Enviri Corp (NVRI) 2011 Q1 法說會逐字稿

Good morning. My name is Chrissy, and I'll 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 prevent any background noise. After the speakers' remarks, there'll 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. Good morning. I'd like to welcome everyone to Harsco's First Quarter 2011 Conference Call. I have here with me today Gene Truett, our Vice President of Investor Relations, and Steven Schnoor, our Chief Financial Officer.

Before we begin, I will ask Gene to read the Safe Harbor statement. Gene?

Thank you, Sal. Good morning, 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 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 statements reasons and risk factors that affect our businesses, and these could be the reasons for any difference that could occur. We invite 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 on our website. Please take the time to access this information at your convenience. Sal?

Thanks, Gene. Our call this morning will commence with some brief comments from me and I will then, of course, turn the Steve -- the call over to Steve so he can give you further details on the quarter. And then I'll make a few other additional comments, particularly on our outlook, and take your questions.

So, let's get started with some opening comments. For the first quarter all four business segments performed well, and what was especially pleasing to me was the performance was well balanced. Overall, our revenues increased 5% and we slightly raised our earnings guidance for the year. We are beginning the year on a positive note.

I am also pleased to report that the restructuring actions that we announced in the fourth quarter of 2010 regarding our Infrastructure business are substantially complete. We are now finally able to look forward with our focus clearly on execution.

Nevertheless, there is still uncertainty throughout the major global economies in which we operate. I'm sure you saw the less than robust GDP numbers for the US as well as the UK.

While we are encouraged by our first quarter results, it is prudent for us to continue to view the near-term outlook with a degree of caution. I will comment further on this later when we discuss our outlook.

I'm going to now turn the call over to Steve so he can give you a little more details on our first quarter performance.

Thank you, Sal, and good morning, everyone. As reported in this morning's press release, we recorded earnings per share from continuing operations of $0.15 for the first quarter. The results exceeded first quarter 2010 earnings per share of $0.10.

All business segments exceeded their prior-year earnings except for Harsco Rail, which was as expected. As previously communicated, Harsco Rail's shipments in 2011 will be heavily weighted to the second half of the year. Conversely, in 2010, shipments were much greater in the first half. The full-year performance of Harsco Rail is expected to approach that of 2010.

First quarter consolidated sales of $779 million were 5% higher than last year with all business segments exceeding last year's sales except Harsco Rail for the reasons I previously communicated. Foreign currency translation increased sales by approximately $19 million compared with 2010 but had a negligible, a small effect, on operating income.

First quarter results reflect stable market conditions for the Metals and Minerals business, the Rail business and Harsco Industrial businesses. The results also reflect continued weak global market conditions in non-residential construction, affecting our Infrastructure business.

On a comparable -- on a corporate-wide basis, as expected, first quarter interest expense decreased by $4 million from the first quarter of last year. This results principally from our October 2010 debt refinancing at a significantly lower interest rate than the prior debt.

The first quarter effective income tax rate was slightly lower than expected. The full-year 2011 effective income tax rate is expected to be in the range of 26% to 27.5%, as communicated at the Annual Analyst Conference in December.

I will now review our cash flows and our liquidity position and then discuss the performance of each business segment in more detail. The first quarter is our most seasonally slow quarter for cash flow. Historically, most of our cash from operations is generated in the second half of the year, principally in the fourth quarter.

This year is expected to be no exception. As such, the first quarter free cash flow was a net outflow of $48 million, impacted principally by cash disbursed with the Infrastructure group's 2010 restructuring action and for capital expenditures in the Metals and Minerals business.

Capital expenditures increased due to required funding for previously announced growth projects in our Metals and Minerals business. Additionally, approximately $10 million of cash was disbursed in the fourth quarter related to the 2010 Harsco Infrastructure restructuring actions.

Our debt-to-total-capital ratio as of March 31st was 38%. This is only slightly higher than 37.6% at year-end, which is the lowest debt-to-capital ration in at least 12 years.

First quarter 2011 debt-to-capital ratio was significantly lower than a 40.1% for the first quarter of last year. So our balance sheet remains in great shape, providing us with substantial financial flexibility.

Let's now review the first quarter performance of each of the business groups. Our Harsco Metals and Minerals segment reported a positive first quarter with sales, operating income and operating margins all significantly higher than the first quarter of last year.

In the first quarter of 2011, steal production of our customers was higher than both the first quarter of 2010 as well as sequentially higher than the fourth quarter of 2010. This has a positive effect on sales, income and operating margins in the first quarter.

Higher commodity pricing compared with last year in our Minerals business also benefited the first quarter results while increased fuel costs had a negative effect. We expect gradual -- we expect stable or gradually increasing customer steel production for the remainder of 2011.

The outlook for the full-year 2011 for Metals and Minerals is positive, resulting from new contract start-ups and contract renewals with increased volumes. Increased fuel costs are expected to somewhat mitigate the benefits of the higher volumes.

Although the continued difficult environment for the global and non-residential construction activity continues to impact performance of our Infrastructure group in the first quarter, the overall performance of the business is encouraging, slightly exceeding our expectations.

The operating loss in the seasonally slowest first quarter was lower than the first quarter of 2010 as the cost savings from the fourth quarter 2010 restructuring actions began to be realized.

The rental equipment utilization rate in the first quarter was 54% compared with an adjusted 51% in the first quarter of 2010. As expected, due to seasonal effects, the first quarter 2011 utilization rate declined from an adjusted 55.8% in the fourth quarter of 2010.

The 2010 utilization rates have been adjusted to reflect the effects of recent acquisitions previously not included in the rates as their information technology systems did not capture the data. The systems have now been integrated to capture the data.

Rental rates in the first quarter were 6% lower than the first quarter of last year when the end market conditions in that business were still declining. However, first quarter rental rates were equal to both the fourth quarter and the third quarter of 2010, again remaining stable in consecutive quarters.

We are on track to realize the previously communicated estimate pretax restructuring cost savings of $43 million in 2011 and over $60 million on an annual basis beginning in 2012. The restructuring savings will increase sequentially each quarter of this year with the full annualized rate effective by the fourth quarter.

Harsco Rail reported better than expected results in the first quarter as certain significant shipments were accelerated from the second quarter of 2011 at the request of our customers.

As expected, operating income for the first quarter was below last year due to the timing of shipments that are weighted more towards the second half of 2011 compared with 2010. We expect the Rail business to continue to perform well for the full year of 2011 as backlog and quoting activity remain strong.

Harsco Industrial sales operating income and operating margins were all higher than the first quarter of 2010. Improvements result principally from the Industrial grading business and ongoing business transformation initiatives.

We expect improved results for Harsco Industrial in 2011 compared with 2010, so our increased presence in emerging markets will be a -- new joint ventures, increased efficiencies and market share gains.

That completes my comments, and I will now turn the call back to Sal.

Thanks, Steve. Let me now summarize for you our current outlook for the second quarter of 2011 and as well as for the year.

With respect to the second quarter outlook the Harsco Infrastructure business, as expected, should show notable improvement compared with last year and the first quarter of 2011 due to the realization of cost-reduction benefits from the restructure program that Steve just discussed with you.

Nevertheless, we still expect a loss for the second quarter from this business. The trend is positive, and we should continue to see both sequential, as well as year-over-year improvement in operating results for the Harsco Infrastructure segment as the year continues to unfold.

Still, uncertainties and challenges do remain in major end markets. The prospects for the full year should be much clearer at the end of the second quarter, as you can expect with the first quarter being a seasonally low quarter.

Our Harsco Metals and Minerals business is expected to continue to perform well in the second quarter. However, there will be an impact on margins on a year-over-year basis because last year's second quarter benefited from an asset gain of approximately $3 million.

As we have consistently articulated the Harsco Rail business will again, just like the first quarter, be down measurably due to the timing of shipments that are weighted towards the second half of the year.

Also, as we mentioned in the press release, the second quarter for Rail will be further negatively impacted by a delivery that was planned for the second quarter but was realized in the first quarter, as Steve just mentioned.

So in summary, the second quarter is looking like this and pretty much as expected. It's going to be well balanced. It'll be a very solid quarter. But, because of the timing of the Rail shipments weighted towards the second half of the year, as we just repeated I think two, three times, the $0.03 per share that shifted from the second quarter to the first quarter, again as we explained in the press release, and the fact that last year's second quarter included a net asset gain of approximately $0.03 per share that are not expected to be repeated in this year's second quarter, makes the quarter-over-quarter or the year-over-year quarter comparison very difficult, as you can appreciate. So, we're trying to give you all the moving pieces here.

Therefore, we expect overall second quarter 2011 results to be slightly below those of the second quarter of last year due to all the aforementioned items. Thus, our present outlook is for the second quarter 2011 diluted EPS from continuing ops to be in the range of about $0.34 to $0.39 compared with about $0.40 last year.

While we are encouraged by the fourth quarter results, as I stated in my opening remarks, it remains prudent for us to presently view the outlook for the remainder of 2011 with a degree of caution, particularly as we have yet to see any measurable improvement in our Infrastructure segment's principal end markets.

As such, we are increasing slightly our previously communicated full-year 2011 diluted earnings per share guidance from continuing ops from $1.25 to $1.35 per share to a new range, $1.30 to $1.40.

We expect our prospects for the full year will be clearer at the end of the second quarter, particularly due to our Harsco Infrastructure segment, at which point we should have further visibility into earnings guidance for the remainder of the year.

I'd like to make one final comment, and that is around free cash flows for the year. I'm pleased to report that our long-term contract-bidding activity this past quarter has gained considerable momentum and, so far, is exceeding our expectations.

The high level of activity is particularly strong in our Metals and Minerals business. Clearly, some of the bidding activity should culminate in new awards. We are hopeful that over the course of the next couple of quarters that you will see evidence of this as we issue press releases announcing contract wins.

These awards will, of course, require us to use some of our free cash flow to fund these higher levels of growth investments that, once fully operational, will contribute to our future free cash flows and earnings.

In the near term, however, it may require higher than expected cash spending for CapEx. We will obviously update our view of CapEx spending for the year as contract wins are announced.

Meanwhile, we have attached to the first quarter release, you may or may not have noticed, a schedule that tracks our free cash flow. This schedule will now be made a permanent part of our earnings release package. So again, in order of full transparency and given the importance of free cash flow, we want to make sure that you have this available every quarter. That completes my formal comments and we will, of course, now be pleased to take your questions.

(Operator Instructions)

Your first question comes from the line of Jim Lucas, Janney Capital Markets. Your line is open.

Oh, thanks. Good morning, guys.

Good morning, Jim.

Good morning, Jim.

Good morning, Jim.

The first question, I wanted to delve into a couple of comments you made on Infrastructure. In your prepared remarks, you said you've yet to see any measurable improvement in the Infrastructure outlook. But, from a stabilization standpoint, have you gotten to a point that you can say that it looks like a bottom is finally here?

Yes, Jim. Certainly. We -- it is stable, and you can see that it's manifesting itself through the rental rates and utilization rates and those kind of things. Clearly, we think we are at the bottom. It's stable.

And -- but, what I meant by that comment is that if you -- you saw, like I said earlier, if you look at the GDP numbers of the US and UK, which are two huge markets for us and nothing to get excited about there. So, we're not seeing any meaningful activity on the construction side.

I will say though again, as part of our strategy, as you well know, we've been shifting part of the portfolio to the Industrial market. And we are getting some wins. I don't want to over-exaggerate it, but you've seen some press releases where we've had some pretty good wins.

And so, it's a beginning of something. We'll continue to aggressively pursue those throughout the world, particularly in some of the key emerging markets where we see some good opportunities.

And that leads into the next question. With the restructuring complete, you said you can finally look forward. And with regards to that transition, any sort of a concrete example you can give outside of some wins on the Industrial side? Or, kind of what is the strategic focus now that the restructuring is done?

Well, one of the things we're clearly focusing on is execution. We think there's still opportunities for us to take more costs out of this business. It's going to take a little longer, but through our Lean Sigma initiative and those kind of things, we believe there's some additional efficiencies that we can gain.

Too, better management of the global inventory, we just appointed an executive to oversee the global inventory, it's something we'd never done before, again to get better utilization, better efficiency.

We are bidding work, particularly on the major Infrastructure jobs, Jim, throughout the world. So, I don't want you to think that there's nothing going on. We're bidding in Africa. We're bidding in the Middle East. We're bidding in Eastern Europe and in Asia and so forth. But, it's nothing that's going to materially move the needle today. But certainly, we're very engaged there.

Ivor is doing a great job on the sales and marketing side. It's something that we were not very good at in the past. And he's bringing a new focus there, a new level of professionalism, there, and I think that's going to pay some dividends down the road here.

But again, as you can appreciate, we've got to be very conservative, very cautious. Once the second quarter is under our belt, I think, in all honesty, I think we can give you a much better view in July and give you --.

So, I know where you're getting at and what you'd like to see, but I just can't give you that right now because I don't have it. I think I will have it in July, but we just need to get that second quarter under our belt.

Well, that's very helpful color. And on the Metals and Minerals, just a little color on both sales as well as the contract bidding geographically, are there any particular geographies where you're seeing better activity, both on the sales side and the contract side?

Absolutely, great question. As you well know, one of my number -- one of my major strategic objectives the last three or four years, and we're making very good inroads, are the emerging markets.

I think you're going to see -- I'm hopeful that you will see over the next two quarters some pretty decent announcements on the Metals and Minerals where we've -- were awarded some contracts in the emerging markets. And it's pretty much scattered, so it's not concentrated in any one country. So, we're hopeful that you'll see that shortly.

Great. Thank you.

You're welcome.

Your next question comes from the line of Chase Becker, Credit Suisse. Your line is open.

Hi. Good morning. How are you?

Good morning.

Good morning.

Good morning, Chase.

I was wondering if you could just give a little bit more commentary on the Metals versus Minerals breakdown of where you're bidding, some of the stuff that's going to require higher CapEx? Is that more Minerals related, kind of related to something like the China JV? Or, is it more Metals related?

It's a very good question, Chase. I mean, the ones that I have in my head right now I would say that it's probably two-thirds Metals, one-third Minerals and -- which kind of makes sense of you look at the proportional sizes of the business. The Metals business is historically much, much larger than the Minerals business. And -- but certainly, it's something like two-thirds/one-third.

Okay, that's helpful. And any update on the timing of when you expect to finalize the China JV in Minerals?

Yes. We're hopeful that we will be able to announce something by the end of the second quarter. That's where we're targeting.

Okay, great. And I guess my last question is, when you think about the Infrastructure business going forward do you have any kind of sense of when you expect that you'd be able to push rental rates actually higher? I mean, I think it's encouraging that you've at least been able to hold it flat sequentially in a seasonally weak period. Any color would be helpful. Thank you.

Yes. You're welcome. Well, that's obviously -- the most important question for our business is, when can we get around it. It's that we can't -- we can't really say at this moment, Chase. It's very difficult.

Again, I think we need to get the second quarter under our belt, and hopefully in July we'll be able to give you a little more color on that. But right now, I -- it's just very difficult. It's just speculation on our part if we were to do that.

All right. Thanks, guys.

You're welcome.

Your next question comes from the line of Jeff Hammond, KeyBanc Capital Markets. Your line is open.

Hey, guys. Good morning.

Hey, Jeff.

Good morning, Jeff.

Hey, I just wanted to get a better sense. It's -- maybe I can just lay out how I'm thinking about it. But, you've got it sounds like a couple million of restructuring savings in the first quarter. That starts to ramp towards that $15 million a quarter savings, and then you're at that run rate in the fourth quarter. Is that the right way to think about the $40 million of restructuring savings?

Yes, Jeff. I mean, we expect by the fourth quarter to be at the full run rate of the $60 million and achieve the $43 million for the full year 2011.

So, it seems like 1 -- if we were to kind of build a bridge 1Q to 2Q from that $17.5 million loss maybe you get $7 million, $8 million of incremental savings and then you get some seasonal lift?

Yes. I mean from a -- yes, absolutely. From the first quarter to the second quarter, the additional savings from the restructuring program, then the second quarter -- you know, the first quarter is always the worst seasonally. The second quarter, the seasonal effects start to become more positive.

That's a fair assumption, Jeff, what you say.

Yes.

Okay, great. And then for CapEx, can you give us, one, this quarter what you think was maintenance CapEx, what you thought was growth CapEx, what you think your full-year CapEx is going to be and how that splits between maintenance and growth?

Jeff, it's approximately 50% for the quarter of growth versus maintenance and that's what we expect for the full year, approximately 50% growth/50% maintenance. As far as the full-year CapEx, it all depends on the wins we get with some of these bids that we have in Metals and Minerals business.

Yes. We're just going to have to track that for you, Jeff, as I mentioned earlier. The -- given the much higher level of bidding activity than we expected, like I said, we expect to get some wins out of that as well. It could change the CapEx spend a bit for the year, but it's too early to say exactly. We obviously have not given up on our average annual cash flow target, as you well know. We've stated that we would do roughly about $200 million in free cash over the next five years.

But, I'll just take you back just to make the point. If you look at the last three years, for example, the period 2008 to 2010 where we actually generated exactly $600 million in free cash or $200 million on average per year, but if you look where the numbers were they were all over the place.

And in 2008 we did $116 million, 2009 we did $269 million and 2010 we did $209 million, but the average was $200 million. I think you're going to see those kind of patterns over the next five years, as you can appreciate. We have to obviously fund growth, and we're seeing some good opportunities, particularly in the emerging markets. We're not going to let those go. They're all organic growth, which is even better.

So, if you -- if you spend in excess and you don't hit that $200 million free cash flow because you're spending more on CapEx, next year or the following would be a digestion year or you'd -- where you'd conceivably pull back, or --?

No. Well, we -- hopefully, you'll see obviously higher earnings, higher cash from ops. It'll start contributing and generating a much higher number from where you deduct the CapEx from. So, that's what we should see.

Now, there's always like a nine to 12-month lag, as you well know, Jeff, with these projects until they get up and running and so forth and start generating positive cash and earnings.

Right. I guess what I'm getting to is, it seems like last cycle you had spent quite a bit on growth CapEx and some of those decisions turned out to be not the best capital decisions. And I feel like at the more recent Analyst Meetings the discussion had shifted to a more balanced approach.

Right.

And it seems like we're kind of re-ramping back to growth CapEx pretty quickly.

Well, no. No, Jeff, you're missing the point here. I mean, first of all, the past was all centered around Infrastructure. And you remember that the cycle time over the Infrastructure projects, they average 6 months at best. Here, you're talking about 10-year contracts, so it's a whole different dynamics here, more recurring revenue streams. You -- we're talking about the Metals and Minerals business. We're not talking about the other businesses.

I think our shareholders would want us to invest in some very good projects in the emerging markets where there's high returns, high internal rates of return and long-term positive cash flow.

You may have some timing issues but, again, we're committed to doing the free cash over a horizon. But, the point I'm trying to make is is it may not be perfect every year, as we just evidenced here for the last 3 years.

Okay. That's helpful. And then just on Rail, can you just update us on how visibility is coming together for kind of beyond this China contract? And what's the likelihood that a lot of that gets ultimately refilled with other China deals or another sizable China contract?

Yes. First of all, Jeff, we were very confident in the number we gave out in December for this year, of course, and also for the five-year outlook that we gave for Rail.

We're hopeful again that you will see some contract orders here, press releases, in the next quarter or two where we continue to fill that void, if you will, that you just alluded to, and you'll see that.

So, we continue to fill that void. There's a lot of -- again, the business -- the second business where we have the most bidding activity other than Metals and Minerals is the Rail. We are bidding work all over the world. We're getting some pretty good wins.

So, we feel confident on what we said back in December about the -- I think it was 7%, the compounded annual growth rate, or whatever the number was, or 5% for Rail. I think it was 7% overall for the Company. But, we're very confident that we can deliver that.

Okay, great. And then finally, the tax rate came in a little bit lower. How should we think about tax rate for the balance of the year?

Jeff, in the range of 26% to 27.5%.

Okay, great. Thanks, guys.

Thank you.

Thanks, Jeff.

Your next question comes from the line of Glenn Wortman, Sidoti & Company. Your line is open.

Yes. Good morning, everyone.

Good morning.

Just looking at the margins in Metals and Minerals, if you pull out the one-time gain in last year's second quarter do you expect margins this year to be comparable to last year? Or, how do you think that will shake out?

Yes. They -- as I mentioned, Glenn, that -- they -- we expect them to be down a little bit due to the asset gain last year that's obviously not going to be repeated and another big number, $3 million.

Yes.

And the other thing too, that's effective -- I mean we haven't talked much about it but, particularly as we get into the second quarter here, we're ramping up quite a few new contracts. And there are some start-up costs in there.

And in addition to that we're bidding a lot of work, and that takes some cost to do that. Especially when you're bidding work in these remote parts of the world, it takes a considerable amount of investment, if you will, to get those orders. So, there's those kind of things going on as well.

But, we're going to do well. It's going to be a good second quarter. It's just that right now, based on what we can see, we think the margins will be down somewhat. But for the year, the margins are going to be up for the group.

Okay.

Okay?

And revenue was very strong in the first quarter for Metals, and do you think these double-digit gains are sustainable for the rest of the year?

Well, we expect a good -- yes, we expect not quite the 14%, I that what it was. I mean, that was a very strong first quarter. But certainly for the year, we expect a very -- you know, possible high single-digit growth rate.

Okay. And then just -- and lastly, back in December you gave us a percentage breakdown by quarter, or at least for your expectation for -- on the revenue side for Rail in 2011. Can you just update us with new numbers if you have them in it?

Yes. I mean, there's no major change from what we said before. Clearly, the earnings are weighted towards the second half and the shipments. I don't have the exact numbers in front of me here, Glenn, but I'm certainly -- you know, Gene can fill you in whatever you need there.

But, nothing has changed from what we -- I think we had given you a chart that showed the -- in December that showed the revenues for the first half compared to '10 and the second half, and they were complete opposites.

Yes. Glenn, I think that the real issue is that we had a little bit of a pull forward, but we know that the Rail people have a very heavy bidding activity and they're working very hard to -- making a full year on a comparable basis.

We're better if they can, but the point is that the revenues that we articulated and the general balance between the quarters back in December is what we're still looking at.

All right. Thanks, for taking my questions.

Sure.

You're welcome.

Your next question comes from the line of Scott Graham from Jeffries. Your line is open.

Hey. Good morning.

Good morning.

Good morning.

Good morning, Scott.

The -- really only one question for you, the Infrastructure business, would it be fair to say that with sales essentially flat in the quarter that the entire operating margin, negative operating margin maybe and then some, is all price?

It's -- well, certainly the pricing has the largest affect on the business. I mean, at the -- really, the benefit from last year to this year, the end reduced loss was restructuring savings that we -- from our actions that we took in the fourth quarter of last year. I mean that's really the biggest benefit, reducing the operating loss.

Yes. We clearly said, that quarter to quarter sequentially that the average run rate was flat, but year-over-year it was still down a bit.

Yes. I'm not really talking about any comparisons. I'm just looking at the absolute first quarter number, which had a little bit of benefit but really only a little from the restructuring.

I'm assuming that mix is kind of neutral, so if we look at this business at a -- as a 3% to 5% early-in-the-cycle margin business, then it would seem to me that price is like a minus 10. And that's all I'm asking, if that is a reasonable way to look at this?

The thing is the pricing, I can tell you the pricing from last year was down 6%. But however, the first quarter is the slowest seasonal quarter for this business every single year. And --.

Well, that's true. Right.

And the restructuring benefit will be kicking in each quarter sequentially with the larger amount of each quarter. So, you get the uptick in the season, generally speaking, of this business plus the additional restructuring savings for the rest of the year. That's the way to look at it.

Right, agreed. Actually, I do have a second question. That was that. Now, I know your reasons for increasing the capital expenditures on a year-over-year basis. I think you're saying that they're ten-year contracts, so maybe we should look at some of the CapEx increments a little bit differently.

I do echo an earlier question where it did seem as if you were kind of saying the CapEx would maybe go as a percent of sales the other direction, which it really didn't this quarter. And I think you're kind of signaling that CapEx will be a little higher, but any kind of additional color around that?

And the change in working capital in the quarter, if I go back to 2008 when all -- early in the first quarter of 2008 when both Metals and the Infrastructure businesses were performing well and consuming working capital, understandably, that number was about $110 million in consumption and this number this quarter is $72 million without anything on a presumably sourcing of cash out of the Infrastructure business.

So, maybe you can help me. In addition to any additional color you can give on the CapEx outlook, maybe you can talk about working capital changes as well because that looked a little harsh.

Yes. Let me deal with the CapEx, and then Steve will work with the working capital. Clearly, we have more organic growth opportunities in the more stable annuity-type Metals and Minerals business than we were foreseeing back in December.

Our -- we are gaining traction in bidding. I think part of this is the success we're seeing in these two businesses of having been combined, putting their marketing together.

Again the difference is, as Sal stated earlier, that back in the '07, '08 time period, the significance of the vast majority of the CapEx growth was in the Infrastructure business where the rental period is, as you know, 5 or 6 months and then you've got to redo it.

Here, you have an average, an average seven-year contract where again it's based on production. The longer-term outlook for the steel industry, we believe, is very good. We've got various safeguard within the contracts to help us there.

And I think it's a question of where do we spend our free cash flow. And most often, the best place to spend it is when you truly have EVA creating incremental organic growth opportunities, and these are -- we're just seeing some very good success here.

So, that's why I don't really think it's different. Now keep in mind, as Sal stated, that as these projects come on board and in a perhaps nine to 12-month lead lag time that they will then of themselves start throwing off more earnings and depreciation, thus paying for themselves from that point of view and in cast from operations.

So, we like to use the term average $200 million of free cash flow over the next five years and, as Sal indicated, we've got some history that shows us that. So, I think the CapEx spend is very wise. I think it's in the right segment. It's in -- under a long-term contract.

And, again, it's part of the success we're seeing, not a -- really a strategic change. It is success, and we're going to use that free cash flow where we think it's best used for our shareholders.

And it --.

Steve, do you want to -- go ahead.

It's going to the emerging markets, which is part of our -- one of our major strategic objectives, which is another very critical part.

Yes.

As far as the working capital goes, now first of all if you look at it from December to now, there's been a pretty big effect from foreign currency translation. The euro has gone up significantly from December to March 31. So, it -- that increases the balances, of course.

But -- and also, March -- out of the three months of the quarter, March is always the -- because of the seasonal aspects, the sales tend to increase in March so you get a lot of the sales that -- in that month, thus increasing receivables. And also, inventory balances -- you know, we have some decent backlog in our Industrial business of inventory balances went up in the Industrial businesses. And however, if you look at it year over year, our working capital percentage of sales is actually lower this year than it was in the prior year.

Okay. Thanks, a lot.

You're welcome.

Thanks, Scott.

(Operator Instructions)

Your next question comes from the line of Rob Norfleet, BB&T Capital Markets. The line is open.

Good morning, gentlemen.

Good morning.

Good morning.

Good morning, Rob.

Just a couple of quick questions I missed and might have been answered. I know on the stated remarks you all mentioned the higher fuel cost obviously would have a bit of an adverse impact on results as we going forward, given obviously where pricing is. Can you remind us of what your fuel requirements or usage are on an annual basis and then how we should look at your ability to pass through these higher costs in terms of pricing and the lag associated with that?

Yes. I mean, I could tell you from a sensitivity perspective, for every $5 increase in the price of oil that affects the business by about $2 million. Now, we're able to recover ultimately increased costs, about 75% of it, 25% within -- immediately with that first -- within a quarter, 3 months or so and then another 50% for the remainder within the year, based upon the contractual clauses that we had to recover escalation of increased costs.

We've been doing a better job of that over the last 2 ore 3 years, getting more of those clauses in our contracts. So, we're in a better position than we were before.

Rob, keep in mind that most of this in the Metals and Minerals business. It's diesel fuel to run these big pipe carriers and slab haulers and front-end loaders, so one can't say how much it's going to be exactly because you have to look at steel production.

And the good news and the bad news, if you would, it's better news, steel production goes up. Your fuel costs will go up. Your fuel need will go up. But again, you're offsetting that with higher revenues from production.

Okay. That makes sense. And quickly in terms of some additional cost savings initiatives you mentioned, clearly one area that it would seem like there would be opportunity would be in SG&A. Can you just walk through a couple of additional initiatives you're looking at to further reduce costs?

That's right. We have a program here, what I call the OneHarsco initiative, where we're -- we've been working with some outside consultants to help us and looking at taking a quite bit of SG&A cost out of our business.

It's going to take a little longer term to do that. We have to implement some technology. As you can appreciate, we're in the process of doing it. So again, we're investing in new technology to do that.

Once that technology is in place -- plus, in parallel with that, we opened up an offshore services center in India. So the combination of all those things, as it all comes together, as we get into 2012 and 2013 and beyond, we think that we can -- we will continue to be able to reduce the SG&A costs of this Company.

You're not going to see much of that this year. We're actually incurring costs to do that this year. But I think, as we get into 2012 and 2013, you will see more of that.

And then also as part of that OneHarsco initiative, is our global supply chain group, which came together on January 1 of this year. Again, we're investing a considerable amount of money to get that group up and running.

We've had to hire quite a few people from the outside that are experts in global sourcing, global strategic supply chain and those kind of things. They're in a start-up mode right now, as we speak. We will get some benefits this year.

But, on a net/net basis it'll be minimal relative to the cost, but there will be a net benefit. But again, as we get into 2012 and beyond, we think that group will make quite a bit of contribution as well.

So when you add it all up, the OneHarsco initiative, you should see in the outer years -- starting in 2012, you should see the SG&A number as well as the cost of sales number on a relative basis hopefully continue to go down.

And see -- and the other thing too with the global supply chain initiative, and this goes back to the CapEx question, is that once that group is really up and running we're hopeful that we can start making a dent in what we pay for this heavy equipment.

So, even though we may need to buy a little more it'll cost us less, and plus you add in our Lean initiatives as well, we're tackling this CapEx thing on many, many fronts because we take it very serious, obviously, and we want to make sure that we can deliver what we said.

So, there's a lot underway right now. We are incurring quite a bit of cost to do all this. I think it's the right thing to do. We're investing for the long term of the business, and we think these initiatives will pay some good dividends as we get into 2012 and beyond.

Great. Thanks for the insight, Sal.

You're welcome.

Your next question comes from the line of Scott Blumenthal of Emerald Advisors. Your line is open.

Good morning, gentlemen.

Good morning.

Good morning.

Good morning.

Sal, do you find more interest in the Minerals recovery, maybe including some non-traditional businesses, copper or maybe even some precious metals with the commodity costs that we're seeing now?

That's a very good question. One of our strategies actually -- one of the reasons I wanted to put the Metals and Minerals business together was so we can start capturing some of these other opportunities that we see.

And we're actually bidding right now quite a bid of work with our Metals and Minerals group, but with the Minerals group leading but with the backing of the Metals group, in some of these other metals.

And we're covering quite a bit of range there, and again, as we continue to diversify with our focus being on solving waste stream solutions. There are a lot of piles of metals scattered all over the world.

There is a lot of different metals producers that have these waste streams they don't know what to do with, and so we are seeing some pretty good opportunities there.

And again, hopefully some of these announcements you'll see this year will support what I just said. And again, as we get into the 2012 time period you'll see that accelerate. So, we're hopeful. Again, there's a lot of positive things going on with the Minerals group right now.

Are these mostly with current customers just expanding your scope of services?

No, actually -- no. Actually, the good news is it's not. The good news it's with a lot of non-traditional customers. For example, the more -- the most -- the best example I can give you that makes the point is the EPA in the US, this -- this one we're doing in the US in Alabama, at Gadsen where it's -- the US EPA came to us to help them deal with this -- piles of slag waste streams to extract the metallics out of it.

That's the kind of thing we're seeing all over the world. And so it's non-traditional customers, but yet it plays right to our technology and what we do very well.

Yes. The transfer here really is that traditionally we had principally done these separations on site out of current production. What we're seeing now through self-recognition of environmental issues and in other governmental pressures, not just in the US, not just in China, not just in Austria, but other places, that there are these dumps as they call them, slag dumps, heaps, that contain metallics that are of concern, and they want something done with those as well. So, we see tremendous opportunities here with our technology.

Okay, Gene. So, we're not just restricted at this point to recovering, for example, ferrous units or nickel units?

No.

Is it something else like copper or --?

Copper, zinc --.

Ferrochrome.

Yes, ferrochrome, certainly the potential is there when you -- and it's -- really is interesting because we want to keep this a little close to the vest right now, if you can understand why.

But, suffice to say that there are numbers of metallics that are in waste streams in a -- numbers of industries where we believe that our technologies as they are today and as our new technology office is developing, something that Galdino Claro insisted upon putting together very correctly, so for our Metals and Minerals business that our scope will broaden. I think we want to keep it a little bit close to the vest right as to the whats and wheres though.

Okay. And, Gene, you've educated us over the years very well as to the renewal rate. Can you talk about maybe -- or have you disclosed the historical win rate or your percentage on bidding this type of new business?

Yes. I think we got this question actually at the last call, and it -- it's always a hard number to come up with. Here's how we've traditionally answered it. We can't answer it from new yet because we're bidding.

But traditionally, what we've said is that of the Metals, principally steel, copper, aluminum, whatever, bids are out, that about half of them come to some decision because, remember, upwards of 70% is still done in-house. Or, some of these environmental services are not done at all.

Of the ones that are decided, we get 50% or more. So, you can either say that we get 25% of what's bid but, remember, it isn't that they've decided not to go with us or with someone else. They've just simply not decided. They -- let's defer that decision for a while. So, we typically win half or a little bit better.

Now, I think what you're going to find is since we're -- win a very limited number of people out there, one might say no others but we'll leave that to be determined by the marketplace, who have the technology in the Minerals area for these separations of these other metallics --.

Right.

That win rate, certainly with our proprietary technology, could be higher.

Okay. And, Gene, then I guess extending the conversation, do you bid these? Is the customer the one that determines how they want to pay you, either in a tolling arrangement or in a recovery arrangement? Or, is that something that you suggest when you're bidding?

Either way, actually. Actually either way, Scott, the -- it depends. There's a lot of variables there, but it can go either direction or even the combination of the two. And so, every contract is a little different.

And we can handle any scenario very well because we have the expertise throughout the world to do that, and we're doing a lot of these things already in a lot of places in the world.

And you have systems in place to -- I guess to bill the customer in both scenarios, Sal?

Oh, yes.

Oh, absolutely, yes.

No, that's a -- yes, there is no question.

That's a -- it's going to be a monthly billing, regardless, every 30 days. Whatever we process, however we bill, we -- the customer gets a bill.

Okay, got it. Thank you.

Thank you.

Thanks, Scott

(Operator Instructions)

There are currently no more questions in queue, returning the call back over to the presenters.

Thank you. Well in closing, I'd just like to make a couple of comments. We are obviously pleased with our progress so far this year although it's early.

We are committed to executing our strategic plan that we outlined to you in December, and we continue to reiterate. And clearly, as we said in December as well, 2011 is a transition year for Harsco as we regain our earnings momentum.

And again, we are committed to delivering consistent double-digit earnings growth in the next 5 years and beyond, as we are articulated back in December. Our objectives are clear, and our journey is underway.

So we look forward to this year, particularly as the new growth era for Harsco. We obviously thank you for your ongoing support and thank you for your participation today. And we wish you a good day.

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