Enviri Corp (NVRI) 2008 Q2 法說會逐字稿

Good afternoon. My name is Tarika, and I will be your conference facilitator. At this time, I would like to welcome everyone to the Harsco Corporation second 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 teleconference presentation and a company webcast made on behalf of Harsco Corporation are subject to copyright of Harsco Corporation and all rights are reserved. Harsco Corporation will be recording this teleconference. No other recordings or redistributions of this teleconference by any other parties are permitted without the express written consent of Harsco Corporation. Your participation indicates your agreement. I would now like to introduce Mr. Salvatore Fazzolari, Chairman and CEO of Harsco Corporation. Mr. Fazzolari, you may begin your conference.

Thank you very much. Good afternoon, ladies and gentlemen, and welcome to Harsco's second quarter 2008 conference call. I have with me today Gene Truett, our Vice President of Investor Relations; and Stephen Schnoor, our Chief Financial Officer. Before we begin this afternoon, I would ask Gene to read the Safe Harbor statement, please.

Thank you, Sal. Good afternoon, everyone. As we do at the beginning of all of our calls, we just want to let you know that we'll be having forward-looking statements in our discussions 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 our best information available, it is possible that the results could differ from what we tell you today. We've listed in our SEC statement reasons and risk factors that affect our business, and these could be the reasons for any difference that could occur. We invite to you to review the SEC filings at your convenience. 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 information at your convenience at our website. Sal?

Thank you, Gene. There are quite a few comments I would like to make. We believe we have a lot of good news and a lot of positive things to say, and so just bear with me here as we go through some of these key points that we like to get across.

Obviously, we had another record quarter. We continue on. Second quarter sales grew by 16% and diluted earnings per share up 18%. In fact, all three business groups posted double digit sales growth for the quarter. To me that was a very, very good quarter. For the first six months, even more good news. Sales are up 17%, diluted earnings per share 20%. Again, very, very strong results and we're very pleased, of course, with that. Particularly given all the recent economic turbulence, we continue to be pleased with our performance and we believe we have very strong momentum as we go into the second half of the year.

Despite the turbulent macroeconomic environment, we are on track to deliver for the fifth consecutive year record results. Revenues for 2008 should be in excess of $4 billion and earnings, again, should grow at double digit rates. For the first six months, overall operating income of the company was $245 million. Why am I telling you that? Because of the balance of the company. 39% of that operating income was generated by access services. Minerals and rail accounted for 34%, mill services for the remaining 27%. That is balance. That was intentionally done that way over the years that built three strong global scalable platforms.

We continue to make very good progress on our geographic expansion strategies we've been telling you about, particularly over the last six months. For example in our access service business, we entered four new countries during the first half -- India, which we're quite pleased, of course, Russia, Romania, and Panama. In addition, Harsco's overall sales for the first half of the year reflect our increasing geographic balance. 21% of our revenues now for the first six months of the year come from emerging markets. Again, that's an intentional strategy of the company that we've been talking to you about quite heavily. Also, 33% for North America and the remaining 46% for western Europe. Again, I like to remind you that even though we're at 21% now and have made really good progress in the last 12 months, our goal is for the next couple years to get that up to 30%, and longer term, our goal is to have 40% of our revenues coming from the emerging markets.

One of the highlights of our second quarter and first half performance is that the minerals and rail group now is clearly an equal partner in earnings capability to our other two groups. Minerals and rail will continue to be a key focus of the company, particularly as we shift more of our growth investments into this group in 2009 and beyond. As we stated in the press release, this group expects its solid results to continue in the second half of 2008, but more in line with those of the same period of last year.

Let me take a moment here to explain why. There are principally four reasons. First and foremost, higher LIFO cost of sales of approximately $4.3 million in the second half due to rising commodity prices compared with last year. Second, all businesses are essentially run at a near maximum capacity. [We're] considering the fact adding additional capacity to our business, for example, Air-X-Changers is currently looking at adding capacity in the Middle East and we're very encouraged by that. Third, within the minerals business itself, a number of high value alloys have come down recently as some other commodity prices have as well. And as I said in the last conference call, the bulk of the Chinese rail orders will be delivered in 2009 and 2010. I just wanted to reemphasize that point. We only expect three machines to be shifted the second half. That's consistent with what we've been saying I think for a long, long time. We expect overall sales of the minerals and rail group for the second half to increase by about 10% in the third quarter and a bit more than that in the fourth quarter. However, because of the increased LIFO costs, income will be essentially flat with last year's second half. And margins will, of course, be down because of the higher revenues. None of this, of course, diminishes our confidence in the future of this group.

Our access service business also performed, we believe, very well in the quarter and posted another record performance. This is despite some expected slowdown in certain countries, particularly the UK, Ireland, and Denmark. Most of the slowdown, particularly in the UK, is mainly isolated to multifamily type construction. Our industrial services and infrastructure business and access in the UK is doing well. With its broad based geographic and services balance and the continuing long-term infrastructure growth in several economies which we're currently expanding in, we expect the access service business to continue to perform well for the remainder of the year and in the future as well.

Our optimism on the access service business is underpinned by our performance for the first six months. For example, revenues from emerging markets for access services grew from 15% to 19%. We are executing our strategy. This gives us confidence in the future performance of the group as well. We not only have geographic balance, but we also continue to have market balance between industrial, infrastructure, and commercial nonresidential construction. I can't emphasize that enough.

We're also encouraged with the improvement from the mill services group. As expected, second quarter margins improved by 130 basis points over the first quarter performance as we promised. We made steady progress during the quarter in addressing the significant escalation of fuel costs and the renegotiations of certain underperforming contracts. However, more needs to be done and we are focused on improving the business quarter by quarter.

I would like to comment particularly on the contract renegotiations and the fuel issue, just to give you a little more color on this. With respect to the renegotiation of a handful of underperforming contracts, I am pleased to report that we have made measurable progress during the second quarter. Our current focus is on nine contracts, principally in the US. All of these contracts currently produce negative returns in 2008. Of the nine, we expect to exit four. Additional compensation is being sought from two, and the remaining three are currently in contract renegotiation with the expectation that these will be resolved favorably. We have identified approximately an additional ten sites across the globe where our returns, although total -- in total are positive, they are below our EVA expectations and requirements. We are targeting these sites for intense efforts to reduce costs, increase revenues, and bring our returns to more acceptable levels. We believe over the next several quarters we will be successful in these efforts and continue to restore the overall mill services margins to more historical levels.

Regarding the significantly escalating fuel costs, we are addressing this on several fronts. First, many of our contracts allow us to recoup a portion of these higher prices. But as I mentioned previously, it does take between 6 and 12 months to do so. We have also approached our customers about more immediate relief using a fuel surcharge. A number of customers have, in fact, responded positively to our approach. We're in active discussions on this matter. To date, we estimate we have recovered approximately 25% of the incremental fuel costs that we've incurred. We believe that's a very good start. We're also approaching all new contracts and renewals with the strategy of having the customer either provide the fuel or at least have more effective and immediate escalation causes that protect us from this obviously highly inflationary event.

I would like to emphasize that we are resolute in our commitment to improving the result of the mill service business. The second quarter performance, we believe, clearly demonstrates our resolve. We're fully confident that we will ultimately regain our momentum and restore the mill services margins to more historical levels, but it will take time.

Finally, I would like to provide insight on some comments that were made this morning about our performance in the second quarter. First, I just want to make it absolutely clear, we have stated and you can look at the script from the first quarter that we said and guided 29% for our tax rate. We not only guided 29%, we also confirmed that it is a sustainable rate. Secondly, as I just indicated, we were very pleased with the 130 basis point performance improvement in the mill services margin sequentially. Again, if you read the script, that's -- what we got is that we would show sequential improvement. We did not provide a number. In our mind, 130 basis point improvement is considerable. And we're quite pleased with that. Third, access services margins were only down 20 basis points, but as Steve will tell you in a moment, access services margins actually improved by 40 basis points when you exclude some one-time costs associated mainly with combining the three businesses. As you recall, we have Hunnebeck, SGB, and Patent, and our intention is -- we're in the process of amalgamating the three into one and we incurred some one-time costs. Steve will give you a little more color on that. So in our mind, there is no downward trend here. These margins are consistent. Again, if you recall, and you go back to the conference calls and presentations we did, we consistently said we expect the margins for access services to be comparable year-over-year. We continue to deliver on that.

I will now turn the call over to Steve to give you more details on the second quarter. Then I will make some further comments on our outlook. Then we will be pleased to take your questions. Steve?

Thank you, Sal. Good afternoon, everyone. We are very pleased with our second quarter performance. Our balanced portfolio of businesses and our geographic diversity served us very well in the second quarter. Sales, income from continuing operations, and diluted earnings per share were all records, with each posting double digit percentage growth. The overall second quarter operating margin for the company was 13.3%, which is comparable to last year's 14% after you adjust for last year's $3.2 million asset gain for a property sale in the minerals and rail group. Sales increased 16% in the second quarter, reaching $1.1 billion. We expect to exceed the $1 billion mark in each of the remaining quarters in 2008. Organic growth contributed about 8% while acquisitions contributed 2% and foreign currency translation accounted for the remaining 6% of the growth in sales. This performance again reflects Harsco's international balance as well as its ability to grow organically and through acquisitions. We are pleased with the company's solid organic growth rate, and it does underpin our continued confidence in future organic growth investment opportunities.

Our diversification strategy again paid off in the second quarter as we achieved a good balance among all three business platforms. Access services and minerals and rail group achieved increased earnings and had double digit operating margins. Mill services group's earnings equaled last year and as expected, a mill services operating margin of 8.3% improved significantly from the first quarter operating margin of 7%. As reported to you during the first quarter conference call, we expect gradual sequential quarter by quarter margin improvement this year in the mill services segment.

In the second quarter, international sales for Harsco were approximately 70% of total sales. Further, 86% of sales were from our industrial services platforms. The international scope and diversity of operations was a significant factor in our record-setting second quarter results as the affected economic downturns in certain markets was more than offset by strength in emerging markets. Particularly encouraging was our sales growth in emerging markets in the first half for 2008. Sales grew a combined 36% in Latin America, the Middle East, Eastern Europe and Asia Pacific. These emerging markets provide higher returns and have been less susceptible to economic downturns than more mature economies.

First half sales were geographically balanced with approximately 21% of total sales from emerging economies as compared with 17% in the fist half of 2007. This 400 basis points growth from 2008 demonstrates we are executing our strategy of better balancing our portfolio and the clearly stated objective of growing emerging markets sales faster than in developing economies. We are also pleased with the improvement in the return on invested capital for the first half of 2008. Return on capital from the continuing operations improved to 12.1% from 11.9% in 2007.

Also worth noting, the company's economic value added, or EVA, in the first half improved over the last year. Over 56% of this year's record capital expenditures or approximately $145 million has been invested in strategic growth initiatives, with the remaining expenditures allocated to sustaining the current revenue stream. More importantly, 39% of the year-to-date growth CapEx was invested in the emerging economies which bodes well for future balance, performance and growth. Approximately 64% or $92 million of growth capital in the first half was invested in our growing access services business, with approximately $$7 million invested in the mill services business due to recent contract signings. The remaining $6 million was invested in the minerals and rail group. As Sal stated earlier, it's our intention to start allocating more growth capital to the mineral and rails group in the future.

Our debt to capital ratio decreased to 40.3% from 41.7% at March 31 and 40.8% at December 31, 2007. The June 30 debt to capital ratio was also over 1,000 basis points lower than the second quarter 2007 ratio of 50.4%. Second quarter 2007 debt to capital ratio reflected the effect of the Excel Minerals acquisition. Our strong cash flows and the successful divestiture of the Gas Technologies business in December 2007 have enabled to us substantially reduce the debt to capital ratio since the Excel acquisition.

Cash flow from operating activities for the second quarter were a record $178 million, which is $24 million higher than last year's $155 million. Year-to-date cash flows from operating activities were record $210 million, $14 million higher than cash flows for the first half of 2007. The 2008 cash flow increased despite a first quarter $20 million income tax payment, which related to the 2007 [gas serve] divestiture. Historically, the company's strongest cash flows are achieved in the second half of the year. Therefore, we are confident we will achieve our targeted cash flow from operations of $525 million in 2008. This will be a record that will provide support for our disciplined growth initiatives.

Let's turn to the second quarter performance in each of the business groups. Consistent with last year, the minerals and rail group and the global access service business led Harsco's performance, setting new quarterly records for sales and operating income. The sales growth of 19% in access services was well balanced throughout the world. We're especially pleased with the 10% organic growth of the group. We're also pleased to see that key emerging economy such as the Middle East, Asia Pacific contributed significantly to the overall sales and income growth of the group. These global economies continue to make significant investments in new construction and infrastructure, modernization, and expansion.

At the same time, the access services group also benefited from its portfolio of balance and diversification. For example, in Canada and to a lesser extent Germany, operating income grew from last year's second quarter, as did the industrial services platform in Holland and the United States. The access services operating margin in the second quarter was 13.5%, only slightly down from last year's 13.7%. A slight decrease reflects this year's higher business optimization costs designed to achieve long-term benefits for the organization. Adjusting for these increased costs of approximately $2.3 million, the second quarter margin was approximately 14.1%, which exceeded last year by approximately 40 basis points. The outlook across the global footprint of our access services business remains positive for the remainder of the year. We continue to see growth over f the last year, another record performance of 2008.

Operating income for the mills services segment in the second quarter essentially equals last year. The operating margin of 8.3% was below the second quarter 2007 margin, but significantly above the first quarter 2008 margin of 7%. The margin was below 2007 due mainly to higher fuel costs of approximately $9 million, however, the sequential improvement over the first quarter 2008 margin reflects continuing execution over business optimization strategies.

As stated earlier, the company has aggressively pursued a strategy to recover or reduce fuel costs. In addition to what Sal says, we are also reviewing fuel costs under our lean Sigma continuous improvement process. Additionally, fuel efficiency and cost recovery are prime considerations in the purchase of new capital equipment and the signing of new contracts. We continue to believe we have this business on direct path to show gradual improvement as the year progresses. We are confident that we will gradually restore the margin of the business to historical levels. The estimated future value of the company's mill services contracts has increased during 2008 and media reports indicate that global steel consumption 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, who will continue to be relentless in the execution of the strategies.

The minerals and rail group posted an exceptional performance, with all business units posting higher sales, and after you exclude the 2007 asset sale gain, all but one posting higher income. We are particularly pleased with the results of this group considering the high bar set in 2007 due to the record performance of our minerals business as well as the asset sales gain of $3.2 million. The operating margin for the group was down 160 basis points from last year's record, due to the performance of the minerals business and the asset sale gain. However, we are still very, very pleased with the operating margin of 23.1% achieved in the second quarter. Excluding the asset sale gain in the second quarter of 2007, margins were the same as 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 second quarter and year-to-date. Our margin improvement strategy, continuous process improvement initiative, and global growth strategy are having the impact that we expected. The 2008 and longer-term outlook for the minerals and rail group is very favorable. We expect another record year in 2008. A solid quarter for the entire company, all of our major business platforms in our portfolio had improved sales and operating income. These results highlight the global portfolio diversity and strategic balance that has been achieved by the company. That balance provides a foundation for continued improvement as we pursue our global growth strategy. That completes my comments. I'll turn the call back to Sal now.

Thanks, Steve. Very comprehensive report. Let me just briefly summarize our current outlook for the remainder of 2008. I think I already made many comments on that, but just to reiterate a couple of very important points. One, again, to stress the global balance. Very strong end markets, particularly in emerging economies, coupled with many, many expansion opportunities for all of our three platforms as we continue to scale the business across the globe. Therefore, we are confident that we will to continue to perform well in 2008 and beyond, and of course post fifth consecutive record year results. The outlook is for sales in the area of $4.2 billion in revenues. The outlook also reflects considerable strength in sales in emerging markets, which I think we've already said quite a bit about. The outlook for diluted earnings per share for continuing operations for 2008 again is for another record year. As you saw in the press release, we adjusted the range up to $3.50 to $3.55. To use the mid-point of this guidance, 2008 will represent a year-over-year improvement of at least some 17%. I think by any measure that is a very, very strong year.

Similarly, our outlook for the third quarter's pretty much the same. We expect another record quarter, record revenues, record income. Hopefully record cash flows as well. We are very confident of that. And you saw the guidance. The guidance is that using the midpoint, we expect to be somewhere close to the (inaudible). So on balance, we are very pleased with our performance for the first six months. We look forward to the next six months. Then of course we look beyond that as well. We would be happy now at this point to take any questions that you may have.

(OPERATOR INSTRUCTIONS) We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Curt Woodward with JPMorgan.

Hi. Good afternoon.

Hi, Curt.

Sal, can you provide a little more color on your outlook for the access business in the second half of the year? You delineated your view for the minerals group for 3Q and 4Q. Could you give us a sense of what you're expecting in terms of organic growth for access in the back half of the year?

Sure. Sure. Be happy to try to give you a similar outlook like we did for the minerals and rail as well. We expect double digit revenue growth in the third quarter for access services and pretty high single digit to low double digit for the fourth quarter as well. So on balance for the second half, we're looking at probably mid teens revenue growth. So again, consistent with what we've seen all along. We expect operating income to continue to grow. We probably more likely the third quarter obviously more stronger than the fourth quarter which is more traditionally the case. Margins, like we said, we expect the margins for the year to end up comparable to last year. That's what we've been saying consistently. We believe that's where we're going to end up the year.

So if you look at where we're investing the money as Steve indicated, we spent a considerable amount of money in the first half on growth CapEx for access. A lot of it going to the emerging markets. We just entered, as I mentioned, four new geographies. We're starting to see some activities there. The UAE, Saudi Arabia, and Qatar particularly are going very strong as is Singapore, Malaysia, and even Australia. So we're seeing good balance and then if you look at Europe, I know there's some concern over Europe.

Well, if you look the way our European business is broken down, it's made -- the strength of Europe is for example in Holland. Holland is mostly industrial. That work is staying consistent year-over-year. There's really very little, quote unquote construction. It's more on the industrial side. Germany which is more balanced -- we see continued good performance there. France pretty much the same thing. You just saw recent announcement where we announced a few new contracts in those geographies. The UK, again if it wasn't for our balance in the UK, one could be a little concerned about the recent downturn, in the multifamily side. But our business in the UK is extremely well balanced between industrial, infrastructure and commercial and some multifamily apartments and so forth. So, we think on balance it's not going to be all that bad.

If you look at the way the portfolio's evolving also as I indicated now, almost 20% of that business now is in emerging markets. We've come a long way in the last couple years from almost nothing to 20%. We should end up probably around the 20% mark. That's good progress. Roughly another 20% for North America and the rest is scattered through Europe. Again, you got to look at Europe very closely like I indicated. It's principally when you look at Europe -- the main drivers of Europe is France, Germany, UK, and Holland. Those are the primary, the big four countries if you will.

So if you look at it on balance, we're, we're cautiously optimistic. Also, we're investing quite a bit of money in this merger, if you will, of the three businesses into one. We incurred costs incrementally about $2.3 million in the second quarter. There'll be some additional costs in the second half. That's baked into the guidance that we gave. Because you can appreciate the costs of changing all the names and closing some offices and doing this and doing that. It takes quite a bit of money to affect the merger of three into one. That's underway.

How much are those costs in the back half of the year?

Probably an additional couple million dollars. Like I said, that's baked into our numbers, though.

Right.

So -- we're trying to do a lot of things here to build this business for the long term, to better balance it, to continue sustained growth, and position ourselves in some of these key markets. We're confident in what we're doing and we're delivering. I don't think you can point to one thing that we've not delivered. Everything we've been saying for the last 12 months I think we've delivered on.

Okay. I mean, 12 months ago I think the target for mills margins was 10.5% to 11%. That's what you outlined at your analyst day in December. It looks like you're going to end up closer to mid eights perhaps. Is it really fuel that's been the major variance there? And if you look at this quarter, you said $9 million incremental but you're getting 25% recovery rates. Does that mean the net hit was $7 million?

No. The net was $9 million. That's a net-net net number. That's the incremental fuel cost that we absorbed.

Okay.

That's the net number, yes. If you look at it on balance when you take all the ins and outs, the fuel cost, it's these underperforming contracts that we're in the process of sorting out, and we will have them all sorted out. Like I said, we've made considerable progress in the second quarter. There'll be further progress in the third quarter, and some of those will already start contributing positively starting here in August 1. Because the ones that we've sorted out already, and so you'll start seeing some benefits from that. As we continue to call back some of the incremental fuel costs, I don't know what the ultimate number is, but certainly we'll do better than 25%. So we'll continue to work at that for the year. That's another reason that gives us confidence that will slowly but surely continue to bring this business back. Then when you add in a lot of the projects we're working on that we'll be announcing over the next six months, a lot of them in the emerging economies as we continue to work the portfolio, you start building all these things in, that's what gives us confidence in our outlook for 2009.

Great. And just one last question, if I may. Can you run through the dynamics of the LIFO charge in minerals and rail for the back half of the year?

Yes.

How that works -- will there be any spillover into '09 for that?

No. The good news is, if you look at LIFO, it makes you take the costs upfront if you will. You have to match revenues with expenses. What happens, though, the good news is, if you have no change in prices of commodities, let's say steel costs which is the primary driver -- if there's no change in 2009 over the current prices of steel, there's no LIFO effect next year. Okay? So you take the brunt of it up front, in a sense, so we're going to incur almost $4.5 million in additional expense in the second half here. That goes away next year, provided there is no incremental increase in the price of those major commodities in 2009 over the level they're at currently. That's built into the forecast as well, that LIFO cost.

Great. Thanks so much.

You're welcome.

Your next question comes from the line of Jeff Hammond with KeyBanc Capital Markets.

Good afternoon, guys.

Good afternoon.

Certainly concerns over just slowing in nonres. I'm wondering in access if you're seeing any additional signals of softening outside of the three countries you mentioned. How would you overall characterize rental rates in access business?

Jeff, if you look at the results and what we just said, there's no change in margins, revenues are growing, we're expanding the portfolio. I don't know what more you want. You're always going to have some markets that are down and some markets are up. If you look at what we're trying to accomplish and what we have accomplished, and the fact that I think the numbers speak for themselves. You're always going to have some pockets somewhere in the world. You're not going to have every cylinder flying here.

We're looking at this thing -- we're saying if you look at the key countries that we're in, other than the UK, all of the other countries are very small. Denmark is very small. Ireland is very tiny. It doesn't matter one way or another. You got to look at the key countries in our portfolio. If you look at Germany, you look at France, you look at the UK, you look at Holland. Then when you look at those countries, you've got to also look at the mix from industrial, infrastructure, commercial and so forth. Then you look at the Gulf region of the Middle East and what's going on there, how we continue to expand. You look at India, you look at Latin America and the opportunities we're looking at there, you look at Asia, and so I don't quite understand what the concern is.

Just as a follow on access. You talk about the balance of industrial, which I think you've talked about as a mix. Have you gotten a better sense of the rest of the balance, or maybe you can just speak to what you think the mix is between industrial, infrastructure, and commercial construction?

Well, we've said consistently 25% of the total access service business is industrial with the major concentration of that in Holland, the US, and the UK. That's where the three -- we do it many other places in the world, but the bulk of it is in those three countries, okay? That business is pretty much steady year-over-year. We continue to grow that business on a very slow but steady pace. It's very predictable. Then the rest -- the 75% roughly is broken down between infrastructure, commercial. There is some multifamily apartments. We don't do any single family homes. But there are some particularly in Europe where you do these large multifamily large apartment complexes. There's a little bit of that as well. Any softness you're seeing is more in that space, Jeff, particularly, for example, in Spain. But we don't do anything in Spain. Just it shows where the major impact in Europe -- it's really in Spain and Ireland on the multifamily side.

Great. Shifting gears to mills services. Just with another quarter under your belt, as you get a firmer handle on the fuel cost issue and these underperforming contracts -- do you have a better sense of what kind of a goal or reasonable run rate margins should be running at exiting the year? And what is a reasonable timeframe for you to see that business kind of back to that normal double digit margin trend?

Certainly as we said, Jeff, we expect sequential improvement quarter by quarter. We believe in that. You will see year sequential if you will, if that sounds right. You will see improvement in '09 over '08. You shall see improvement in '10 over '09. Again, that's based on all things I said earlier that occurred. If you look at the contracts we're bidding on that we're confident we're going get in emerging markets, you look at sorting out these nine very problematic contracts as well as those other roughly 10 contracts that are not performing to our standard. Then you sort out these fuel issues and so forth. We believe clearly all those come together to get this ready to go. Now, on top of that, we think the lean Sigma initiative, which will take 12 to 24 months to get us even to starting to make a contribution, longer term, we think that's going to make quite an impact. But that's a much longer term thing. Shorter term, '08 and '09 and '10, you're looking at all the things I just talked about. So you will see sequentially year-over-year improvement. We're not prepared to give you an exact number right now. As you can appreciate, we haven't even done our plan, our strategic plan for 2009 yet, but we have an idea where we're going to be in 2009 -- we're just not ready to say. We can say we do expect to improve '09 over '08 and continue down the path year over year.

Just a final question. Housekeeping item. What you think growth CapEx for the year would be and total CapEx?

I would say it would probably maintain the same ratio we have now, Jeff, 56% growth CapEx.

Okay. So what's the total CapEx for the year?

We're probably running at for the first half a little higher than an annualized rate. So it'll be somewhat less than twice the amount that we've spent year-to-date.

Okay. Thanks, guys.

You're welcome.

Your next question comes from the line of Tim Hayes with Davenport and Company.

Good afternoon.

Good afternoon.

Just to clarify from the first question on access services, you gave some figures on revenue growth for Q2 and Q4. Was that for the total segment, or was that just for new business/organic growth?

That was for the total access services segment.

On that, in terms of organic growth for that segment, any feelings on that rate for '09 versus '08? Do you expect that you would see the rate of organic growth to slow next year versus this year?

We'll answer again the way I answered Jeff. We've not even started our planning process for next year, but again, look at the dynamics. Look what we've been saying. Look at the amount of capital that we were investing in this business, continue to invest. We just invested another record amount of growth CapEx. That's going to go somewhere. We're also looking at many other expansion opportunities in other geographies and so forth. We're not going to give you a number now, but you've just got to look at the dynamics of what's going on with this business and what we're trying to do with it.

Thank you very much.

Welcome.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of Bill Fisher with Raymond James.

Good afternoon.

Hey, Bill.

On entering the new markets in access in the countries, most of that -- do you tuck in acquisitions or do you add some mill yards? How are you going into some of these new markets?

All of the above, Bill. For example, in Romania, we purchased our distributor, where in Russia and India and Panama we went straight in organically. In India, we're invited in by Tata Steel, because they saw the good work that we do in the UK, on the mill side interestingly enough. And we're of course talking to them about mill services as well. They were anxious to get us started in India and help them with a lot of things, including some of their infrastructure work. That's what we're doing on the access side there. So there's a lot of ways we get in. We also get in by initially exporting or selling some equipment into a market. Once the market accepts that, the contractors and particularly the engineers, then the next phase is probably setting up a branch. There's multiple, multiple ways of getting in. We're currently also right now looking -- I think as of June 30, we were in 35 countries if I'm not mistaken in that business. We're looking at possibly another two or three yet this year. So if you look where we were eight years ago, we were in three countries. Not too long ago we were in 20 some countries. Now we're up to 35. It wouldn't surprise me if next year we're close to 40 countries, so again, a lot of opportunities. We're looking at some key markets where' we don't participate in, where we think we have an opportunity to grow.

Somewhat I guess related to that -- given your growth CapEx is more in those markets, just as we go forward on a straight math basis, if you keep growing there, in typically lower tax rate countries, shouldn't your [spend to rate UK] remain slow. Shouldn't that rate move down a bit over time?

That's a good question. That's exactly right. If we continue to expand successfully in these emerging markets, if you look at the tax rate -- look at the Middle Eastern, most of them don't have a tax rate. So yes, the tax rate will continue to be driven down over time as we continue to expand in these much lower tax countries.

Last quick one. You utilize EVA, but you have a lot of growth CapEx on there, but do you still look -- I think you bought back a little bit of stock in Q1. Do you periodically look at that and its attractiveness?

Guarantee we'll be looking at that very closely given where the stock price is now. We think it's deep value stock right now. We're certainly going take a very hard look at that.

Great. Thank you.

Welcome.

Thanks, Bill.

Your next question comes from the line of Yvonne Varano with Jefferies and Company.

Thanks. I want to talk about the organic growth in mill service, which was pretty impressive here in the quarter -- what we haven't seen rates like this for I think seven quarters now. Can you talk a little bit about where it's coming from geographically and whether you're penetrating new customers? Or is this more sales of services to existing customers?

Yes. Good question, Yvonne. If you look at a couple things. Couple macro comments because it's important. We never really talked much about this. Our mill services business is the best positioned business geographically than all the other businesses. Last year's number is in 10-K, so I'm not telling you something that's not in there. In the 10-K, you'll see that 20% of their revenues come from emerging markets, and that number's growing. Again, intentionally by design. We should be closer to some 30% this year.

It does come from emerging markets, and also some of our key countries and key customers. The key thing with us is not only the geography here, but also the customer diversification. We're doing more and more work with some of the Russian steelmakers for example. We're trying to do more work with some of the other larger steel producers. We're looking in Brazil, we're looking in Saudi Arabia. We still continue to get a lot of work from (inaudible) and Mittal, and so forth. Yes, we have for example Peru. We just started up a new contract in Argentina. We started up that new contract Ningbo Steel in China, on and on and on. It's a nice mix. This business like I said has the best profile of any of our businesses when it comes to geography. This will continue to improve. Now as we sort out and exit out some of these contracts, you've got to remember you have to deduct these exits from the growth rate. As we get into the future, the growth rate is not going to be 7%. It can be 7% and we said we can grow this business at a healthy rate, if you exclude out these types of things, like exiting out of these underperforming contracts.

What about progress in India? Is that an area that you're looking at?

Absolutely. We're in we're active dialogue with Tata Steel as we speak, and we're in active dialogue with quite a few other steelmakers throughout the world, particularly again in emerging markets. We're looking at some key geographies to expand in.

Just a little on Excel Minerals, because I know that that's another area where we're looking to grow. Just a little update on what you're seeing there?

It's slow, Yvonne. First of all, we like it look at it more as the minerals business, Reed and Excel together, because they're really one. And it's going much slower -- the growth rate than we had hoped, but for good reason. We're in the process of integrating the business. You've got to remember it was a family owned business. They had very little or no internal controls. Very poor computer systems. On and on and on. We spent a considerable time and money getting them up to SOX level controls, modern ERP system. All that stuff is finally now coming to an end. So we're looking at 2009 as I mentioned earlier. Not only the minerals business, but you look -- we're actually going to be expanding all three businesses in there -- rail, minerals, and products. The rail business is going to expand just by the fact of the major Chinese order. We're looking at expanding that business hopefully across some other geographies as well. On the minerals business, same thing. We're looking at China and some other key markets. On the product side as I mentioned, Air-X-Changers are looking at expending overseas in Asia and the Middle East. ITG's looking at doing some work in Canada. We're looking in Latin America, possibly China, so all the businesses are very active, very engaged, and again, our intention is to start reallocating and, again -- because we like the balance of the three segments. And to grow this business hopefully a little faster than they've grown in total.

Right. Just on Excel, the growth is slowing mainly because you're focusing on getting operations the way you want them before moving forward, or are there market factors that have been impacting it?

It's really us. We going a nice disciplined -- we like the word discipline. We're not slowing. We're growing at a disciplined rate. Okay? And so that's what we're trying to do.

Great.

Because it's all about people.

Thank you very much.

You're welcome.

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

No. Just want to finally just say thank you. We're obviously very, very pleased with our quarter results. We're very pleased with our six months results. We're very pleased with our outlook. We stand ready and hopefully deliver the fifth consecutive record year of strong both top line and bottom line growth. Thank you for your support and your participation today.

This concludes today's teleconference. You may now disconnect.