Enviri Corp (NVRI) 2008 Q1 法說會逐字稿

Good afternoon. My name is Crystal and I will be your conference facilitator. At this time, I would like to welcome everyone to the Harsco Corporation First Quarter Earnings Release Conference Call. All lines have been placed on mute to avoid any background noise. After the speakers' remarks, there will be a question and answer period. (OPERATOR INSTRUCTIONS). Also, this telephone conference presentation and 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. Sal Fazzolari, Chairman and CEO of Harsco Corporation. Mr. Fazzolari, you may begin your call.

Thank you very much. Welcome everyone to Harsco's first quarter 2008 conference call. It is an honor and a privilege for me to lead the call today. With me here today, I have Gene Truett, who all of you know well, our Vice President-Investor Relations, and Stephen Schnoor, our Chief Financial Officer. Before we begin the call today, I would ask Gene to please read the Safe Harbor statement.

Thank you, Sal. Good afternoons, 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 documents 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 this website at your convenience. And you can also hear replays at the website. Sal?

Thanks, Gene. As reported this morning, we achieved another record quarterly performance. Sales grew by 18% and diluted earnings per share from continuing operations, were up 24%. We are obviously quite pleased with our strong start to 2008, particularly given all of the economic turbulence in certain markets. We expect 2008 to be another record year for the Company. For the first time, we should see our revenues this year cross the $4 billion mark, and we should also see the continuation of our double-digit earnings growth. Most pleasing to us for the first quarter performance is the operating balance that we achieved.

Overall operating income for the Company was approximately $100 million for the quarter, with Access Services accounting for 38% of the total, Minerals and Rail for 34% and Mills Services accounting for the remaining 29%. We believe that's really good balance. We are particularly encouraged by the continued strong operational results of our Access Services business, which set new first quarter records for sales and operating income. Although operating margins were down for the first quarter, due to certain very explainable items which we'll get into, we are very confident that the margins for the Access Services business this year will be at least comparable to last year and we're also very confident that Access Services business will post another record performance in both revenues and income as well. We were quite pleased with the record quarterly performance, of course, of the Minerals and Rail Group. Sales operating income and margins were all records for the quarter.

As you know, or may know, particularly Gene and I have been going around and meeting with a lot of you, or a lot of our shareholders, that we have worked very hard over the past couple of years in building and reshaping this group, which is now, we believe, poised to grow and perform well in 2008 and beyond. 2008 should be another record year for the group. The Minerals and Rail Group has now become -- or has come, we believe, of age and is equal partner with other two groups in providing earnings balance across the three scalable platforms.

The Mill Services Group did not perform up to our expectations in the first quarter, due mainly to a significant escalation in fuel costs and the protracted renegotiation on certain contracts which have deferred by several quarters the expected improvement in margins. However, let me be clear. We are making progress and we are addressing the underperformance very aggressively. One of the most important actions that we are pursuing to improve performance is the implementation in the first quarter of our enterprise we call Lean Sigma Program.

We believe the Lean Sigma as a tool for streamlining processes and maximizing efficiencies will greatly benefit the Mill Services business once it is fully implemented. In addition, we have a sound strategy to deal with the significant increase in fuel costs, but it will take time. Just going back to Lean Sigma, this is, as I said, an enterprise-wide disciplined approach to process improvement. Last year, I challenged our engineers to find a methodology that would mirror and compliment our highly successful EVA system in which we could begin implementing 2008 across the entire company. After considerable investigation, we settled on a methodology from a firm called TBM Consulting Group. They are the architects of Lean Sigma, in the same way that Stern Stewart, by the way -- our partner for EVA -- was the architect for EVA. Lean Sigma combines lean and Six Sigma to drive broad scale improvement in business processes. We think it's an ideal fit with EVA. I think you've often heard me say it's a perfect marriage between EVA and Six Sigma, or Lean Sigma in this case. We kicked off this Lean Sigma initiative in the first quarter.

Our priority and initial focus will be on Mill Services; but this is a powerful tool that will benefit and should benefit all of our businesses across the globe. The other key operating strategy we are pursuing is the renegotiation of a handful of underperforming contracts. The renegotiation of these contracts centers mainly around price. We have made it clear that if we are unsuccessful in our renegotiations, that we will exit these contracts, and of course any exit would be orderly and professional. Our main focus, however, is on successfully negotiating these and getting the higher prices; and like I mentioned earlier, we are making good progress. It's just that the negotiations are taking longer than we had expected, but the end result will be, we believe, that most of these contracts will get resolved favorably to our satisfaction. Significantly escalating fuel costs are also being addressed on many fronts. For example, many of our contracts allow us to recoup the majority of these higher prices, but it takes between six and 12 months to do so. Secondly, our using our Lean Sigma process methodology, we are closely examining fuel costs and we expect this initiative to start benefiting the year.

And finally, as we renegotiate contracts with customers, we continue to dialogue with them about possibly some of the customers assuming responsibility for fuel. Our large customers in particular can purchase fuel much more efficiently than we can. So that's a state of strategy as well. So we believe the recoupment through the inflation indexes, the Lean Sigma optimization and also the renegotiation process that we will make a significant dent in the fuel cost. In summary, then, the execution of Lean Sigma optimization initiative, obviously on the Mill Service side, the resolution of the underperforming contracts, the strategy for dealing with the escalating fuel costs as I just mentioned, and just as importantly, our ongoing geographic expansion strategies that we have articulated to you over the year, are all critical in restoring margins for the Mill Services business. We do believe that this business will get better in the ensuing quarters. I would like to emphasize that we are, of course, resolute in our commitment to improving the results and we are confident that once all these strategies have been fully implemented, it will restore the margins to more historical levels.

What I'm going to do now is turn the call over the Steve to give you a little more insight into the quarter, and then I'll make some other comments and we'll take your questions. Thank you. Steve?

Thanks, Sal, very much and good afternoon, everyone. It's a pleasure to be on the call with everyone today. Overall, we are very pleased with our first quarter performance. In the first quarter, sales income from continuing operations and diluted earnings per share were all records, with each posting double-digit percentage growth. The overall first quarter operating margin for the Company was 10.1%, essentially flat with last year's 10.3%. As Sal stated, sales increased 18% in the first quarter, just shy of $1 billion. We expect to exceed the $1 billion mark in each of the remaining quarters of 2008. Organic growth contributed about 7% while acquisitions contributed 3%, and foreign currency accounted for the remaining 7% of the growth in sales.

This performance again reflects Harsco's international balance, as well as its ability to grow both organically and through acquisitions. In this regard, we are certainly pleased with our solid organic growth rate as it underpins our continued confidence in future organic growth investment opportunities. Our diversification strategy again paid off in the first quarter, as we achieved a good balance among all three business platforms.

Access Services and all businesses of the Minerals and Rail Services and Products group achieved increased earnings and had double-digit operating margins. This balance, achieved by strategic design, enabled the Company to more than offset the first quarter reduction in earnings of the Mill Services Group. As Sal mentioned, we have a multi-faceted strategy in place which will result in gradual improvement in Mill Services business throughout 2008 and beyond. This strategy is being implemented with the utmost vigor.

International sales for Harsco were 70% of total sales. Further, 86% of our sales were from industrial services platforms. This again represents further evidence of our diversification, which provides a hedge against economic downturns. Particularly encouraging was our sales growth in emerging markets in the first quarter. Sales grew 37% in Latin America, the Middle East, Eastern Europe and Asia-Pacific. We believe these emerging markets are less susceptible to economic downturns than mature economies such as North America. Sales for the quarter were geographically balanced as follows: 20% in emerging economies such as the Middle East, Latin America; 33% in North America and the remaining 47% in Western Europe. In the first quarter of last year, sales in emerging economies were only 17%. So we grew 300 basis points in the first quarter of 2008 compared with last year. Emerging market growth is consistent with our strategy. To remind you, our goal over the next three years is to increase sales outside North America and Western Europe to about 30% of sales. Of course, on a much larger base.

We are also pleased with the improvement in the return on invested capital for the first quarter. Return on capital from continuing operations improved by approximately 30 basis points to 10%. Also worth noting, the Company again improved economic value added EVA in the first quarter. Importantly, over 50% of this year's record capital expenditures, or approximately $62 million, has been invested in strategic growth initiatives, with the remaining expenditures allocated to sustaining the current revenue stream. Additionally, 37% of the first quarter growth CapEx was invested in economies outside North America and Western Europe. This is consistent with our goal of 30% of sales coming from these economies within the next three years. Based on the expected organic growth rate for 2008, approximately 56% or $35 million of growth capital for the quarter was invested in our growing Access Services business.

The remainder of the growth CapEx, or approximately $27 million, was invested mainly in the Mill Services business due to recent contract signings. First quarter has historically been the slowest period for operating cash flows. Therefore, as expected, our debt-to-capital ratio increased slightly by 90 basis points during the quarter, to 41.7%, from 40.8% at December 31st, 2007. However, the 2008 debt-to-capital ratio was 21% lower than the first quarter 2007 ratio of 52.6%. First quarter 2007 ratio reflected the effect of the Excell Minerals acquisition. Our strong cash flows and the successful divestiture of the Gas Technologies business have enabled us to substantially reduce the debt-to-capital ratio since the Excell acquisition. The slight increase in the debt-to-capital ratio from December 31st is principally due to the record growth-related capital expenditures in the quarter, as well as a $20 million income tax payment which primarily related to the gain on a sale of our discontinued Gas Technologies business, which was divested in the fourth quarter of 2007.

According to Generally Accepted Accounting Principles, the income tax cash payment has to be reflected under operating cash flows, while the proceeds from the sale of the business were reflected in cash flows from investing activities last year. Additionally, in the first quarter, the Company returned $16.9 million to stockholders in the form of share buybacks. Cash flows from operating activities for the first quarter were $32 million, $9.7 million lower than last year's record $41.7 million. The decrease in cash flows in the quarter was expected, and is due mainly to the Gas Technologies income tax payment that I mentioned earlier, as well as higher inventory purchased to meet the strong backlog demand that we have. We are confident that we will achieve targeted cash flow from operations of $525 million in 2008. This will be a record and will support our growth initiatives. Let's now turn to the first quarter performance of each of the business groups.

Consistent with last year, both the Minerals and Rail services and Products group and the Global Access Services business again led Harsco's performance, setting new quarterly records for sales and operating income. The sales growth of 20% in Access Services was well balanced throughout the world. We are particularly pleased to see that key emerging economies such as the Middle East, Eastern Europe and Asia-Pacific contributed significantly to the overall sales and income growth of the group, as these global economies continue to make significant investments in new construction and infrastructure, modernization and expansion. First quarter performance was well balanced and broad-based. We are especially pleased with the excellent 10% organic growth of the Access Services business in the first quarter. While margins were down slightly in the Access Services Group, last year's operating margins were exceptional and benefited from a $1.6 million asset sale gain and large non-recurring export sales with high margins, as well as very mild weather in Europe. In contrast, 2008 first quarter margins were unfavorably affected by the earlier Easter holiday, which last year occurred in the second quarter.

In Europe, Easter holiday is a significant vacation period and business slows considerably for the entire Easter week. The spring construction season does not accelerate until after Easter. Adjusting for these factors, first quarter margins were essentially flat with last year. The operating margin of 10% for the quarter compares very favorably to the 7.4% in 2006. That emphasizes the tough first quarter comparison to last year's exceptional margin of 11.1%. The outlook across the large and expanding global footprint of our Access Services business remains positive. We continue to see favorable market conditions for 2008 and another record year performance.

Moving on to Mill Services, as Sal mentioned earlier, lower Mill Services performance in the first quarter compared with last year was due principally to significantly higher fuel costs and the protracted negotiations on underperforming contracts. We continue to believe that we have this business on a correct path to show gradual improvement as the year progresses.

As Sal mentioned, we have a broad-based business optimization plan in place, thus we are confident that we will gradually restore the margins of the business. As our press release reports, the estimated future value of Mill Services contracts is at record levels and global steel usage is forecast to increase in 2008 and 2009. Therefore, the key to improvement of this business is the execution of the optimization programs articulated by Sal. We will be relentless to ensure their successful execution. The Minerals and Rail Services and Products Group posted an exceptional first quarter performance, with all business units posting higher sales, higher income and improved operating margins. As a result, the group as a whole achieved a record operating margin of 17.7%, a 580 basis point improvement over last year.

We are particularly pleased with the performance and year-on-year improvement of our Rail Services and Products business, which achieved record operating margins in the first quarter. Our strategies of value selling, business optimization and global growth are having the impact that we expected. The 2008 and longer term outlook for the Minerals and Rail Service and Products Group was very favorable. We expect another record year in 2008. To sum up the quarter for the entire Company, all but one of the businesses in our portfolio had improved year on year operating income, highlighting the strategic balance that has been achieved by the Company. That balance should allow the Company to continue to improve earnings. That was evident this quarter with the Access Services and Minerals and Rail Services Group performance more than offsetting the lower performance by the Mill Services. That completes my comments, and I will now turn the call back to Sal.

Thanks, Steve. Let me just quickly summarize our current outlook for you. Based on our continuing strong end markets, numerous international expansion opportunities, and our enterprise business optimization initiatives, we are confident that we will continue to perform well in 2008. Our current expectations and outlook are for another record year. As a result, this morning we raised our guidance from continuing operations from $3.40 to $3.50 to a new range of $3.45 to $3.55. Using the midpoint of the guidance, our expected 2008 results will represent a year-over-year improvement in diluted earnings per share of over 16%. This will represent the fifth consecutive year of significant EPS growth for the Company. The outlook for the second quarter of 2008 from continuing operations is for another record quarter.

Diluted earnings per share from continuing operations in the second quarter were forecasted to be in the range of $1.01 to $1.03, and that compares with $0.91 in the second quarter 2007. Again, using the midpoint of the range, this would represent an increase of approximately 12%. It should be noted, however, that within the Minerals and Rail Group last year's second quarter included a one-time $3.2 million pretax asset gain of approximately $0.03 per share from the sale of a property. Adjusting for this gain, our anticipated year-over-year increase in EPS in the second quarter of 2008 will approximate 16%. Also, in last year's second quarter, the Minerals and Rail Group had an exceptional performance from Excell Minerals.

As you may recall, we were quite emphatic during our second quarter conference call last year that Excell Minerals results were exceptional and would not be repeated to this degree. Nonetheless, we expect to have another record quarter led by a very strong performance that we expect from Access Services in the second quarter, and that's underpinned by strong activity that we're seeing in regions that Steve articulated -- we've had tremendous growth in the Middle East, in Asia-Pacific and other key emerging markets, as well as our strong underpinning in some of the North American and Western European markets as well. Also, we do expect the Mill Services business sequentially quarter-over-quarter to perform much, much better in the second quarter than it did in the first quarter, and we of course expect solid contribution from the Minerals and Rail Group, taken into consideration, again, what I said just a couple seconds ago relative to the $3.2 million asset gain, as well as the exceptional performance of Excell Minerals. Well, that completes our formal comments. We would of course now be very happy to take any questions you may have.

(OPERATOR INSTRUCTIONS). We will pause for a moment to compile the Q&A roster. Your first question comes from the line of Jeffrey Hammond with KeyBanc Capital Markets.

Hi, good afternoon, guys.

Hi, Jeff.

Hey, Jeff.

I just wanted I guess get a little more granular on this Mill Service issue and turnaround. I guess if I pull out the fuel cost impact, your margins look still down sequentially. And I just wanted to better understand, within some of the other operational issues, what in your mind kind of got worse, despite what seemingly was a more stable production environment? And then two, maybe just give us a better sense of where you see the inflection point, where some of these improvements start to come together, and then maybe answer those and I've got one more.

All right, Jeff. First of all, as you recall, on the operation other than the things you said, which you stated very well, is if you look at some of the operational issues, we're still working through some of these maintenance things by having equipment delivered. We're just in the process of implementing these cost optimizations initiatives. Some new contracts are just getting started up. They should contribute -- we expect those new contracts to perform very well as the year progresses. And you can look back at the press releases over the last 12 months, starting with China late last year, as well as some in Brazil and other parts of the world and Argentina and so forth -- as those contracts kick in, you should start seeing performance. So when you underpin it by the -- you know, we'll start recovering a little bit of the fuel, the efficiencies start getting a little better, these new contracts kick in and so forth, we believe the first quarter is certainly the low point here.

And so sequentially, you should see, we believe, an improvement in the second quarter and that will continue to build with a much more improvement in the third quarter. And that's the way we're seeing it right now. These negotiations on these contracts, it's good news, bad news. The bad news obviously, they're protracted. But that's the good news. That means that we're making some headway, the customer's listening; so which means that we'll probably resolve a lot of these more favorably than we perhaps thought maybe even like a month or two ago. So the things are turning more satisfactory, but it just takes -- you can appreciate the bureaucracy and the amount of time to resolve these things, Jeff. It's just one of those things. Believe me, we'd like to push them and get them done a lot quicker. We're really at their mercy relative to timing. So on balance, this is certainly the low point.

Okay. And then shifting gears to Rail and Mineral, would you attribute the track strength simply to timing of the China contract coming on or is there more things going on there?

No, I mean, we could talk to you about rail forever. We're very excited about the rail story. Again, we've been working on this Minerals and Rail Group for a lot of years. Putting it together, restructuring it, changing the business model. We changed management. We introduced value selling. Announced Lean Sigma. It's all starting to come together now; and on the Rail side, it's not the China order at all, actually. That's coming later in the year. This is just simply executing better, better pricing through our value proposition, going after the right type of work and so forth. So we think there's some very good long-term prospects for this business. Then all the businesses in that group -- the Minerals business, Excell and Reed Minerals -- continue to perform relatively well and so forth. So as a group, we think this kind of performance can be sustained. They're running at record backlogs and frankly, we're very upbeat about this group.

Okay. And then just finally, you know, you had the -- even if you X out the one-time item last year in the second quarter, you had an exceptional margin quarter within Mineral and Rail and I think a lot of it was some timing around some mineral shipments. Can you just help us out with the compare there, 2Q to 2Q?

Oh, for the second quarter?

Okay.

Yeah. Again, don't forget, you've got to back out the $3.2 million asset gain where we sold a property. I mean, that's a big number. That's $0.03. Then fundamentally, you're looking at the exceptional second quarter that Excell Minerals had last year that we said that will probably never be repeated again, and we were very serious when we said that. Having said all that, we think the group is going to do very, very well; not only in the second quarter, but they're going to perform and post quite an outstanding year with high margins and high returns characteristics. But it is somewhat of a tough comp. You know, when you have those two factors of the asset gain as well as the Excell Minerals exceptional performance, the strong end market demand, you know, for their products that we had where they operated literally 24 by 7 every single day in the quarter, which again, it's highly unusual to ever see that again.

Okay. That's good color. Thanks.

You're welcome.

Your next question comes from the line of Curt Woodworth with J.P. Morgan.

Hi, Good afternoon.

Hi, Curt. Good afternoon.

You know, Sal, in terms of the fuel issue, you know, what percent of your contracts have fuel escalators and what is your fuel spend annually in the Mills division?

Steve, do you want to give him the fuel...

If you look at the fuel thing, Curt, the majority of our contracts, it's a very high percent. I mean, I don't want to give you the exact percent, but it's a very high percent of the contracts do have this. Now, keep in mind, you're not going to recover 100%. I mean, it's impossible. We believe we're going to recover a substantial amount of this, plus what we're trying to do longer term is two things. One as I mentioned in my comments, is that we're -- with this Lean Sigma initiative, we think we can make a Heck of a dent in using less fuel in the way we run the business; and then secondly, as we renegotiate contracts, in some cases we're getting a fair hearing anyway that people are listening to what we're saying about possibly the Mill absorbing that cost, because they can procure it a lot cheaper than we can. So there's all those kind of dynamics going on, and so this is really a timing issue more than anything. It's just that as you well know, we've had this significant ramp-up, escalation in fuel costs that happened so quickly, that we just have not had the ability to recover from that.

Yeah, for fuel costs for the Company in the first quarter last year was less than 4%. It's gone up for the Company to over -- to about 4.5%, with Mill Services having a higher percentage than that. So that gives you an indication of where we are with total fuel costs and the increase overall.

Okay. And just in terms of the optimization and the renegotiation of the underperforming contracts, you know, is it -- if you can reprice these contracts to where you want to be, is that going to be kind of the main hurdle to get you to the kind of 10% margin target that you guys have been, I guess, targeting for this year?

Yes. That's right, Curt. It's that and trying to recover some of these fuel costs and getting this equipment in place for the maintenance costs, which we're making -- we're making a lot of progress on all these front. It doesn't appear to be obviously from the results and it's unfortunate, but we had a confluence of things happen in the first quarter here; but believe me, we are very, very focused on turning this thing around as quickly as humanly possible. This business is not broken by any stretch of the imagination. There's upside to this business. As the year progresses, you should start seeing some new contract signings and some of them in emerging markets -- again, consistent with our strategic objective, expanding those emerging markets.

Also you should start seeing some new contract signings, even some of the more mature markets but with better terms and conditions, and you may see exiting one or two contracts as well. So as we continue to turn this, we believe that this business will return to historical levels, then we'll build off of that through -- particularly because the Lean Sigma initiatives takes year and years to really get the full effect of it. We just started that literally in the first quarter at five of the largest sites we have in the world, and we should start seeing some initial results of that probably by second, third quarter; and then what we'll do is we'll take the best practices out of that, particularly on the fuel side, and implement those across the globe. But then we'll redouble back and make sure that every single mill site gets the full treatment, if you will, when it comes to the Lean Sigma.

And again, you know, Curt, just to emphasize -- not to beat a dead horse here, about the balance. That's why we've been working very hard to build up this third platform. As I've said, it has come of age and it's not by accident. We worked very hard the last three years, particularly, to build this thing, to get this balance, and we subscribe to this balanced portfolio running the business and I think the results this quarter really manifested that well. Of course, we would have liked to have better results from Mill Services. We will get better results from Mill Service.

Okay. And then on -- you know, kind of tying it in here with the contracts that are underperforming, I mean, it seems like even if you adjust for fuel your margin was about 8%, 8.2% in the quarter, so it just feels to get from there to 10 that you have to have a fairly significant amount of contracts that you're going to need to reprice to have that kind of impact on the total segment. You know, is that -- can you give a sense for maybe how many contracts, what percent of sales or is some way that we can kind of quantify it?

Well, we've been trying to stay away from giving you -- because the numbers kind of change a little bit.

Yeah.

It really is down to the underperforming contracts as well as just some general efficiencies that we're trying to sort through in the operating sites, and that's a combination, like I said of equipment, training, new people, you know, expansion. We have these start-ups. I mean, again, we haven't talked much about this. But we've had three or four new contracts that we signed late last year and, you know, you never get exactly the date they're going to start. Well, they were supposed to -- we initially thought a lot of them would be fully effective for the first quarter. They weren't. Those are kicking in more in the second quarter. So those kind of dynamics are going on. So again, it's just unfortunate, like I said, that all these confluence of factors happened in the first quarter ended up being such a poor result there.

Got it. And then for Access, you commented that you think the margins can be the same, if not better, than what they ended the entire year in '07. So you know, that would obviously assume margin expansion year-over-year the next couple quarters. Can you just -- what's driving that view, and also if you could talk about kind of this construction market outlook, your order rates in both the U.S. and Europe that you've been seeing recently in Access.

That's a very fair question. Because again, you know, the first quarter performance from Access on the surface does not appear to be as strong as perhaps some people would have liked or would have expected. It's very explainable, as Steve said. As Steve went through all the details of that, you had the holiday, you had the asset gain, you had some one-time export sales and so forth. When we looked at this very carefully for the year, if you look at the growth we're seeing in the emerging markets, very strong. If you look at some of the market share gains we're seeing in a few of the countries that we operate in, if you look at the balance -- particularly like the Middle East, Eastern Europe, parts of the U.S., parts of Western Europe as well, we're seeing some good market gains, very strong order fill.

As Steve indicated, you saw that the CapEx growth investments for the first quarter were still at a pretty good level for Access Services. We don't place any orders for anything unless we have orders in hand. So 2008 looks very, very strong for Access Services. You should see a very strong second quarter and a very strong third quarter from this group. We're very confident of that. The margins will be fine. So, you know, we're feeling really good about this group. We're feeling really good about the Minerals and Rail Group, and of course we just talked I think quite a bit about Mill Services. So on balance, and that's why we raised the guidance, that's why we feel confident about the year. And we have some very good momentum and so we are, we're -- I think we sound confident. I mean, personally, I am.

Absolutely confident. We have a good balance. It's not just construction. It's industrial work and it's worldwide. Lot of it in emerging markets as well, so very confident.

Okay. Great. And just one final question on Excell. Can you talk about your capacity expansion plans or plans you expect to put in place in this year and if you have any visibility on '09?

We're looking right now in two key markets. One is in China and the other one is in Europe, and hopefully by sometime this year, we should be able to make some further announcements about the new contracts, at some point this year. Hopefully, at least in one of those locations, but possibly more.

Okay.

With this business, just like we've done with the other businesses, we go very slow at first. We want to make sure they're fully integrated. We make sure we get the foundation straight, we make sure we have the management straight and then we start executing the growth strategy, Curt. So again, this one is going to go slow at the beginning and it will pick up momentum, just like Track has taken quite a while to get them sorted out. But they are sorted out now and we see a similar situation with Excell.

Okay. Great. Thank you.

You're welcome.

Your next question comes from the line of Bill Fisher with Raymond James.

Hi, Bill.

Hey, just on the Access margins, you mentioned the focus on the emerging markets and how that has a higher margin mix and helps. Just remember I think in December you touched on also hopefully increasing the forming and shoring mix over time, I think which has a better margin. I was wondering if you, looking at the growth CapEx you have this year, do you see that kind of trending forward as well?

Yeah, Bill, I'll let Steve comment on this as well. But if you look at the mix of what we're seeing, particularly lately, all the -- again, we don't buy anything without orders in hand. The orders in hand are migrating more towards infrastructure spend, industrial maintenance, the emerging markets; so all the things you're seeing in the headlines in newspapers, that's where a lot of the investment is being directed towards and that's why we feel comfortable about the balance. And as you well know, the form work business is a higher value proposition and that continues to be obviously a significant part of our growth strategy.

No, I agree with Sal. This is Steve. A lot of our work in the Middle East is form work and shoring because of the infrastructure build. It's a big part of it. On the other hand, Sal mentioned balance and the industrial services does balance us out in places like the U.S., where the petrochemical plants are going full steam. They need to be maintained and there's capital expansion there. So depending on what market you're in, we have that balance. So the formwork and shore which has higher margins, you know, is definitely where we're going in Eastern Europe, Middle East, and places like that; but in places such as Holland, U.S., other parts of Western Europe, we have that counter balance of of industrial services. It has high EVA returns.

Okay. Great. And just on the emerging market mix, does that higher mix -- does that do anything to your tax rate forecast for this year?

Well, that's a very good question, Bill. I'm sure you've heard us say repeatedly, particularly over the last six, 12 months, is that we're on long-term strategic objective to lower the overall effective tax rate. I think that the tax rate is -- the lower tax rate is sustainable because of what you just said. And more and more earnings are coming offshore in much, much lower tax jurisdictions than the United States. United States has the second highest, I believe if I'm not mistaken, tax rate in the world and with 70% of our business now, and probably I would argue a little higher income than 70% -- 70% of revenues by much higher income coming from offshore, you're going to see the tax rate we think over the long horizon continue to decline. But certainly for the near term horizon, we're comfortable at where it is right now.

Okay. So it's around, what, 29 in the first quarter; is that right?

Yes.

Yes.

Okay, and that kind of looks to be sustainable near term?

Yes, yes.

Okay. Great. Thank you very much.

You're welcome.

Your next question comes from the line of Timothy Hayes with Davenport & Company.

Hi, good afternoon. Actually, all my questions have been answered. Thank you.

Okay, Tim. You're welcome.

(OPERATOR INSTRUCTIONS). Your next question comes from the line of Scott Blumenthal with Emerald Advisors.

Good afternoon, everybody.

Good afternoon.

Hi, Scott.

I don't know where everybody went after two or three callers. Steve, could you give us the growth CapEx number again for Access Services?

Sure. Steve will give you that.

Yes, that's -- that number for the quarter, the growth CapEx, I believe was 37 million.

Yeah, 35 million.

Yeah.

Okay. You said it was 35 for Access and 27 for Mill Services, I believe.

25 for Mill. 35 for Access, 25 for Mill and a couple million for the Minerals and Rail and that was mostly Excell Minerals, so that 62 million in growth CapEx came from split roughly in those proportions.

Okay. Thank you.

You're welcome.

Sal, can you give us an idea of what the scale or scope of an Excell contract would be like in the overall scheme of Harsco's business?

Well, it could be as sizable as our normal Mill Services contracts, so it could be anywhere from say an annual run rate of 2, $3 million to possibly as high as 7, 8, 9, 10 million a year, over say an average five to seven, eight, nine year contract. Somewhere in these parameters. Depends on the project.

And are those -- do you anticipate that those contracts are going to be similar in duration to a Mill Services contracts, and are you going to try an align those up with the Mill Services contracts in those locations where you already are?

They will be -- should be similar as far as length of the -- term of the contract, but it will be a lot different in terms of some of the other characteristics, particularly like I said, we're looking at different types of markets. We're looking at different types of customers. You know, we want to better balance out our customers, for example. We want to better balance out the geography as well. Right now, like I said, we are targeting particularly China and some of the other Asian markets and to -- and Brazil and then parts of Western Europe where there's a high concentration of some of the higher values, particularly the stainless steel producers.

Can you give us an idea as to what the actual purchase decision and some of these customers you think, you know, what tipped them to actually sign on the dotted line as opposed to leaving things the way they are?

Well, they -- it's -- you know, one of the key things we're focusing on is the environmental services. With Excell, what seems to attract particularly the Asians more than say -- as well as Brazil, I should say, there's tremendous interest in solving our environmental issues and Excell does a very good job. They're a very good environmental solutions company that take these waste streams and so that's what opens -- seems to be opening up the doors right now. And that's being very effective. So you really get to the very top of the organization, but the steel mills for whatever reason tend to be a bit bureaucratic and it just takes a while to get through the engineering, and procurement and everyone else, and then legal; and then ultimately you've got to remember, if you get a, say, a 10 year contract that does 5, 6, $7 million a year in revenues, that's a big contract and a lot of times those have to go to the Board. So then they have to go in front of their boards to get approval. So you can appreciate -- it does take time, unfortunately. These things don't just happen overnight.

Sure. Understood. Switching to Mill Service -- Mill Services, just for a second, do you have any idea or have you done any work on how long would it be, if you took your current contract, you know, the current population of contracts that you hold, how long would it take to roll off all of the contracts that don't have fuel escalators?

Oh, that don't have fuel?

Yeah.

Don't have fuel escalation?

Correct.

Well, I don't think we can answer that question, simply because the average life of the contracts, Scott, is 7.8 years. They run off at various times. They get renewed at various times. We've never separated it that way in all honesty.

But I guess it is safe to say that all new ones have it?

Well, yeah, we're trying to get the customers in some case to take that ownership of that directly. So we're not even involved in any fuel discussions at all. In fact, we already have one or two contracts that have that provision now where we were able to successfully get that in.

Okay. That was renegotiated?

Yeah, where they give us -- they provide all the energy. Because as you know, our business model is that we're on their site 24 by seven, so we have one or two cases where they actually provide all the energy for us to do the service. So that way, they can control it better. They can procure it better and it's a win-win for both sides. What we're trying to do is get more and more customers to accept that, and that's part of the strategy. It takes time. You know, we've got to go around -- don't forget, we're at 170 sites and it's site by site, country by country, and there's a lot of work to be done on the fuel side. We think when it's all done, all this work, that we should get a pretty good result.

Understood, that's very helpful. And I guess my last one, you mentioned that Rails and Minerals, very strong and Chinese order really doesn't kick in until later in the year. We're going to start to see that in Q3 or is that a Q4 event?

Yeah, there should be one -- you could possibly see one order going out late Q2, but certainly Q3. It doesn't really ramp up to a much higher degree until next year. The bulk of the orders are in '09 and '10 and then there's a little bit of tail-off in '11 as well and there's a front end here obviously in '08; but the majority of the order will be pretty evenly shipped and recognized during '09 and '10.

Okay. Great. Thank you.

You're welcome.

Your next question comes from the line of Ted Wheeler with Buckingham Research.

Hi, good afternoon, all.

Good afternoon.

Hi, Ted.

I Wonder if I could just ask another couple questions on Excell. What do you think the growth rate of that business will be? I guess you're still obviously working it and taking it to the places that you want to go, but I mean, what should we think about if we look at '09 and '10 what kind of growth rate that company can deliver?

Yeah, I mean, this year, for example, you should see low double-digit growth rates, for example.

Even on top of that blow-out second quarter, huh?

No, you're talking -- I'm talking top -- we're talking revenue growth, right?

Right.

Yeah. I mean, revenue growth for the year, you should see roughly double-digit revenue growth for the business this year compared to last year. And you know, could be as high as possibly 15%. But somewhere in that range. Now, is that sustainable? We think that as we move out into the out years that certainly high single digit, low double-digit for the next two, three years should be achievable. And you know, again, with the focus of getting better geographic spread and really focusing in more on these environmental type services -- like I said, our primary focus right now with Excell is really to grow Brazil, Asia, certain parts of Europe, and also to better develop the minerals side, you know, the co-product side where we take the waste streams and dispose of those waste streams into cement, agricultural and turf and some of those other markets and abrasives and so forth. So that side of the equation is going to be a little slower because we want to make sure we're in the right markets, because you do have to make obviously an investment for that. We've got to pick where we want that investment because geography is very critical there. And so it becomes a scalability issue, it becomes an investment issue. So we want to make sure we get that right.

In your ownership and sort of digging into the issues surrounding Excell, are there competing co-product companies out there that you've encountered or do you guys still have some proprietary sort of head start on particularly the turf side?

Well, I mean, to our knowledge, you know, what we do and where we do it, there are not a whole lot of people that do it the way we do it, when you consider that we take the entire waste stream from beginning to end. You may have people that do some of the front end, some of the back end. But to our knowledge, no one -- and MultiServe does a little bit of this on the Mill Services side as well. So you've got MultiServe, you've got Reed Minerals and you've got Excell, all three of them actually do similar type of work. And to our knowledge, aren't many companies that provide 100% solution, if you will.

And lastly, on Excell, are there any of these cost issues cropping up? I know fuel. I don't know what the deal is on there.

It's minimal. It's minimal. I mean, if you see MultiServe, they -- we have a tremendous fleet of equipment and obviously that equipment uses a lot of diesel. And like I mentioned earlier, we think the Lean Sigma initiative is going to benefit there -- benefit us there because it's looking at all ways that we run our equipment and how we move equipment -- you know, even for example at times you may have equipment that sits there idle for various reasons. So there's a lot of different ways to look at that and we're hoping when we're done with this result this year that we'll be able to implement these best practices across the globe.

But Excell doesn't have the kinds of margin pressures that --

No, nowhere to the scale of -- yeah, nowhere to the scale of the Mill Service business, no.

Well, thanks for the rundown. Nice job.

Thank you.

Your last question comes from the line of Mark Grzymski with TimesSquare Capital Management.

Good afternoon, everyone.

Good afternoon.

Good afternoon.

I apologize if you already talked about it, but you mentioned the new contract opportunities in the Track Technologies business. Wondering if you could just elaborate on that a little bit?

Sure. Well, the Track Technologies, you know, what we've been doing is changing the business model and we're focusing on obviously the services side, we're focusing more on assembly, less manufacturing; obviously we have a very strong export market. We have a very strong parts business. And also the geography is very important. We're making some good headways, for example, in Brazil, and even the Middle East. Of course, China is very big in our future. We're working on projects. We're bidding on projects in India. We're looking at a lot of things in North America, from Canada, particularly, and the U.S. of course, which is our base and the U.K. So we have a very nice balance of services, products, geographies, and we have really a full plate and we have more than enough work to keep us busy for the next few years. So what we're focusing on now is to make sure that the work we do take on does have very high return characteristics and hopefully they're more of the longer term contract nature than just simply, you know, one-off order.

Do you think or are you seeing the effects on Rail globally with fuel costs rising and transportation costs escalating? Is this -- I mean, are you beginning to see the stage of -- excuse me, the early stages of a pick-up in that business? Is this your sense or -- ?

Well, I think so. I mean, if you look at where a lot of the focus is coming from our customers across the globe, and that's in rail grinding. In rail grinding, there's direct technology that lowers the amount of energy required to move a train from point A to point B.

Right.

So yes, absolutely we have seeing tremendous inquiries. The Chinese order's all grinding. The India order we're bidding on right now, that's all grinding. We've had inquiries like I said from Brazil, from Japan, and Singapore and many other markets throughout the world, and a lot of them are focusing on grinding technology and some of them also on new track construction. Because in some cases they need to replace some rail and that's very expensive, so you want to get obviously the best equipment you can to do that.

But from a competitive -- and also from a competitive standpoint, are you in a position -- do you have some pricing power in this market, assuming that demand is strong?

Yeah, we think we're very well-positioned, absolutely. And a lot of it is due to what we've been doing the last few years of outsourcing manufacturing, taking -- converting more to the services side and those kind of things.

Great. Thanks for taking my questions.

You're welcome.

At this time, there are no more questions. Mr. Fazzolari, do you have any closing remarks?

Yes, thank you very much. Appreciate all the questions. Again, just want to reiterate briefly what we said earlier, and that is that we do have complete confidence in this business. We think we are going to have a very, very good year. We should post record results. Again, underpinned by both Access Services and Minerals and Rails, and we do believe that the Mill Services business will start to show improvement in the second quarter sequentially over the first quarter, as we start to build and recover in that business. So again, we thank you for your support and we look forward to speaking with you soon. Thank you very much.

This concludes today's Harsco Corporation first quarter conference call. You may now disconnect.