Access Services, first quarter performance of the Access Services business was again broad based and exceeded our expectations. As previously noted by Derek, Access Services did set and post new records for sales, operating income and margins. We were especially pleased with the strong 24% organic growth of this business. Even excluding the effect of a $1.6 million pretax gain in the first quarter from the sale of a property, operating margins in Access Services improved by approximately 320 basis points, to 10.6%, and that is up from 7.4% last year. The industry outlook for nonresidential construction as well as industrial maintenance in many of our key markets continues to be favorable. We believe that the Access Services business continues to be an excellent vehicle for long-term growth as we continue to expand globally.

The Mill Services business performed relatively well in the first quarter considering the negative effect of unplanned maintenance outages at a number of mills, lower steel production in certain regions, higher maintenance costs and in some cases poor weather. Also, a $1 million provision associated with the termination of a contract unfavorably affected the results in the first quarter. Excluding the $1 million provision, operating margins in the first quarter were 9.2%, and that compares with 10.3% last year. We do remain optimistic that the Mill Services business will perform well for the remainder of the year, and margins are expected to recover to double-digit levels. In fact, as you may recall back in the first quarter of 2003, we had a similar quarter with margins at 8.9%, and we ended up the year at 10.4%.

With the slowest seasonal period now behind us and given an expected increase in steel production we should see the Mill Services business return to its more historical performance for the remainder of the year. This is further underpinned by our continued focus on business optimization initiatives, particularly Six Sigma process improvements and our "partnering for savings" initiatives with our customers.

With the acquisition of Excell Minerals our former Engineered Products and Services group has been renamed to more appropriately reflect the key growth platforms of this group. That is, Minerals and Rail Technologies. The group had excellent performance in the first quarter with higher sales and income; margins were 11.9%, the same as last year. We were pleased with the solid contribution of Excell Minerals to the group's first quarter performance. Excell is expected to make a further and growing contribution to the group results in 2007. Both the short and longer-term outlook for this group is favorable, and we expect year-over-year improvement in sales, income and margins.

Now relative to the outlook for 2007 and the second quarter, as we stated back in January the announced divestiture of our Gas Technologies segment would not be dilutive to earnings for 2007 for three reasons. The first reason was that we expected the global markets, particularly Access Services to perform very well during the year, and it has. Secondly, several projects that were expected to come on stream including some small acquisitions are expected to contribute to earnings, as well. And finally, the accretive results from Excell Minerals will also contribute. We believe that the record first quarter results validate this confidence.

As a result of all the above, we are raising our EPS guidance from continuing operations for 2007 from a range of $2.52 to $2.57 to $2.69 to $2.74. Again, to be clear this guidance excludes the results of Gas Technologies, which will be reported under discontinued operations. Our outlook for the second quarter 2007 from continuing operations is for another record quarter. Diluted earnings per share from continuing operations are forecasted in the range of $0.76 to $0.79, and that compares with $0.63 in the second quarter of 2006. This would represent an increase of 21% to 25%.

That completes my comments and I will turn the call back over to Derek.

Thank you, Sal. We will now take any questions that you may have, ladies and gentlemen.

(OPERATOR INSTRUCTIONS) Curt Woodworth, JPMorgan.

Good afternoon. You commented that you expect margins to improve in the Mills Services business over the back half of the year. Can you comment on whether that is going to be a function of better operating leverage or targeted cost savings opportunities, or mixed issues?

I think it's all the things I said. That is higher production, lower costs, our ongoing cost reduction initiatives, new contracts coming on stream. As we mentioned, we do continue to exit contracts that are not meeting the EVA performance and as new contracts come on stream they are going to perform better. So there is a whole series of things that affect that. But generally it is all those. It is cost and production, lower costs and higher production.

Okay, and on the Access business when you look at maintenance versus kind of the more project oriented business, can you give a sense of what the revenue breakout is? And also can you comment on the growth rates you are seeing on maintenance spending as well as on more of the project side of the business?

As we said, about 45% of our capital goes toward growth, and 55% goes toward maintenance CapEx. Now in the first quarter, though, for Access Services they did account for about 70% of our growth capital. So out of the $38 million in capital that growth capital that was spent out of the $83 million, $38 million was spent on growth; out of that about $26 million went to Access Services. They took a disproportionate amount which is consistent with what we are seeing. Our markets are very buoyant, we continue to expand in new territories and new countries and so forth and demand is very strong.

And you'd still characterize the demand in North America and Europe is very strong? Are you seeing any changes in trend growth rates there?

No.

Great. Thank you.

Jeff Hammond, KeyBanc Capital Markets.

Sal, at your December analyst meeting you laid out some targets for the businesses. Obviously there has been a number of moving pieces, acquisition of Excell, the divestiture, obviously a lot better results in Access. I was wondering if you could reframe those targets in terms of revenue growth and margin targets (multiple speakers).

This is not the forum to do that. Perhaps at some point this year we will have to do that in a different format but certainly it is probably something that needs to be done but I do not think this is the forum to do that in.

Okay. I guess in terms of Mill Services, given kind of the slower start to the year on the margin side do you have kind of a bias within that '07-'08 target of 10.8 to 11.3 where you might fall out? Do you get some margin improvement back half of the year?

Jeff, all we're going to do is just return to the norm. Sal has said that in the first quarter in the Mill Services group particularly there was one or two unexpected shutdowns and delays. But generally speaking, Jeff, it was on plan except for one minor reserve that we took at our instigation regarding a contract that we weren't too happy with the continuing performance. Last year as Sal reminded you, the margins ended up with what they ended up and whilst we were a bit behind in the first quarter the prospects are that the overall year will enjoy the same or a very similar margin. So that will mean that margins in quarters 2, 3 and 4 will need to exceed the average for the last year when joined to the margin in the first quarter. So we had that in prospect. We can see clearly where it is coming from. And that is what gives us to the present confidence to say what we've said.

To further underpin that, if you look at the past four years, there is nothing better than history, you look at the past four years -- Mill Services did 10.4, 10.6, 10.3, 10.8. That pretty much sums it up. I think we will be probably in that range.

That's helpful. And then on Access, it clearly outpaced your expectations as well as ours. Anything in the first quarter results, either project, weather-related etc. that you'd view as unsustainable?

No, there weren't really anything that any of us here could bring to mind regarding what affected the results unusually. It was simply that the Hnnebeck business continues to perform very strongly. SGB does very well. Patent is now picking up from all of the savings and the costs and the management restructuring that took place. And of course the significant addition to new products in the United States, which have been very well received by the market, and are causing this buoyancy in the United States. So we think that this, frankly, is a sustainable issue rather than being impacted by any unusual items. Particularly pleasing of course is the organic growth rate of the new acquisitions and the organic growth rate of Patent in the United States.

And final question on Gas Technologies. How would you characterize indications of interest and are you still comfortable with the previous timeframe that you laid out for getting that divestiture done?

We are at the point in that transaction whereby we are expecting in the next week indications of interest from the large number of people that have expressed an interest, both strategic and financial purchasers. And I am sure that process is on time and we will see in the next several weeks, I guess, where that is likely to lead us. But it is on time. The process is being diligently pursued by our investment banking advisers and the team here, and we will see where it leads us. The process is on time.

Perfect. Thanks, guys.

James Gentile, BB&T Capital Markets.

You commented on the strong organic growth profile at Patent. Could you refresh our memory in the total Access revenue, how much of the Patent -- how much of the total revenue is in the United States?

James, we typically don't break those numbers out, but you can back into it. When we say that 80% of our Access Services business is outside of North America, say so roughly 20% is in North America. So you can back into the number.

And the new organic, the new product platforms, have they been leveraged from the Hnnebeck bit of business that you acquired?

No, they are not; in fact they were uniquely discovered and brought to the market by Patent itself. And in fact it is a product line which we are moving out of the United States and we are using internationally. The reverse is also true, of course, that Patent from time to time has taken product lines from Europe. But this one was researched, developed and is being marketed by Patent in its own right.

Which product is this in particular?

It is the Pro-Shore product.

It is forming and shoring.

And then with regard to -- just one last question -- the Access business, I notice that you guys just initiated a short-term credit line for $200 million with some European banks. Could you kind of characterize why this near-term capital had been needed?

James that's just really to make sure we have plenty of capacity as we continue to invest in the business. As you recall, a couple things are going on. Typically the first quarter cash flows as you saw here, we were even a little worse than we expected for good reason. So you've got working capital needs. It is a lot of timing issues, and then you have the sale of Gas which we expect in the early, hopefully early third quarter. So that will all work out. It is just to give us added ammunition if you will because we don't want to miss these great opportunities we have, particularly on the Access side of the house, as well as our Minerals and Rail Technologies, have some good projects we are working on.

Just one last question where we are with regard to the change in strategy on the Track Technologies business; will we see an incremental capital spend as you move from a manufacturing to a service model there? Is there any reason to think that we would see an acceleration of spending over the next four quarters dedicated toward the Track Technologies business?

No, you won't, we've got it very clearly defined. We are expecting the requirement for an uplift in working capital due to the commencing of some longer-term orders. Those will be partially covered by necessary upfront payments by our customers because they will be for export. And so one tries very hard to manage our revenues with our expenditures clearly to manage our capital. But we may see a modest capital increase but basically, I think we will expand that business, but it will run well within its means.

So any pickup in the growth rate that we may see over the next year, year and a half or so out of Track Technologies will still be the sale, manufacture and export of these track, these rail grinders and whatever --.

Not exclusively so, but certainly I think the majority will be to fund large manufacturing projects, yes, and the sale into the export market, yes.

Thank you very much.

Bill Fisher, Raymond James.

Good afternoon. Just on the Access margin improvement, one other thing. I know the utilization I thought was pretty good last year, but if you look at either product mix or geographic mix, I was just wondering if that has improved as well. Say in forming and shoring or if you are getting better pricing or just a little more color on it, if those factors helped on the margin.

It's everything, Bill. The geography is critical. We're expanding in a lot of key markets throughout the globe and there is a lot of demand for our services. And so it is really by -- you have to look almost by geography to really give you -- we can't give you one overall answer. But certainly we are introducing a lot of new technology to our product set, like what Derek talked about Patent for example, that Pro-Shore formwork is state-of-the-art equipment that really demands premium pricing. Because it greatly accelerates -- it provides efficiencies to the contractor and this saves them a lot of money. And as you well know, that time is everything. So those are the kind of things, but we are doing that with Hnnebeck and SGB and so forth. So it is both geography, it is new technologies, it is all those things.

And on the products there, it sounds like the forming and shoring, the new products there are definitely a higher mix than they were a year or two ago.

Yes.

And on Excell is there going to be seasonality in that business, or how does that flow through the year?

Excell? There is a little bit of seasonality if you get a real bad winter but it is minor. If you get a severe winter of course the first quarter is probably going to be a little slower but not much slower.

Okay, and do you have them jointly bidding with you yet on any new projects, or is that a while away?

Absolutely.

Great. All right. Thanks a lot.

(OPERATOR INSTRUCTIONS) Yvonne Varano, Jefferies.

In the Minerals and Rail Technologies segment, which was the one portion of that business that did not have year-over-year sales growth?

Out of all the business units in there?

Yes.

I think it was probably IKG. I can tell you year-over-year revenue growth. It was Reed, actually. Every other business unit had revenue growth. Reed was the only one that was down, and that is because roofing is down a little bit because of the construction is down a bit on new housing.

All right. And then on the operating income side, Reed was down and which was the other one?

Reed and PK were down just slightly. Reed and PK were down very slightly, I mean $100,000 type thing, so very minor.

Why was PK down?

That is timing.

Just timing?

Yes. Again you're talking about very, very insignificant numbers here.

And then just on Track, is there any update you can give us from the China Ministry of Railways and what their expectations are in putting some orders through?

I got back from China last Wednesday, and I came back with a degree of optimism that there might be in the not-too-distant future that you see some very tangible evidence of the hard work that we've been putting in, in the last several months.

Great. Do you see anything more on Track coming through domestically?

We are just doing our usual thing in the United States. We continue to get orders, but from around the world and we are very happy with the progress we are making domestically and internationally.

Okay. Thanks very much.

Jeff Hammond, KeyBanc Capital Markets.

A couple follow-up questions. Can you provide an update on where you think your full-year capital expense is as well as cash flow from operations within the context of the new guidance?

You know the cash from ops targets is $445 million for the year; we are very confident we're going to hit that.

So that is unchanged --.

That is unchanged. The CapEx, I think we had given last December, I think as a target was about $320 million or something like that. We're going to be in that range.

That is subject to -- we have the cash, we have the cash flows and it is a subject of opportunities. Sal and I are going tomorrow after the shareholders meeting and a board meeting, tomorrow evening to Germany, and we are going to be making another assessment with our, particularly Access equipment people in Europe, as to how we might possibly accelerate that and take advantage of the opportunities as they are arising. So that should be an interesting few days.

And then Excell Minerals we only kind of had a sliver of a view based on when it closed, but I am calculating a revenue run rate based on what you disclosed from acquisition contribution closer to $150 million in revenues versus I think you said it was a little over 100 in --

I think you are high there, Jeff. It's probably going to be more like $120, $125 million. There were some backlogs and those kind of things. I think the two-month numbers you saw there is a bit on the high side. I think their annual -- we're expecting about $125 million for the year.

And finally, tax rate was a little low in the quarter. How should we be thinking about tax rate for '07 and going forward?

It should be between 32.5% to 33%, somewhere in that range.

Is that adjusted for Gas Technologies being divested? I would imagine that they would carry a higher tax rate.

It is, Jeff. It is adjusted for continued and discontinued operations. Yes, absolutely.

Okay. Thanks a lot.

(OPERATOR INSTRUCTIONS) Ted Wheeler, Buckingham Research.

Great progress. On the Gas Technologies sale, I think you mentioned within a week or so you might get some feedback. Assuming the feedback has got enough interest in it, what would be the next step and what would be the timing for the whole process from here?

We've stated publicly and I have no reason to change my view on this that we are expecting something to happen, if it does happen probably early in quarter three. Certainly quarter three sometime, and we are being very deliberate about the process and examining all of our options and we're clearly not in any special hurry on this.

Is this feedback then of information in the schedule that you had envisioned originally? In other words getting some feedback at this point in time?

Yes, I think I did say that, didn't I? What I said was it was a very deliberate process where detail is extremely important and there is a constant exchange of information amongst our team here. And we have a team appointed very specifically for this important project. And yes, there is a constant exchange of information and examination. And it is on schedule.

No, it sounded like it might be moving a little faster, that's all.

It's on time.

Excellent. Good quarter.

Thank you.

At this time there are no further questions. Are there any closing remarks?

Thank you very much, Tracy. Tomorrow is our annual shareholders meeting, and I will be saying to them, just like I am saying to you now, if there are no further questions it remains for me only to endorse with confidence the outlook which Mr. Fazzolari has so well defined. We believe that we have placed your company in a strong strategic position to continue to grow globally. We have very desirable, market-ready products and services. We have the international organizational structure and, most importantly the "A Team" personnel to execute our strategies. And perhaps most importantly, we have very exciting opportunities on a global scale.

I will thank the board, I will thank the employees and I will thank our shareholders for their support and assure you that we, the senior management team will continue to work to maintain and deserve that support. And in the absence of any other comments, the chair will now entertain a motion to adjourn, which is what I'm doing now ladies and gentlemen. Thank you very much for your support and for your attendance, and we look forward to having a similar discussion with you in July. Thank you.

Thank you for participating in today's conference call. You may now disconnect.

??

??

??

??

1