Enviri Corp (NVRI) 2013 Q3 法說會逐字稿

My name is Ryan and I will be a conference operator today. At this time I would like to welcome everyone to the Harsco Corporation third quarter results call. All lines have been placed on mute in order to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

(Operator Instructions)

I would now like to turn the call over to the Director of Investor Relations, Jim Jacobson. You may begin.

Thank you Ryan, and welcome to everyone joining us today. I am Jim Jacobson, Director of Investor Relations for Harsco. With me, are Patrick Decker, our President and Chief Executive Officer, and Nick Grasberger, our Chief Financial Officer.

This morning we will discuss our results for the third quarter of 2013 and provide our outlook for the fourth quarter. Then we will take your questions. Before our presentation, let me take care of a few administrative items. First, our earnings news release was issued this morning before the market opened. The PDF file of the news release, as well as a slide presentation that accompanies our formal remarks for this call, have been posted to the Investor Relations section of our website. We encourage you to access these files.

Second, this call is being recorded and webcast, and a replay will be available on our website later today. Next, we will make statements considered forward-looking within the meaning of Federal Securities Laws. These statements are based on our current knowledge and expectations, and are subject to certain risks and uncertainties that may cause actual results to differ materially from the forward-looking statements. For a discussion of such risks and uncertainties see the risk factors section in our most recent 10-K and 10-Q as well as in certain of our other SEC filings. The Company undertakes no obligation to revise or update any forward-looking statements.

And last, both the third quarter of 2013 and 2012 included special items. In this call we will refer to adjusted results that exclude those special items. A description of the items and a reconciliation to US GAAP results are included in our press release issued today, as well as our slide presentation. And now I will turn the call to Patrick Decker, our President and CEO.

Thanks Jim, and good morning everyone. This morning we reported our third quarter earnings per share, which was $0.20, and within our guidance range, as will a strong free cash flow driven by working capital improvements. Nick will provide additional details on our third quarter performance momentarily. I'll keep my comments today concise, as we will be providing detailed commentary regarding the Company's future strategy at our Investor Day next month. With that said, we have made important initial progress to transform Harsco since our last earnings call.

In mid September, we announced a transaction to sell the Infrastructure division into a joint venture with Clayton, Dubilier & Rice. This significant action is the first step in Harsco's transformation to optimize the Company's portfolio by simplifying our operations, creating efficiencies, and capitalizing on higher return growth opportunities, with the ultimate goal of increasing our earnings power and return on invested capital. This transaction provides numerous benefits to Harsco and its shareholders.

First, it immediately strengthens our financial profile as we will receive $300 million in cash upon closing. We will use these proceeds to reduce debt and strengthen our balance sheet. Second, it allows us the flexibility to pursue both organic growth and bolt-on acquisition opportunities over time, which will create differential value, and generate improved returns and growth. Third, the transaction reduces the earnings volatility of our portfolio.

Finally, by retaining a 29% equity stake in the new stronger Company, our shareholders have the potential should to capture significant additional value as the end markets recover, and as the new venture grows and realizes costs and revenue synergies from combining two market-leading businesses. We are on track to close the transaction in the fourth quarter, likely in late November or early December.

With the joint venture transaction nearing its consummation, we're turning our attention to improving the operational performance of Metals & Minerals and accelerating growth in Rail and Industrial. In particular, Nick and I are actively engaged in overseeing Metals & Minerals with a near-term goal of improving results, particularly, return on invested capital, and driving greater operating efficiency. The recent leadership transition affords us the opportunity to work more directly with the core leadership team, and to sharpen our focus on a few areas that, we believe, can have a sizable and meaningful impact on the business.

In Rail, we're focused on rebuilding our project backlog following the completion of our large multi-year China project early this year. Consistent with our prior statements, overall bidding activity remains healthy. We were pleased to announce that we won a significant new contract in Europe. This new contract with SBB, the federal railway system in Switzerland, is valued at $100 million, and demonstrates Harsco Rail's strong leadership position in the maintenance of way market. For this project we will design and manufacture 31 Utility Track Vehicles or UTVs.

These machines will be use to maintain two integral tunnels in the Swiss AlpsTransit project. We will deliver the first of these machines in 2015 and the remainder of the project will extend into 2016. Beyond its scale, this win as an important strategic entry for us into Europe, the world's largest rail market. Our win validates our ability to compete successfully in this market, and it creates a strong foundation from which we can build.

Within Industrial, I am very encouraged by the strong operating platform we've built and the attractive end markets we serve, in particular, natural gas. We believe these will serve us well to accelerate growth both organically and through bolt-on acquisitions. Now, Nick will go over the quarters results and our near-term outlook.

Thank you Patrick. Good morning. My comments will refer to the slides beginning on page 3.

So the adjusted EPS for Q3 of $0.20 per share was in the middle of the guidance range. Relative to what we expected, the Rail business did a bit better, the Industrial business is about what we expected, and Metals & Minerals and the Infrastructure business, a little worse. In terms of cash flow, it was a very strong quarter. We delivered cash flow of about $50 million, which was more than 2 times the cash flow in the third quarter of last year.

As expected, the second half of the year will be stronger than the first. You may recall that through 6 months our free cash flow was minus $40 million. So we are now about plus $10 million for the first three quarters. We also reported a sizable loss in the quarter, due to the write-down of Infrastructure assets that will be sold into the joint venture with CD&R. We expected to be lost to be larger, we guided to be between $350 million to $450 million, it came in at $240 million because of the value of our retained stake in the business was higher than we anticipated a few months ago.

Turning to page 4, the key performance indicators for the quarter. The key revenues were down 2% versus the same quarter last year. Operating income down 23%. That is relatively high operating leverage, that $13 million decline on -- in earnings on a $17 million decline in revenues, that is due mostly to the Infrastructure business, and we will talk about that in a minute. EPS down about 49%, the tax rate was higher in the quarter versus the same quarter last year. About 39% excluding special items versus 29% last year. And interest expense was up about $2 million year-over-year. Free cash flow of $49 million was really driven by the Metals & Minerals business. They generated about $50 million for the quarter, Rail, about $15 million, and Industrial, about $15 million, and then Corporate was a deficit of about $20 million, and Infrastructure's cash flows were basically breakeven for the quarter.

On page 5, we reconciled and reported GAAP operating income and EPS to the adjusted results. You can see on the first line there -- the second line, the impairment charge of $240 million. Again, this reflects the -- some of the $300 million that we expect to receive in cash, plus the book value of the minority stake, relative to the book value of the assets net of liabilities that were on the Infrastructure balance sheet.

We also recorded about $12 million of transaction related costs in the quarter. On a non-cash basis, the tax impact of the transaction was about $0.24. That is largely the reversal of some NOLs, or deferred tax assets we have on the balance sheet of Infrastructure that have been removed. As part of the accounting for the transaction prior to closure, we also stopped depreciating the assets of the Infrastructure business, so we make that adjustment as well. So the adjusted operating income is $42 million, or $0.20 a share.

On page 6, the revenue bridge for the quarter versus the same quarter of last year, again, revenue is down about 2%. You can see that the Metals & Minerals and Rail businesses were down, the Infrastructure and Industrial businesses were up. And, we will talk about this more detail in a minute, but, there were no surprises here relative to what we expected for the quarter.

The next chart, chart 7, the operating income bridge on the same basis versus last year. Again, you can see that each business is down year-over-year. I will talk more in a minute about Infrastructure showing a $13 million increase in revenue and a $2 million decline in earnings. The Metals & Minerals and Industrial businesses would have performed better, from an operating income standpoint, if not for a handful of unusual items in the quarter relative to the same period last year. And the Rail business, actually, because it had some part sales in the quarter, at a very high margin, it helped offset the impact of the end of the large project in China.

Turning to cash flow on chart 8. This is a reconciliation of the $49 million of cash flow that we delivered in the quarter relative to the same quarter last year. The second line shows the change the working capital year-over-year. $59 million favorable variance due in large part to be very strong receivables performance in Metals & Minerals, as well as strong performance in Rail relative to weak quarter last year. CapEx for the quarter was about 10% above the same quarter last year, we expect CapEx on a full-year basis to be between $250 million to $260 million, which would be down modestly versus the full year of 2012.

Chart 9 shows a few of the key balance sheet metrics. As we discussed previously, we have changed our principle covenant in the bank facility from debt to capital, to debt to EBITDA. That debt to EBITDA ratio in the quarter is 2.6 times versus the threshold of 3.5 times. On a pro forma basis, following the sale of the Infrastructure business into the joint venture, we would expect debt to EBITDA to be 2.2 to 2.3 times against the covenant of 3.5. We expect debt at year-end, which is about $1.07 billion at the end of the quarter, to be around $800 million at the end of the year, on a net basis, net of cash about $700 million at year-end.

Turning to a brief review of each of the divisions beginning with M&M. Revenues were down 3%, operating profit down 15% in the quarter versus the same quarter last year. If you look at the operating income impact of lost or exited contracts relative to new contracts, the impact was roughly zero on operating income. So even though we lost about $15 million of revenue on a net basis, because of the higher margin on the newer contracts, the net impact on operating costs was zero. As I mentioned we also had a few million dollars of one-time items in the quarter. And as Patrick mentioned, we are also spending some money in Metals & Minerals for consulting support to improve the performance of the business. And finally, the nickel pricing and scrap demand was weak, and due to the high margin of those products, that affected the profit sampling.

In terms of Rail, Rail revenues were down 27% in the quarter, profit down 42% in the quarter. Again, the big change here was the ending of the large contract in China. About $30 million of revenue year-over-year in the third quarter was taken out because of the China order. The core business, if you exclude China, was up about $5 million or up in the high single-digits. As I mentioned earlier, the sale of spare parts in the quarter had a very high margin, certainly, helped mitigate the operating leverage effect of the large decline of the China revenue. Industrial, not much of a story here in the third quarter, revenues were basically flat, profit was basically flat. We had some growth in the IKG Grating business as well as Patterson-Kelley Boiler business, offset by a weak mix in the Air-X-Changers business. We also higher commodity prices in the IKG business which had a negative accounting impact to the LIFO.

Infrastructure had a weak quarter, even though revenues were up 6%, profit declined about $1 million. And this is really an issue with a handful of geographies that are much weaker than others. In North America, for example, and parts of Europe were quite strong. But then a lot in Australia, and parts of the Middle East were quite weak. That is what really led to the negative leverage, in particular, in Benelux, we had begun to invest in some new contracts that have ramped up slower than we expected. And so that had a sizable negative effect on the quarter.

Turning to the outlook for the quarter by segment on page 14, in Metals & Minerals, we expect to see year-over-year both revenue and profit growth. Profit growth probably in the high single-digits, is held back somewhat by some of the consulting costs that we have mentioned earlier. We do see on a year-over-year basis, on a like-contract basis, 2% to 3% revenue growth in LST. In terms of Rail, a similar situation to the third quarter. A very difficult comp the fourth quarter of last year due, to the China contract. So we, again, expect revenues to decline in that 30% range, but the operating margins remain in the low double-digits.

In terms of Industrial, again, a similar quarter to the third. Revenues essentially flat, but the OI margins remaining high in the mid- to upper-teens. Infrastructure, again, similar to the fourth quarter. High single-digit growth in revenues, but the operating loss year-over-year will be roughly the same. Again, due in part, in large part, to new contracts in the Benelux and the costs associated with wrapping up those contracts.

Chart 15 is the consolidated outlook for the year -- for the quarter. What we have decided to do here is provide guidance on operating income only, and only for the ongoing businesses, Metals & Minerals, Rail, and Industrial, largely because of the uncertain timing of the Infrastructure sale into the joint venture, and the recording of a stub period of equity incomes from the joint venture. There is simply too much uncertainty around the timing of that to really provide a meaningful EPS number for the quarter.

In terms of operating income for the remaining businesses, the ongoing businesses, we expect the range to be $37 million to $42 million which is down 18% to 27% versus last year, and it's really all the Rail business. As I mentioned, we expect earnings to improve both in Metals & Minerals, as well as Industrial. If you were to exclude some of the consulting costs that we are planning on incurring in the quarter, that we would not incur in the fourth quarter last year, the operating income decline would be more in the 10% to 20% range.

In terms of free cash flow, for these remaining businesses and Corporate, we expect that to be, plus or minus zero. Let me reconcile that for you back to the guidance that we have provided, on a full-year basis, for cash flow to be $50 million to $75 million. We provided that guidance back in early August. Year-to-date the Company is at about plus $10 million of free cash flow. We now expect the deal costs on a cash basis to be about $15 million, which were not anticipated in the guidance, at least not provided in the guidance. That gets us to about $25 million for the year.

Since we are selling Infrastructure very late in the quarter, and December tends to be a very strong month in terms of working capital, reductions and infrastructure, we expect that after the deal closes, we will receive a post-closing adjustment based on the working capital test. That should yield something around $20 million of cash. So that takes the full-year free cash flow up to the $40 million to $45 million range. And then the last piece, was the poor performance in Infrastructure for the quarter, on the operating income basis also translates into cash flow, so the Infrastructure cash flow is $15 million to $20 million lower in the quarter than we would expect. So those items, if you adjust for each of those items, gets us back into that range of $50 million to $75 million for the full year on free cash flow.

I have also highlighted here what we have not included in guidance. As I mentioned, we are not guiding on the Infrastructure performance for the period over which we owned the business in the quarter. We are also not providing guidance on the equity earnings from the joint venture. There will be an adjustment in Q4 to the impairment charge that was recorded in Q3 for the Infrastructure assets, based on changes in the balance sheet accounts since the end of the third quarter.

We also talked previously about a restructuring charge in Q4 related to the reduction of Corporate overhead. We mentioned on the last call, that Corporate overhead of about $30 million annually is allocated to the Infrastructure business. That will be stranded or remain behind. And the plan is to take a $3 million to $4 million charge in Q4 that will result in reducing at least $15 million of that $30 million of Corporate costs. If you look at the $70 million of Corporate costs that we have in total, and look at what is addressable in the shorter-term, we are reducing about one-third of the addressable Corporate costs in the fourth quarter on an annualized ongoing basis.

We may also, although it is not yet clear, take a charge in the fourth quarter for the simplification initiative in the Metals & Minerals business. We're working very actively through that program now. If it is not recorded in the fourth quarter, it will likely be recorded in the first quarter of 2014. We also have not included in the guidance the transaction related cost and the impact on earnings. Through the end of the third quarter, we have spent -- or expensed about $15 million of costs associated with the transaction, and by the time the transaction closes, we will likely have incurred $20 million to $25 million of total cost on the Infrastructure transaction.

And the tax rate, you will also see, will be unusually high in the quarter -- in the fourth quarter due to the transaction. I think, going forward, looking at the remaining businesses and their profile, we would expect an ongoing tax rate in the 30% to 35% range. Those are the comments on the third quarter and the outlook for Q4. I will turn the call back to Patrick.

Thanks Nick. We are committed to creating long-term value for our shareholders, improving financial returns, and will continue to take the necessary steps to do so. The Infrastructure transaction was the first major step in the transformation of the Company. Embarking upon a transaction of this size, obviously puts into motion various necessary actions, such as restructuring and associated charges, and clearly leads to various transaction-related accounting adjustments.

These are all necessary transition effects and we take the actions required to reposition the Company for long-term success. I very much look for to our Investor Day next month, during which we will share much more on our strategic objectives, the road map, and our plans for the future. Operator, we would be happy to take questions at this time.

Certainly. (Operator Instructions)

Robert Norfleet from BB&T Capital Markets.

Good morning.

Good morning.

This is Ashby Price on for Rob.

In terms of Metals & Minerals, can you discuss how underperforming contracts impacted margins in Q3 and so far in Q4? And how should we think of the impact in 2014? Will additional contracts roll off? And what is the average duration of the contracts?

I will try to give a few answers to that question. First of all, the average tenure of our contracts really varies by site and customer. I think historically, we have said that it is a more typically in that kind of five- to seven-, sometimes, ten-year timeframe, we have some that go longer, some that go shorter. But it is that high single-digits, from a year prospective.

Secondly, in terms of what we saw in the third quarter, and the guidance that we have given for fourth quarter, does reflect the fact that we are seeing the turn now, in terms of having gotten more revenue from the contracts that we have won recently, which are higher returns, versus those that we had either walked away from or exited, over the course of the past year.

In terms of impact for 2014, premature for us to give any guidance in that regard as yet. Obviously, it is heavily sensitive to volume as well.

But we look at each one of these contracts that come up for renewal individually, and we will continue to take a bright line on making sure that they are generating attractive returns on capital in order for us to continue to pursue them. There could still very will be some churn in contracts as we continue to shine that bright light, but we will give much more color on that in the Investor Day next month.

Great. And can you discuss the timing of overhead reduction in M&M and what specific actions are being undertaken to achieve this, outside of productivity enhancements? Will these actions provide meaningful improvement in 2014?

Yes, as Nick alluded in his comments, we are very actively engaged, and have been over the past few months here, with the Metals leadership team on looking at what are the opportunities. Not only to drive a level of cost reduction -- that is certainly part of simplification. But it also is largely about making sure that we drive efficiency, speed, decision-making, and get better at site execution and contract negotiation. So there are a number of factors that go into what we are addressing in simplification, with cost reduction certainly being one of those.

We aim to be in a position, as Nick pointed out, to hopefully take a charge either in Q4 or no later than Q1 of next year. And so, obviously, we would expect to then begin seeing benefits realized over the course of 2014 and beyond. Again, we expect to be in a position to share more in that regard as we get to Investor Day.

Great. And lastly, in terms of work you are currently bidding on right now in the M&M, what is the breakout between legacy-based logistics work versus less capital-intensive recourse recovery and environmental services work? And what is the difference in margins between these?

Generally speaking, the margins and return profile on those contracts that have a higher portion of recourse recovery and byproduct sales, if we are in an environment where nickel prices and scrap metal prices are normalized, then those are higher margin, higher return projects, typically, than the base logistics work that we do. But again, those contracts, as I said, are sensitive to nickel prices and scrap metal prices, other things that affect demand and pricing on the resource recovery and byproduct side.

In terms of mix, it is hard for us to point right now to a specific number as to what percentage of revenue we would be looking at in the contracts that are up for renewal over the course of 2014, so I would probably stay shy of giving you any marker in that area.

Great; thank you very much and I will get back in queue.

Scott Graham from Jefferies.

Good morning.

I wanted to ask several questions, and one of them is the guidance for the fourth quarter in M&M. That would imply a fairly meaningful turn from what we saw in the third quarter. And I'm just hoping that you can give us a little bit more breadcrumbs to get there.

Sure; if we look at the fourth quarter, and we compare it to Q3, we are effectively looking at LST volumes being up about 2% sequentially. And certainly we would expect there to be a fair amount of operating leverage on that lift, given the size of our fixed cost base. As Nick pointed out, the things that are holding that back a bit in Q4, from a natural leverage standpoint, are these one-off consulting costs that we've got that are working with us on the simplification effort.

We also are seeing -- we are, at least, expecting -- a slight decrease in nickel prices from Q3 to Q4. That ticks up from a margin and mix standpoint as well. When you look at the year-over-year, Scott, that comparison looks a bit richer, largely because of the fact that Q4 of last year was the lowest volume quarter that we had seen in about three years. And so I don't find the year-over-year to be entirely meaningful. It really is more of a quarter-sequential discussion, as you pointed out.

Okay, that is helpful. Thanks.

If we take a step back -- and this is more of a Corporate question -- you have really accelerated activities, let's call them, Patrick. Particularly when Nick joined on, it seems like that triggered a lot of things. And when you talk about all these different things that we are doing -- it is an Infrastructure deal, it is a lowering Corporate overhead, it is a ramping new contract, it is a focus on cash flow. How is the organization taking that?

I am asking that because it was a little bit sleepy before you guys got there. And so -- I know that they were eager, but how is that happening?

And then, maybe an ancillary question to that is, as you restructure M&M to lower the corporate overhead, how does that work exactly? Your assessment of M&M is that there is, maybe, one too many people in all the locations, or how does that work?

Let me take your first question. Obviously, the Company and the organization is experiencing a fair amount of change. And I think, to your point, you insinuated that people were probably hoping for a level of change, given, certainly, my arrival and I would say, not only Nick's arrival, but others that we have hired onto the team that are helping in this effort.

Change is always difficult, but change is necessary here, and I think that people are appreciating the focus, they are appreciating the catalyst, that we're doing some things to address the portfolio. I think it has been well received across the business units, that we are taking a sharp look at what the role of the Corporate center is, and how this group interfaces with the businesses to really create value. Obviously, we have continued to bring people onto the team and upgrade talent. We have highlighted a number of people, obviously, that were on the team already, that are very talented individuals, that have really carried the bucket here in terms of whether it be the transaction, whether it be the restructuring work at Corporate -- a lot of those activities are going on.

And we are building strength and capability through this process. This is the best training people can have, is on the job, in terms of moving things forward here. I think it has been well received. Obviously, we measure the temperature of the organization and make sure we pace it accordingly.

In terms of the Metals & Minerals simplification, there are multiple aspects of this. I think we are -- first of all, we are taking a very inclusive approach with people, both at the site level as well as people that are above the site in various administrative and leadership roles, because I do not believe in a purely top-down, from the corner office mandate, in terms of what a restructuring or redesign looks like. That adds time to the process, but I think you get to a much better outcome, and it is a part of the change in management.

In terms of what the nature of the savings will be over time, I think first of all, some of the savings would need to be reinvested back into building capabilities and adding some resources in different areas. But net-net, I see the opportunity to reduce costs, because I do believe that there are some efficiency opportunities at site levels, in terms of headcount levels; but also I think its even more so above the site. And as we have refocused and repurposed what we are going to be going after from a strategy perspective, I think there is an opportunity for us to re-look at what those headcount levels are and adjust accordingly.

That is fine. Those were my two and a half, three questions. I appreciate it. Thanks for your time.

Jeff Hammond from KeyBanc Capital Markets.

Hello guys. This is James Picariello filling in for Jeff.

Can you flesh out the comment on the $240 million restructuring? And how that fell below your guidance of $300 million, $350 million restructuring charge?

To be clear, it was not a restructuring charge; it was the impairment of assets under the Infrastructure business that will be sold in joint venture.

When we provided the guidance on that expected loss a few months ago, we were looking at some precedent transactions of the same type, and what their book values were on the balance sheet relative to the headline value of the deal. And there was a pretty sizable discount applied in that process. So we used that precedent to estimate what the impact would be on the Harsco deal.

In reality, as we began to value, from an accounting standpoint, that stub; and looking at the cashflows of the Infrastructure business in the joint venture, they, quite frankly, supported a much higher valuation than we thought. So that led to the loss being about $100 million less than we thought it would.

Got it. And could you provide a general feel on the Metals & Minerals segment and should we be feeling better about the steel industry, steel capacity utilization? And any early reads into 2014 would definitely be helpful.

Sure. I think we are seeing some slight improvement here quarter-sequential, although I would not suggest that a quarter or two makes a trend line. And I think there still is a fair amount of uncertainty in the marketplace.

Obviously, as you've seen, there have been some upgrades recently by the analysts on some of our major customers; better outlooks in North America, et cetera. I would just balance that with the fact that you are also seeing reports of some softening in steel production and demand in places like China and India. So, I think we are still very much in a touch-and-go here, in terms of when we would see sustainable improvement in volume.

We are still obviously saying softness in terms of nickel prices and scrap prices, so that has been fully vetted into our guidance; so obviously, as that would turn over time, which we believe it will over time, that obviously begins to drive some lift from a margin and earnings standpoint for us. But we are certainly not declaring that yet for 2014.

As part of our planning process, we get good reads from our customers, as we develop what are own outlooks and plans are. We probably won't be in a position, even on the Investor Day in December, to give definitive guidance at that point for 2014, because we will not be at the planning process yet. But we will continue to keep you guys posted in terms of what we are hearing and seeing.

Excellent; appreciate it, guys.

Glenn Wortman from Sidoti & Company.

Good morning, guys.

Good morning.

Just back to looking at the Metals & Minerals business from 3Q to 4Q. Do some of the implied operating income decline in your guidance also include the allocation of some of those stranded Corporate costs for Infrastructure?

No, it does not. Those are remaining at Corporate in the fourth quarter -- or in that stub period after the deal closes, let's say, for that, perhaps, one-month period.

And then, just again, at the Rail business, if you could comment on the pipeline heading into 2014. I know it's early; I guess we will get more color at your Investor Day. And then, also if you could add any comments on what you see as the significance of this recent contract win in Switzerland.

Sure. I will take the latter part first. We think it is a very big win for us. This is the first win for us in Europe, certainly this size and scale. And I think it is probably helpful to those listening in to realize how influential the European railway authorities are from a specification standpoint around the world. Many of the developing markets around the world take their lead from the European rail specs, and so this is also a big referential win for us, as we are bidding on projects elsewhere around the globe. Two, it's a very good foothold into that particular customer, in Europe. And we certainly expect to use this relationship to get close with them and hopefully take other work over time.

In terms of the impact for 2014, this project itself will not begin to ship out until 2015, and then into 2016. So, I think as we said before, as you guys can all appreciate, these are very long lead times in terms of the design work and the actual spec and production work. That is why the long time to deliver.

In terms of the outlook for the business, we do have a hole that we have been trying to fill here, in terms of 2013 going into 2014 by way of the revenue that we have had this year for the China Ministry of Rail order, that has now been shipped out. And we have been trying to fill that gap by aggressively going after aftermarket parts and service work. And I am pleased by what we are seeing there. But we still have some of that hole to fill as we go into 2014.

Again, I take a longer-term look at Rail. The bidding activity is very healthy, it is robust. We've got line of sight to a pretty healthy, lengthy list of projects that we are pursuing; and certainly we plan next month in the Investor Day to give you guys more clarity as to what that pipeline looks like. And when we think those things come to fruition and the impact it will have on our financial performance over time.

Thanks for taking my questions.

Robert Norfleet from BB&T Capital Markets.

This is Ashby on for Rob again.

Post-close of the Brand Energy JV, can you discuss what you consider an optimal capital structure, especially on the debt side?

I think we will certainly be sharing much more in that regard in next month's Investor Day as we walk you through what our overall financial policies and biases are going to be. But I think the initial use of proceeds will be to pay down debt. I think, Nick alluded to what those net debt levels would be as we exit the year. And certainly, we also understand the importance in terms of the dividend to our investors. And so, again, at the Investor Day we will walk through a clear construct as to how we think about capital allocation. But in the immediate-term, that very much would be to pay down debt and sustain the dividend.

Great. Thank you for taking my follow-up.

Brian Jacoby from Goldman Sachs.

Good morning; thank you for taking my question.

When you're looking at your capital structure, and you talked about some debt reduction and so forth, can you just tell us how you are thinking about your capital structure going forward, in terms of whether you want to have a capital structure that looks like an investment grade company, or more of a high-yield company? And, maybe, if you could share with us your review for downgrade by S&P? If you have had any updates on that, in terms of how that might impact your funding if you do get downgraded to high-yield, or whether you think you can stay IG there? That would be helpful.

Let me take the latter part first.

Obviously, it is difficult for us to predict what is in the heads or minds of people at the rating agencies, in terms of how they are going to think about that. But clearly we stay close to them and we do have ongoing reviews and dialogues with them.

In terms of, if there was any downgrade there, would it have any impact on our ability from a financing standpoint, either financing capacity or cost -- we don't believe it has a meaningful impact. Obviously we aspire to be investment-grade rating over time; but in the meantime, we are going to do what we need to do appropriately and in a disciplined fashion to transition the Company. And to do the things we need to do there.

But again, certainly over time we aspire to having very healthy investment-grade credit rating. Again, we will share more in Investor Day as to timeframe and how we look to navigate that over the course of the coming time.

Okay, thank you.

No further questions in queue. I would now like to turn the call back over to the presenters.

Thank you, Operator.

Let me conclude the call by simply repeating that we do understand its imperative to improve our operational processes and execution, to enhance the financial return profile of the Company, and to generate stronger results.

In the third quarter, we announced the first major step in this transformation with the Infrastructure sale under the JV. I'm highly confident in our actions and look forward to communicating more with you at our Investor Day next month.

With that, good day to everyone, and we will see you soon.

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