Enviri Corp (NVRI) 2007 Q4 法說會逐字稿

Good afternoon. My name is Arnica, and I will be your conference facilitator. At this time, I would like to welcome everyone to the Harsco Corporation fourth 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. 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 of Harsco Corporation. Mr. Hathaway, you may begin your call.

Thank you very much. Good afternoon, ladies and gentlemen, and welcome to this conference call, which principally will be dealing with the year 2007 and its fourth quarter. With me in the room today are Gene Truett who is our Investor Relations Principal and also Chief of Credit Control for Harsco Corporation; Ken Julian, who is our Director of Communications; Stephen Schnoor, who is the Chief Financial Officer, formerly Controller, who became the Chief Financial Officer on January 1st of this year. He was present at the last conference call and he's present with us here today. Mark Kimmel, who is Chief Counsel, Board Secretary; and Sal Fazzolari, who is our new Chief Executive Officer, formally our Chief Financial Officer, as you're aware. It's a very considerable pleasure obviously for me to conduct this, what will be my last conference call in the long career that I've had with Harsco Corporation. And most of the meeting will be I guess led by Sal, our new CEO, and the gentleman who we anticipate will become the Chairman immediately following the annual meeting on April the 22nd, 2008. You will understand the particular pleasure that it gives me personally to account for the results of the year and the fourth quarter. They're quite self-explanatory in the press release and all I can say is, as a summary for the year, we did what we said we were going to do and more and that all of the principal objectives that we laid out in 2006 relating to 2007 were accomplished, plus a little bit. So without any further adieu, I'm going to hand the call over now to Mr. Fazzolari, who will give us a lot more detail on the results. Thank you, Sal.

Thanks, Derek. I do need to have Mark just briefly read the Safe Harbor statement before we commence comments. Mark?

Okay. Thanks, Sal. Good afternoon, everyone. As we do at the beginning of all of our calls we just want to let you know that we will be having forward-looking statements in our discussion with you today. These statements relate to the future of our business, our operations, our results, economic expectations and other aspects relating to and affecting our business. While what we say today is based on the best information we have available, it is possible that the results could differ from what we tell you today. We've listed in our SEC statements reasons and risk factors that affect our business and these could be the reasons for any difference that could occur. We invite you to review the SEC filings at your convenience. Also I would like to remind you that replays of this call and related information are available at our website. Please take the time to access that at your convenience and you can also access replays at that website. Sal?

Thanks, Mark. Well, good afternoon, everyone. Certainly it is a pleasure to be here with you today. We were obviously very pleased with the fourth quarter 2007 performance from continuing operations. Sales, income, diluted earnings per share and operating margins were all records, underpinning exactly what Derek just said. Also, the overall fourth quarter operating margin for the company was quite pleasing to us as well where we hit a record 11.4%. And that's an 80 basis point improvement over last year's 10.6%.

Additionally, we are very pleased with the improvement on return on invested capital for 2007. The return on invested capital from continuing operations improved by approximately 120 basis points to 11.8%. Margin expansion and improvement in the return on invested capital of course all translates to value creation. This value creation is captured in what we call the measurement of EVA or EVA performance. For 2007, our EVA performance exceeded the target by nearly 400%. I would also like to remind you that the annual EVA target of Harsco is set independently by Stern Stewart, our EVA consultant, and the Management Development by the Compensation Committee of the Board of Directors. We don't set or control the EVA target. We just simply try to exceed it.

Staying with the full year results, there are some other salient points I would like to make regarding the overall exceptional performance of 2007. Operating margins for the company overall for the year, a record 12.4%. That's a 100 basis point improvement over last year's 11.4%. Our strong performance, we believe, was underpinned by a well-constructed and well-balanced global portfolio of substantially industrial services businesses that we believe are well-positioned, both geographically and operationally, to continue their forward momentum in 2008.

This balance was manifested well in 2007 in the overall operating income of the company. Full year operating income was $458 million, with Access Services accounting for 40% of the total, Minerals and Rail accounting for 31%, and Mill Services accounting for the remaining 29%. We believe that's balance.

Sales increased 22% in 2007 to a record $3.7 billion. Organic growth contributed about 9%, while acquisitions contributed 7%, and foreign currency translation accounted for the remaining 6% of the growth in sales. This performance again exemplifies Harsco's balance.

We're also pleased with our business profile at the end of 2007. For the year, our industrial services portfolio accounted for 86% of total sales, while international sales accounted for almost 70% of total sales.

Our sales for the year were geographically balanced as follows: 19% of total sales in emerging economies such as the Middle East and Latin America, with 34% in North America, and the remaining 47% in Western Europe. To remind you, our goal for the next three years is to increase sales outside North America and Western Europe from about 19% to about 30% of total sales, off of of course a much larger base.

Noteworthy for the year was the sales growth of our Access Services segment. Sales grew by a very healthy 31% with approximately 19% coming from organic growth. Only 5% from acquisitions and 7% from foreign currency translation. The sales growth in Access Services was well-balanced throughout the world. We were particularly pleased to see that the key emerging economies, such as the Middle East and Eastern Europe, contributed significantly to the overall sales growth of the group as these economies continue to make significant investments, as you well know, in new construction and infrastructure modernization initiatives.

Also noteworthy for 2007 is that we did exceed our cash flow target of $445 million -- that is cash flow from operations. And that was exceeded by $27 million. So for the year we ended up with $472 million which is a 15% increase year-over-year.

Consistent with our growth initiatives, our substantial cash flows enabled us to invest a record $444 million in CapEx in 2007. This is an increase of approximately 30% over last year's $340 million. Importantly, over 55% of this year's CapEx or about $246 million has been invested in strategic growth initiatives, with the remaining 45% allocated to what we call sustaining the current revenue stream, what you may call maintenance CapEx. The $246 million in growth CapEx is in addition to, you may recall, the $148 million we invested last year in growth CapEx. So it's quite a substantial amount of capital that we've invested. Again, that's manifesting itself in the financials through organic growth, particularly that which we just outlined for you on Access Services. So based on this organic growth rate for 2007, as you would expect, approximately 68% or $168 million of the growth capital for 2007 was invested in fact in our rapidly growing Access Services segment. The remainder of the growth CapEx for 2007, or approximately $77 million, was invested mainly in the Mill Services business. So again, good balance there.

I'm also very pleased to report that our debt-to-capital ratio decreased 760 basis points during the quarter to 40.8%, from 48.4% at September 30, 2007, and 730 basis points from 48.1% at December 31, 2006. This substantial decrease is due to the cash proceeds from the sale of the Gas business as well as our strong internally generated cash flows from operations. If you look at on the net debt, if you back out the cash, we're well below the -- it has a 3 in front of it. We're well below the 40. I believe it's around 38%. We're quite pleased with where we are from a debt-to-cap ratio. In a nutshell, we ended the year with a very strong, very healthy and a rearmed balance sheet.

Now, let's look, turn and look at the fourth quarter performance both from an overall perspective as well as some of -- talk a little bit about each of the business groups. Overall sales for the fourth quarter for the company grew by, again, 21%, very strong. Organic growth contributed over 8% while acquisitions contributed approximately 6% and foreign currency translation accounted for the remaining 7%. We are certainly pleased with our strong organic growth rate, again, as it underpins our continued confidence in our future organic growth investment opportunities that we see throughout the globe. Cash flow from operating activities for the fourth quarter came in at about $99 million, that is $31 million lower than last year's record $130 million, but this was as expected. The main reasons for the decrease are two things. One is we expect a much higher tax payments in the fourth quarter year-over-year and also we've had a little bit of inventory or capital -- working capital build-up to meet the extremely strong backlog that we have at some of our businesses, particularly at HTT, as we get geared up for the China order.

Looking at the segments in a little more detail, as it has done all year long, our global Access Services business led Harsco's growth, setting new quarterly records for sales, operating income and margins. The fourth quarter was well-balanced and broad-based. We again were especially pleased with the excellent 18% organic growth of the business in the fourth quarter. Also noteworthy in the fourth quarter is the fact that operating margins in Access Services improved by 300 basis points to a record 13.3%.

Reflecting on the year, operating margins improved 190 basis points from 11.1% to 13%, and we are obviously very pleased with this performance.

The outlook for Access across our large and expanding global footprint is pretty much the same. We remain very positive. We see significant growth opportunities. And you should see similar investments in 2008 as you saw on average the last couple years.

On the Mill Services side, as pointed out in the Press Release, the Mill Service performance for the fourth quarter, again, internally as expected, it was down, due principally to a $4.7 million pretax charge, as well as $2.9 million in additional expenses as part of our overall initiative to optimize the organization. As you may recall, we spent quite a bit of time in December talking to you about how we are investing money in the business overall and particularly on the Mill Services side, as well, on better optimizing the organization. And we'd be happy to expand on that more if you'd like. These actions in the fourth quarter were of course part of the plan that we outlined to you both during the third quarter conference call, as you may recall, and at the December analyst meeting, and with the single objective to restore margins to more historical levels. And as we stated during our conference call, and as well as in December, we clearly are not satisfied with the overall performance of the Mill Services business. But, we do believe, however, that the path that we've taken now will show year-over-year improvement. So we are confident that we will improve margins in 2008.

Our optimism is underpinned by the actions that we've taken to date and where we are in our overall improvement plan. So I think it would be helpful to give you a little more color on that as to where we stand, particularly the points that we outlined to you back in December. Again, you'll recall that the main objective is to restore margins to normalized levels in 2008, back to somewhere in the annualized rate of about 10.5%. If you examine the prior three years' operating margins for Mill Services, say from 2004 to 2006, the annualized operating margins for Mill Services are really in a very tight range, 10.6%, 10.3%, and 10.8%, respectively.

Some of the key components of our margin improvement plan in no particular order include the following. One, you'll recall we said that we're in the process of renegotiation and, if unsuccessful, the exit from several older underperforming contracts, principally in North America. This is still an ongoing process, but we did exit one such contract in the fourth quarter. Our intention is to divest a low margin transport business in the UK -- that sale process will be underway in the first quarter and we do expect completion in either the second or third quarter. The execution of our geographic expansion strategy, particularly in Eastern Europe and Middle East and Africa, Latin America, and Asia-Pacific, where we generally do much better from a return standpoint than we do in North America and Western Europe. We believe we are making very good progress in this area and you should see additional press releases underpinning this throughout the year. We're also continuing to closely examine our global cost optimization initiatives as well as site optimization efforts. As you'll recall, site optimization includes among other things, reducing equipment maintenance costs and improving the overall efficiency of the site. We are optimistic that these actions will provide the appropriate momentum to restore the Mill Services' margins to more historical levels.

And also, underpinning this is and giving us more optimism are the recently published numbers on global steel production. You may have seen this, but the International Iron & Steel Institute reported that global steel production for 2007 increased 7.5%, or by 3.3% if you exclude China. So, still very good growth. You might further note that 2007 was the fifth consecutive year that world steel production grew by more than 7%.

One final comment on Mill Services margins for 2007. If you adjust for the reorganization and other one-time costs, margins in 2007 would have been approximately 9.7%. That compares with margins of about 10.8% in 2006. We believe that the gap of some 100 basis points can be closed in 2008 based on the plan that we just outlined for you.

Briefly on the Minerals and Rail Services Group, the Group posted exceptional fourth quarter performance with all business units posting higher income and higher margins. As a result, the Minerals and Rail Group as a whole achieved record operating margins of 16.4%, a 640 basis point improvement over last year. Both the short and long-term outlook for this Group is very favorable and we expect another strong year in 2008.

Let me now summarize our current outlook for you. Based on our continuing strong end-markets, numerous international organic growth opportunities that we see and our enterprise business optimization initiatives, we are confident that we will perform well in 2008. Our current expectations and outlook are for another record year. As a result, we are raising our EPS guidance from continuing operations for 2008 from a range of $3.35 to $3.45, to a new range of $3.40 to $3.50. Using a midpoint of this guidance, our expected 2008 results will represent a year-over-year improvement in diluted earnings per share of 15%. This will represent the fifth consecutive year of significant EPS growth for the company. We're quite proud of that record.

Similarly, our outlook for the first quarter of 2008 from continuing operations is for another record quarter. Using the midpoint of our guidance for 2008 to calculate the first quarter, diluted earnings per share from continuing operations in the first quarter are forecast to be in the range of $0.60 to $0.62. That compares with $0.54 in the first quarter of 2007. Using a midpoint of the range, this will represent an increase of about 13%.

I would like to make one further point on our guidance for the first quarter of 2008. Several initial research reports issued earlier this morning noted that this guidance was below current first quarter 2008 consensus estimates. I would like to point out that there were only two such estimates, that is, only two out of eight analysts that reported to FirstCall. One of the estimates was at $0.63, which generally is in line with our guidance, and the other estimate is an outlier at $0.77. I would strongly suggest that when only two such divergent data points are averaged, they tend to make the comparison to a consensus estimate much less reliable. Furthermore, I believe that when only two out of eight analysts provide estimates that it does not truly reflect a consensus estimate. I would also like to remind you that the company never gave guidance for the first quarter of 2008 until now. That completes my comments and now we would be very pleased to take your questions.

(OPERATOR INSTRUCTIONS) Your first question comes from Curt Woodworth with JPMorgan.

Hi. Good afternoon.

Good afternoon.

In terms of your comments around Access Services on the outlook, basically saying that you expect to see more of the same -- so are you essentially saying that you think you can continue to grow organic growth in sort of that mid-teens level? Is that kind of embedded in your guidance for 2008, Sal?

We never gave specific percentages, Curt. What we said is that the business will continue to grow at a healthy rate. We certainly see that business can grow at high single digits or better. And if you look at -- it's going to depend on the amount of capital investments we make this year. Right now I can tell you we're pretty much tracking where we were last year. If that continues for this year, I can certainly see a scenario where that business can grow at double-digit rates, revenue wise, yes.

And in terms of disaggregating the growth, I don't know if it's possible but how do you think about it in terms of actual end market demand relative to your ability to penetrate new markets, gain market share, just to try to get a sense for if we think kind of the market is growing high single digits, then --

We've got a lot of things going for us. First of all, we think we're the best in the world, number one. Number two is we're making a lot of progress in some very key markets, like the Middle East, Eastern Europe. We're also looking at parts of Asia, like India for example. We're looking at many other parts of the world where we're starting to get a footprint in. We're expanding in other geographies as well. And in addition to that, in some of the markets that we are in, we are gaining market share because of what we bring, the value we bring. We have we believe the most modern equipment. We have the best people and the best engineers and so forth. So we think we can bring a lot of value and so that's why we're so optimistic. We think this business has a lot of momentum. It's very focused and the opportunities are there.

And in terms of just resources for this industry globally or where you operate, are you seeing any shortages, any inability to meet demand which would potentially lead to a better pricing scenario next year?

There are pockets we see. Historically what happens in these markets is actually competitors rent equipment to each other instead of -- if there's a shortage of equipment you'll see, it's not uncommon for actually competitors to rent equipment to each other and we call it rent for rerent and that happens. But it's not a major thing, but that's one way you compensate if there is a shortage somewhere.

Okay. And can you comment on the acquisition pipeline or strategy now that the balance sheet is a little lower?

Well, certainly we're very pleased where we are. Like we said in the comments. We have a rearmed balance sheet and we're looking at everything. Like we always do. We look at share repurchases. We look at growth CapEx. We look at acquisitions and we're not going to do anything silly like overpay for an acquisition. So it's really going to depend on valuations. There's certainly numerous opportunities out there. But it always comes down to valuation and EVA and value creation. And we have an internal house rule and the house rule is that if it's not EVA and EPS accretive, we don't do that. And the final thing we look at raising the dividend as well, as we've done 12 to 13 to 14 consecutive years. We look at -- we're a balanced company. That's the way we run the business and that's the way we run the company and we look at where the best place -- if you look at the projected cash flows for the year and the strong balance sheet, we should be able to fund all the growth without adding any kind of leverage at all. Unless there's numerous opportunities, then certainly we're willing to leverage up a little bit.

Right. And from the seller's perspective, has there been any change in kind of valuation parameters that some of these companies are still expecting? Or has the bar been reset a little bit lower post the credit issue?

We're just starting to see that.

Yes.

Just recently there's been a little bit of an adjustment, which is -- believe me, it was needed, because the market has gotten way ahead of itself. Some of the EBITDA multiples we saw in some transactions we were bidding in were just ridiculous. We're very pleased and we welcome this change.

Thank you very much.

Next question comes from Jeff Hammond with KeyBanc Capital.

Hi, good morning or good afternoon, guys.

Hi, Jeff.

You did a good job articulating the progress on the Mill side. I just wanted to get a better sense of where -- what do you think the timing is for an inflection point where you start to see things notably improve and what are some of the swing factors therein?

That's a good question, Jeff. Production seems to be holding up well, which is good. We're starting to make some inroads on the maintenance cost issues, which is good. Fuel prices have kind of moderated, if you will, relatively speaking. So all those things are very good signs. We've taken some action with some contracts. So it's going to be a nice, even progression as the year goes on, Jeff.

Okay. And then there seems to be emerging concerns about non-res construction in the U.S., and Western Europe in general. Can you just maybe speak -- it doesn't seem to be showing up in your business, as you go out and quote projects are you seeing any pockets of weakness anywhere?

I mean, we're not seeing it, Jeff. And the thing is, you've got to be careful. People say Western Europe and they say the U.S. What does that mean? You got to look, see what markets we're in. Don't forget, we're very diversified. We provide formings, scaffolding, shoring, the whole thing. We provide industrial maintenance. We're in concrete forming. We're very diverse marketwise. Then you've got to look and see what areas are being impacted. In Europe, for example, you're seeing maybe a little bit more impact on the residential side like you're seeing here in the U.S. But the major infrastructure projects and the industrial maintenance, we're not seeing any slowdown. In fact, we're seeing a pick-up in some markets in some of those key areas.

Okay. Great. Final question, can you just give us a better sense with Excell being a newer business, how that business is from a seasonality standpoint? Is there much in the way of seasonality?

No, it's a little bit like MultiServ, in a sense that you have a little bit of -- January and December are not the two best months, they're the two worst months. Other than that, it's not too bad.

Okay. Perfect, thanks, guys.

Next question comes from Bill Fisher with Raymond James.

Good afternoon.

Hi, Bill.

Following up on Jeff's question, looking at the growth CapEx, I think you said roughly 70% of it was in Access. Do you have any sense if well over half of that was in more of your emerging markets or some color there.

Bill, that's a very good question. Believe it or not, actually it was pretty well dispersed. The U.S. -- I mean, we're making some very good headway in North America. Canada and the U.S. are making good progress. Eastern Europe, a lot in the Middle East, and a little bit in Western Europe and a little bit in South America with Chile and so forth. It's pretty evenly disbursed. We don't have a concentration where all the capital is going in one particular part.

You touched on some of the global production on the steel side. Noticing that the Chinese government put some export reduction or restrictions on steel I think in Q4. I noticed it helped some of the volumes outside China in the fourth quarter. Is that something your customers see a benefit from since you're more weighted outside China?

Yes, I think that's why we think production is holding up well. I mean, the Chinese, plus they've had a very severe winter, that slowed production as well. And you see steel prices have really held up. In fact, they keep coming up with higher prices every day, seems like, so the -- that seems to be working well for our customers outside of China, yes.

Okay. And just lastly, you mentioned Rail sales were down in timing in the fourth quarter. Do you have -- you said the record backlogs, but do you have a percentage on what the overall backlog on the Mineral side was up in the quarter?

I mean, all the businesses have superb -- Air-X-Changers has record backlogs, HTT has record backlogs, IKG's backlog is very strong. So you go through each of the businesses, every one of them has a very, very strong backlog. It's another reason we feel confident about '08.

Okay. Great. Well, thank you.

(OPERATOR INSTRUCTIONS) At this time, there are no further questions.

Well, thank you very much. Brevity is better than anything else, we think, because that may be an indication that people are at least pleased with the detail that has been given. That's what particularly impressed me, as now somewhat a little removed from the leadership and now we have a new Chief Executive Officer. But these things can be listened to again and the thing that impresses me about our CEO and the team's report today is the detail that we have given and more importantly, I think, the carefully chosen words regarding optimism for the future. There is a plan in place. I do believe that it will be executed and that are welcome listening to the quarter one report obviously sometime in April. That being said, on a personal note I want to thank you all for the support that you've given this company and I use the word company, this is not a personality cult organization. We've always worked as a team. But thank you for the support of the team. I hope that that will continue under the new leadership, as you play your part in assisting this corporation to achieve its goals and objectives.

And finally I would, knowing that many of the managers around this company are listening to this and to the gentleman that share this Board Room with me at the moment, I just want to say thank you to the team for all of their support and to say publicly -- I said this in December and I'm taking the opportunity again. This is a great corporation which I've been privileged to lead for many years and I'm very, very proud and I hope that people will regard the legacy that I leave -- the principal legacy is not so much the present performance, but a team that will even improve the performance in the upcoming years. So thank you. We look forward again to talking with you in April. And in the meantime, wish you all well. Thank you very much.

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