Enviri Corp (NVRI) 2012 Q1 法說會逐字稿

Good morning, my name is Sarah and I will be your conference facilitator. At this time I would like to welcome everyone to the Harsco Corporation first quarter earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question and answer period. (Operator Instructions)

Also this telephone conference presentation and accompanying webcast made on behalf of Harsco, are subject to copyright by Harsco and all rights are reserved. Harsco will be recording this teleconference. No other recordings or distributions of this telephone conference by any other party are permitted without express written consent of Harsco. Your participation indicates your agreement. I would now like to introduce Mr. Eugene Truett, Vice President Investor Relations and Credit of Harsco Corporation. Mr. Truett you may begin your call.

Thank you, Sarah. Good morning. I would like to welcome everyone to Harsco's first quarter 2012 earnings release conference call. I am here this morning with Henry Knueppel, Harsco's interim Chairman and CEO and Steve Schnoor, Harsco's CFO and Treasurer.

As we do at the beginning of all of our calls, we want to let you know that there may be 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. 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. I would like to now turn the call over to Henry Knueppel. Henry?

Thank you, Gene. And I would also like to add my welcome to all of those participating in the call this morning. Thank you, for your continuing interest in Harsco. We will follow our typical agenda. I will make a few opening remarks about the first quarter and Steve Schnoor will provide you with further details on the results. I will then finish up with some comments regarding the second quarter and we will open it up for questions. As all of you who follow our stock know, the first quarter is seasonally Harsco's slowest quarter. This is principally because of the effects of weather on new construction starts and steel mill operations and rail track maintenance. We took these factors into account in the first quarter guidance that we provided you in January.

As we stated in that call, we also expect difficult end-market conditions to continue throughout the quarter. Particularly in our two largest business segments; Metals and Minerals and Infrastructure. And in fact, actual market conditions in both segments turned out to be even worse than we had projected. Global mill production at the customers served by Harsco continues to be at what we, our customers see, as the at the low end of normalized production levels. While we are optimistic that the production levels will start to pick up and return to more normal levels as the year progresses, we are still not seeing that improvement at this juncture.

Obviously, one way to counter those market headwinds is to broaden our base. And we have been successful over the past several months in expanding our footprint with additional new customers. You have seen the announcements regarding new customers in Italy, Bahrain, Sweden and Chile. However, we will not see the benefits of those new contract signings until later this year and into 2013. We also continue to see year-over-year weakness in market conditions in our Minerals business during the first quarter, principally due to lower stainless steel production at mills in the US In our Infrastructure segment, end-market conditions continue to be challenging in the UK, Central Europe and in the US. Fortunately, we are seeing some strengthening in other regions, principally the Middle East and Latin America, as well as measurable cost savings from our restructuring initiatives. As such, we expect the first quarter 2012 loss of approximately $18 million, before restructuring charges, to be substantially reduced in the second quarter. In fact, if the one-time pre-tax gain of $4.5 million associated with restructuring actions as noted in this morning's press release is achieved during the second quarter, overall results could be essentially at break-even for this segment for the second quarter. Again, this is before restructuring charges. On a full year basis before restructuring charges, we are still driving toward a goal of being at or near break-even. However clearly the end-market headwinds I have just mentioned make this goal a difficult challenge.

Regarding the restructuring, we are making good progress both in the Metals and Minerals and Infrastructure businesses, and we are slightly ahead of the schedule we announced at the end of last year. Also partially offsetting the market softness in our two largest businesses was better than expected performance in the first quarter by our Rail and Industrial businesses. Rail posted higher than expected contract service revenues and also benefited from the timing of equipment deliveries that we initially expected would occur in the second quarter. The industrial segment benefited from strong backlogs in the two largest units; Air-X-Changers and IKG, both of which support the energy sector. When you add all this together, we achieved overall results at the upper end of our earnings guidance. Still, we would not characterize these results as particularly pleasing. We are simply not yet where we need to be in the areas of growth, capital allocation and free cash flow. Clearly we need to make meaningful progress in each of these areas and we are focused on the disciplines and rhythms that we need to improve performance in each.

It is clear to me that Harsco is a great company with dedicated employees, excellent products and services and enormous potential. That said, we have under-delivered on the value we promised to stakeholders and we need to rebuild confidence through meeting our commitments and through steadily improving our performance. We will start with one success at a time and then build on that base. I will now turn the call over to Steve Schnoor, Harsco's CFO.

Thank you Henry. Good morning, everyone. As reported in this morning's press release, excluding previously announced pre-tax restructuring charges of $35 million, we recorded earnings per share from continuing operation of $0.05 for the first quarter. The results include approximately $0.04 per share of separation costs for the former CEO, and a pretax pension curtailment gain of approximately $0.02 per share. Excluding those items, earnings per share were $0.07, exceeding our previous guidance $0.01 to $0.06 for the quarter. First quarter 2011 earnings were $0.15 per share. First quarter consolidated sales of $752 million were 3% lower than last year. Both of the reductions resulted from foreign currency translation due to the weaker euro.

On a comparative basis, the first quarter results were affected by lower steel production volume in our Metals and Minerals business, and continued end-market weakness in our Infrastructure business, particularly in Europe and North America. This is offset by strong performances of our Rail and Industrial businesses. A portion of Harsco Rail's first quarter operating income results from shipments that were originally expected to occur in the second quarter.

The first quarter effective income tax rate, excluding restructuring charges, was 68% as previously communicated. The higher first quarter tax rate resulted from reduced tax benefit from certain international jurisdictions, compounded by the seasonally lower first quarter earnings. For the year, the effective income tax rate, excluding restructuring charges, is estimated in the area of 27%.

As previously announced at our Annual Analyst Conference in December, to ensure the continued successful transformation of our infrastructure and Metals and Minerals businesses, especially in light of headwinds from the European economy, we are executing a restructuring program which began in the fourth quarter 2011 and will continue through 2012. Total pretax restructuring charges are estimated at approximately $198 million to be recorded in both 2011 and 2012. We recorded a pre-tax restriction charge of $101 million in the fourth quarter of 2011 and $35 million in the first quarter of 2012. The remaining $62 million will be recorded during the balance of 2012. As a reminder, the restructuring charge includes further streamlining of our European presence, exiting underperforming locations, and rationalizing our worldwide asset base. Total 2012 savings are expected to be approximately $36 million with full annualized savings estimated in the area of $65 million beginning in 2013. As Henry has just said we are on schedule to deliver those savings.

I will now review our cash flows and liquidity position and then discuss the performance of each business segment in more detail. First quarter cash from operations was $27 million, excluding $29 million of cash paid for restructuring activities. Cash from operations in 2012 exceeded $23 million, again, before net restructuring payments, recorded in the first quarter of 2011. Excluding net restructuring payments, discretionary cash flow for the quarter was an inflow of $7 million, compared with the cash outflow of $9 million in the first quarter of 2011. Discretionary cash flow is cash from operations, plus cash from asset sales, less maintenance capital expenditures. First quarter capital expenditures decreased compared with 2011 due to the timing of project capital requirements.

First quarter cash from asset sales also increased in 2012 to $22 million compared with $7 million in 2011. Such asset sales, which in 2012 included $7 million related to the sale of assets disposed in restructuring activities, are a routine part of our business and the cash is used to offset capital expenditures. Thus, our net capex in the first quarter were $38 million, excluding the restructuring cash receipts. Our debt-to-total-capital ratio as of March 31 was 44.4%. This compares to 42.7% as of December 31. The higher ratio as of March 31 results from seasonally higher commercial paper debt at the end of the first quarter. Net debt-to-capital, which considers our balance sheet cash, was 40.6% as of March 31, compared with 39.2% as of December 31. I mentioned in our last conference call that we were working to renew our revolving credit facility that expired at the end of 2012-- was to expire at the end of 2012, that is. I am pleased to report that we have renewed the facility for $525 million and a five-year term. This provides us with sufficient liquidity for an extended period of time.

Let's now review the first quarter performance of each of the business groups.

First quarter sales and operating income of the Harsco Metals and Minerals segment was lower than last year due to contracts that were exited in 2011, lower steel production by certain customers and foreign currency translations. This is partially offset by higher income in the roofing granules and abrasives business. Looking forward, second quarter results for Metals and Minerals are expected to improve from the first quarter, but be below the second quarter of 2011, due to continuous lower steel production volume. However, operating margins are expected to approximate second quarter of 2011 due to restructuring cost savings.

The $18 million first-quarter operating loss, excluding $36 million of restructuring charges, for Harsco Infrastructure approximated the $17.5 million operating loss in the first quarter of 2011. Results in the quarter reflect weaker than expected end-market conditions in North America, due to deferred industrial maintenance projects, and continued weakness in Europe, particularly the UK. These were partially offset by restructuring savings. First quarter sales were below 2011 due to lower volume in North America and Europe, foreign currency translation, and $5 million from the disposition of a UK product line in 2011, as part of the 2010 restructuring program. Despite the lower sales in 2012, the operating loss still approximated 2011 as a result of restructuring savings.

The rental equipment utilization rate in the first quarter was 56.3% which is comparable to the adjusted utilization rate in the first quarter of 2011. And as expected, due to seasonally decreased market activity, lower than the fourth quarter 2011. To provide a valid year-on-year comparison, utilization rates for 2011 have been adjusted for the equipment rationalization that occurred as part of the restructuring. Rental rates in the first quarter approximated those in the first quarter of last year, as well as the fourth quarter of 2011. Looking forward, we expect seasonal improvements in Harsco Infrastructure business in the second quarter as well as additional cost savings from the restructuring program. Therefore second quarter operating income, excluding restructuring costs, should improve for both the first quarter of 2012 and the $5 million loss in the second quarter of 2011.

Harsco Rail sales and income in the first quarter exceeded the comparable period of last year. These better results reflect higher machine sales and contract services revenue. Certain first quarter machine shipments were originally expected to ship in the second quarter. Therefore, second quarter results will be lower than originally expected. Also, please recall that the second quarter of 2011 included an $8 million one-time gain resulting from a change in estimated costs for the China Ministry of Railways contract. As a result of that, plus the movement of certain shipments in the first quarter, as well as the third quarter, second quarter operating income will be below 2011. However, bidding and contract signings are both strong, which will benefit the full year results.

Harsco Industrial continued to perform well in the first quarter. Sales and operating income were higher than the first quarter of 2011, as well as the fourth quarter of 2011. Operating margins were somewhat lower than last year due to higher material costs. Looking ahead, backlog for Harsco Industrial has been increasing and the near-term outlook is strong. As of now, orders have not been affected by the volatility in natural gas prices. However, we are closely monitoring the markets and are ready and capable to immediately reduce costs as necessary. That completes my comments and I'll turn the call back to Henry.

Thank you Steve. Looking into the second quarter, we expect steel production by customers we serve to remain below the comparable period of 2011, and below what we expected as we entered the year. However, we should also see an increasing benefit from restructuring actions that we undertook at the end of 2011 and into the first quarter of this year. We expect end-market conditions for our Infrastructure business to remain difficult through 2012, but just as with Metals and Minerals, we expect to see measurable and increasing benefits from our sizable restructuring actions as we enter the second quarter. Second quarter results in our Rail business are likely to be down significantly on a year-over-year basis due principally to the timing of deliveries that I mentioned earlier and the fact that last year's second quarter included the one-time pretax benefit that Steve talked about a few minutes ago. This benefit will not repeat in 2012. On the other hand, we expect results in our Industrial group to be better than last year's second quarter. Again reflecting their strong backlogs and ongoing continuous improvement initiatives. To be sure, we have a lot of work in front of us. I am confident that we will get to the current macroeconomic issues with the structure that can produced solid returns.

As you know, we are in search mode for a new permanent CEO for Harsco. I can tell you that the Board is fully aligned and will exercise whatever patience and due diligence is needed to select the right person. Our search will look both inside and outside to find the skills and demonstrated track record necessary to lead this organization and put Harsco's significant assets back on track creating shareholder value. We would now be pleased to take your questions.

(Operator Instructions)

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

Good morning, gents. A couple of questions here. First, I wanted to follow up on a comment in the earlier part of your prepared remarks when talking about the under-performance on growth capital allocation and free cash flow that you are focusing on the disciplines to improve in those areas. And I was wondering if you could expand upon that comment in terms of -- what do you see as the opportunities -- the biggest areas of improvement?

Well, the quick hitter, frankly, is quickly improving working capital. I think there is a lot of opportunity for us to improve working capital both in day sales outstanding and days payable outstanding, so to speak. We need to be far closer with those two measures than they are today; there's too wide a spread. So, I think that's a quick hitter.

Longer term, clearly we need to get our margins up, and we need to be able to spend less capital to do that. So, capital efficiency becomes a key issue for our future. There are a number of things we need to do with ongoing preventive maintenance, et cetera, on equipment to help our equipment last longer. But I think the bigger issue over the next few years is to continue to work on technologies where we bring a better value-add to our customers with less capital intensity.

Okay. That is very helpful. As you and the Board are looking at the search for a new CEO, what are some of the key criteria that you are looking for?

Well, I think that's pretty straightforward -- we want someone with an operating background. I mean, this is an industrial operations company, and so, I think someone who has an operating background that can come into play in this scenario is extremely helpful. Certainly someone who has had significant global experience because, as you can see, we are continuing to make great progress on the globalization of the business, and the future really depends on being far more diversified in markets, and what we do in those markets. And it would be obviously very helpful if we can get someone who has had public company experience to bring to play.

Okay. And with regards to the Infrastructure business, obviously there are still a lot of headwinds there. Could you just bring us a little more up-to-date in terms of where the restructuring stands today? You alluded to the benefits playing out as expected, but in terms of some of the end-markets being a little weaker than expected, is the current restructuring enough to offset the continued headwinds?

Yes, let me talk about it a little bit. I think everyone knows what's going on in Europe. I think there are opportunities within Europe for us to get at; I think you've seen some announcements from us recently, so, despite that market, there's still opportunity there, we have to make sure that we're getting more than our fair share.

In terms of North America, we've got a little bit more headwind than we would like, particularly in industrial maintenance. A lot of it has to do with what would this time of year be a pretty nice amount of work that goes into the maintenance of power generation facilities. And what we are seeing is because of the natural gas prices. A number of the coal-generating facilities are frankly not doing the maintenance that we would normally see. And I think that they are kind of in the hold mode trying to figure out whether or not it makes sense to run coal-generated facilities with natural gas prices being where they are. So, I think the good news is that it is a very nice area of business for us in power generation in North America. The bad news is, at the moment, there is a lot of volatility there.

Okay. Thank you very much.

And you're next question comes from the line of Jeff Hammond from KeyBanc Capital. Your line is open.

Hello, good morning, guys. Okay, just on the guidance, you give us some great color on 2Q, but I'm wondering, are we pulling away from kind of the full year? How should we think about that?

Well, Jeff, you've known me for a long time, and I don't believe in yearly guidance. Yes, I think right now we need to be concentrating on, I'll call it -- say do, if you will, in the quarter immediately ahead; make sure that we are continually hitting what we say we are going to do. And just regain confidence there first.

In terms of the year, if somebody can tell me exactly what is going to happen in Asia with steel demand, and here with energy demand et cetera, I could probably give you a lot more color. But I'm certainly not the person to make that call at that point, so, I think I'll try to stick to what I know best and that is what is in front of us and what we can do with the business that is in front of us.

Okay. But it sounds like -- in the release you mentioned being profitable in the back half in Infrastructure, and I'm just wondering what level of demand recovery you need to see there for that to happen? And I think within Metals you mentioned kind of improvement from here, and I don't know if that was a year-on-year comment as much as sequentially, but maybe a little more color on what you really need to see from a macro perspective to hit those bogeys?

Yes, I think that's fair. In Infrastructure, we would expect to make the improvement if we have normal seasonal kind of trends. We are not expecting some great new windfall, and hopefully we don't see the situation we're seeing with this North American industrial maintenance situation continue on for much longer. But I think if we see the normal kinds of trends in our business, then we feel pretty good about where we are headed.

In terms of Metals and Minerals, we are hearing more positive tone, if you will, for our customers in the second half. But, I mean, I always have to give you the caveat, I mean, we had a little bit more positive tone than what we've seen in the first half. So I think a lot of this depends on how the global recovery continues, particularly, as you know China and India have a lot of influence on that, and I think as we've all learned recently, we don't always know exactly what's going on there. Hopefully that is firming up, and we will see that demand improve as we go through the year.

Can you give us a sense -- maybe this is a question for Steve -- a sense of how this $36 million of savings falls out second half, first half, or kind of the cadence in terms of how it builds for the year?

Yes, Jeff, it's Steve. Savings will be weighted toward the second half of the year. We had some savings in quarter one, as we said, a little bit more in quarter two, then the bulk of it starts in quarter three, quarter four. We are on track to achieve the full $36 million, if not a little bit more.

Is there a way to frame first half versus second half, is it 80/20? 60/40?

I can tell you what we did the first quarter, for example. We did $6 million in savings out of the $36 million we expected for the year. There will be a little bit more in the second quarter than as -- the third and fourth quarter is the bulk of it.

Okay, that is helpful. And then, just -- can you give us an update, Henry, you talked a lot about capital efficiency, can you give us an update of how we are thinking about free cash flow for the year? How are we thinking the same or differently around total capex, and within that, maintenance versus growth capex for the year?

I'll give you some color, Jeff, but I'll just tell you that it is a work in progress; and we are working on this pretty heavily internally right now to look at alternatives in what we can do. This year is not going to be an exciting free cash flow year. One, because of the spending we are doing on restructuring. As much as I'd like to say -- just ignore restructuring costs, they're real costs. And that is what we've already announced.

In terms of the capex for ongoing operations, there is a fair amount of carryover from last year that I think will cloud what the numbers look like this year. So, I think, we'll be positive, but it's not going to be an exciting number. For the future, I think we all recognize here that free cash flow as a percentage of net income needs to be north of 80%, and ideally north of 100%. We are working on how do we get there. I am pretty comfortable that we will find those paths, if you will, but we have some work to do to make sure that we have them firmly in place. And we have the carryover from last year.

Now, some of the carryover-- just so you know, some of that carryover is good news, not bad news, it's just that it is what it is. The new Tisco contract has a lot of carryover capex costs. Some of the other new lines of business that we've added have carryover capex cost, and unfortunately, we get the cost side of that hitting us this year, and it's late in the year before we start see a lot of benefit, so it's not necessarily bad news, but for a snapshot if you will of this year, I'd don't-- our cash flow will be positive but not very good.

Okay. Thanks, guys.

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

Yes. Good morning, everyone. Separating out any typical seasonal pick up in Infrastructure, and then Metals and Minerals, can you just qualify how the business is going from 1Q to 2Q. Are you seeing further degradation in your markets? Can you give us just a little color there?

Actually it is improving. It's improving with the normal kind of seasonal mix. What we are not seeing is improvement that would be over what you'd expect seasonally. In the first quarter, we were probably in the area of 4% or 5% below of what we expected to see in Metals and Minerals, and I think that's going to continue through the second quarter, as I mentioned earlier. Anecdotally, if you will, through comments from our customers and so on, we're hearing better things about the second half. But it will be up over the first quarter, and the same thing is pretty much true -- not pretty much, it is true, in Infrastructure as well.

Okay. And then just focusing on Metals and Minerals, the margins there, it sounds like you expect 2Q to be comparable to 2Q a year ago. Can you just maybe talk about a margin goal for that business for the full year, and then perhaps your longer-term margin goals.

I had a little trouble understanding the last question you asked, but I'll start then come back at me, if you will. When we look at the second quarter, we will be down on a year-over-year basis in terms of the base business. It will be better than the first quarter, but down on a year-over-year basis from last year. Despite that, I think our earnings are going to be pretty even with last year, so, that's kind of testament, if you will, to the restructuring things that we've done, and the continuous improvement efforts that are going on within the business. And I think when you're operating at the low end of a cycle, and your business goes down further and you're able to hold profitability, it's a pretty good sign for the future. I apologize, but I didn't catch the second part of your question.

No problem, actually, it just kind of led into my second question, so, in a more normalized operating environment, where do you think those margins will go?

The magic question of course is what is a more normalized operating for all of us? But I think certainly not back to the 2007, 2008 level, but if we were back in the 2005 and 2006 kind of a level, we certainly think we can return to the kind of margins we had then, perhaps a little better.

Okay, thank you.

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

Good morning, everybody. Just a quick question to Henry I wanted to ask. I understand you are getting away from annual guidance, and I think that is a smart move, focusing on the quarters clearly at this point. But you all obviously have spent a lot of time kind of putting together what ideas, kind of your framework for how Harsco can get back to, let's say, a $3 to $4 earnings number by 2015, which included restructuring savings and other initiatives. Is that framework still in place? Or is there anything that has structurally changed since then for us to not continue to look at that type of earnings power for Harsco the next few years?

Well, first of all, I want to say that's the first compliment I've had been in this job, so I appreciate that. The framework that was laid out, I think, was pretty straightforward in terms of what the component parts are. There are some parts of that, that I think are a little more challenged than other parts, so I'm not going to sit here and try to give you three or four year out guidance. I will say, it is clear that we have a lot of runway for improvement. And that the cost-out things that we talked about in that guidance are very real.

Okay, that is helpful, thank you. And then just a quick question on capital allocation; I think you talked about that a little initially. I guess, could Steve maybe update us on what we should expect in terms of asset sales for the remainder of the year? Even though I know you can't give out a specific number, maybe a ballpark number? And obviously you do have an authorization to buy back stock, where did buybacks kind of rate on, in terms of importance from a capital allocation standpoint in 2012?

I'll answer that one, and let Steve answer the first one. I don't foresee us, at this point, seriously considering a stock buyback. I think right now, given the spending that we're doing on restructuring, and spending that we are doing on follow through capex for growth projects, et cetera, from previously announced opportunities. We need to get that accomplished, and make sure that we are on the right path before we start contemplating other uses of cash.

As far as the asset sales; we are ahead of where we expected to be in the first quarter, we had $22 million in the first quarter. For the year, we originally expected $25 million, so I would estimate conservatively probably another $10 million or so, or $10 million or more for the rest of the year.

Okay. That's great, and last question I have. Henry, you mentioned one thing that I -- when I was listening to your comments about looking at ways to reduce the capital intensity of the business, and obviously, predominately I think you are talking about in the Metals and Minerals business. I was just wondering, the way that you structure contracts in that business, and the large upfront payment that's made in that business, what are some initiatives you're looking at to potentially reduce the amount of capital we need up front to order equipment and get it into the customer to maybe make it a more capital-efficient model?

Yes, I think there are several things involved there. One is making sure that, as we go down life's path, that we're doing things that we can do to make capital last longer, and I think that there are opportunities there. Probably more important, as I mentioned before, is that as we move that business to a higher value add where we are doing more resource recovery, and less just logistics, if you will, on a mill site. The capital intensity of that business is actually less than the straight logistics business, and the value add to the customer is frankly higher. So, it is the model that we think has got a lot of runway for growth for us, and where we frankly delight customers more. It's not that we're going to get away from the logistics business, but I think the mix needs to change, and it is changing and it will continue to change.

Great that was helpful thank you all for your comments.

(Operator Instructions)

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

Hi, good morning, Henry. So, in your press release that announced your arrival here, you seemed to endorse the $3 to $4, and now it seems like you're not. I just want to understand what you are saying.

Okay, I apologize if that sounds like I'm not. What I would just say to you is that there are challenges to everything we do, and there are pieces of that, that came from various initiatives that I have not personally fully vetted, I can tell you that. But there are going to be pieces of that, that come out stronger than we thought and pieces of it that don't. I'm certainly not saying we can't get there. I am very hesitant when you start talking about something that is three and four years out when I think it is difficult to understand what the economy is going to do six months from now. To start endorsing much of anything, no matter whether it's in this business or any other part of my life.

So, even though that's kind of what the wording said in a press release, maybe second thoughts, that's more your style. Is it a more stylistic thing than anything?

Yes.

Okay. The other question I had is maybe a little more holistic, and there was a previous question asked about capital allocation of businesses, let me maybe ask that question in a, just a different way. You are largely a service company, and the significant amount of capital that has been allocated both to working and fixed assets has really hurt the free cash flow over the last couple of years. And I know that's what you're talking about with capital allocation and free cash flow, but doesn't that also suggest that your two largest businesses are just spending a lot of money on resources that are kind of low margin, which to me, kind of tells me that those businesses' office footprints need to be shrunk, and we need to increase the sales per employee from them. And I think the only way to do that is to focus on your best markets, and let the other ones go. Some of that is already being enacted in the restructuring, but I guess I am a little bit surprised that you haven't expanded the restructurings in each business, if capital allocation is a priority.

Well, it is really what the restructuring is all about. We're exiting a number of areas in Infrastructure that are exactly what you just got through talking about. It will provide a much better operating picture for us. In terms of Metals and Minerals, we work off a lot of long-term contracts, and we have walked away from some contracts that just no longer make sense for our business. And we've been converting to more of the higher value add resource recovery kinds of agreements with customers where it's clear that the value proposition works for both of us. We are making those changes, but in that business in particular, you can't just walk away. We do have long-term commitments, and we do live up to our commitments.

Fair enough. Let me just ask you this final question on the Metals and Minerals business. You indicated that your customer outlook for second half is -- your customers have maybe a little bit more positive tone. We've got the largest contract in the history of the company about to be executed this year, and I'm just wondering if that, combined with the customer comments, that maybe this business should be -- should have a pretty good second half. How are you planning for that on the capital side?

I assume you're talking about the TISCO contract. I think that actually comes into play towards the very end of the year, so we won't see a lot of benefit. Unfortunately, we see the expense side, but we won't see the benefit until the end of the year, but I think, going forward, it's certainly going to be a very positive development for the Company. In terms of steel demand, there are a lot of questions still to be answered globally in this economy. We see them every day and read about them every day, and that is going to be the bigger picture, that's the macro of what's going to drive it. We are -- we believe we're seeing reduction in inventory at our customers. We hear them talking about better mill utilization rates in the second half, and so we are cautiously, if you will, optimistic about seeing improvement in the second half.

Okay. I thank you for those answers. It's just the first question was more along the lines of the capital allocation in front of Tisco. You said that they're spending in front of it. That's exactly what I'm talking about. So, I was wondering how you are mapping that spending out. Last year we had a number of contracts that helped sales at the operating margin line, very little if not, and sometimes even diluted free benefit, cash flow even worse than that. How do we get away from that dynamic with this Tisco contract by allocating capital better? How do we do that?

I don't think that there's any magic that is going to automatically, that we know of right now, that's going to change that for the Tisco contract. I think this one's pretty straightforward. It's going to be good business, good returns, et cetera, as it gets rolling. But it's kind of tantamount to investing in new product development, where you do have investment upfront, but the new product has to work. This one is just a surer new product, if you will. And we already know what the income stream is, and we know what the cost structure is going to be. And so, it is, I guess in some respects, a high-grade new product development, R&D expenditure thought process.

Very good. Thanks a lot for your time.

But there isn't anything specifically that we can do to change that structure at this point.

Okay, thank you.

Thank you. Okay, I think that's all the questions that we show. Again, I want to thank everyone for joining the call, and for your interest in Harsco. The take-aways from this call hopefully are that the first quarter was on the high end of our expectations despite some continued headwinds. The second quarter sequentially will show a significant improvement, but the headwinds still persist. Restructuring is ahead of schedule, and we have work to do, but we have great people to do it and businesses that have and will again produce solid returns. So, we thank you. Have a great day.

And this concludes today's conference call; you may now disconnect.