Harsco Corporation (HSC)

Analyst Day Conference Call

December 9, 2011 8:00 a.m. ET


Eugene Truett - Vice President, Investor Relations & Credit

Salvatore Fazzolari - Chairman, President and Chief Executive Officer

Ivor Harrington - Executive Vice President & Group CEO of Harsco Infrastructure

Galdino Claro - Executive Vice President and Group CEO of Harsco Metals and Materials

Scott Jacoby - Vice President of Harsco Corp and Group President of Harsco Rail

Scott Gerson - Vice President and Group President of Harsco Industrial

Stephen Schnoor - Senior Vice President, Chief Financial Officer and Treasurer


Jeff Hammond - KeyBanc Capital Markets

James Lucas - Janney Montgomery Scott

Steve Wilson - Lapides Asset Management

Charles Garland - Hamlin Capital Management

Scott Graham - Jefferies & Company

Scott Blumenthal - Emerald Research


Eugene Truett

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Welcome everyone to our Annual Analyst Day for Harsco Corporation. I’d also like to welcome our webcast participants this morning. For those of you who may not know me, my name is Gene Truett and I’m Harsco’s Vice President, Investor Relations and Credit. Before we start our formal presentation today, I would like to read a summary of our Safe Harbor statement.

Our discussions with you today, including our response to your questions, are likely to contain forward-looking statements. These statements relate to future operations, results, expectations and other aspects of our business. Our statements are based on current information, expectations and beliefs. While our statements are based on the best information currently available, future results could differ materially from the statements made to you today. Possible reasons for any difference between our statements today and actual results could be the result of certain risk factors and uncertainties which we have listed and discussed in our various filings with the Securities and Exchange Commission. We invite you to review these at your convenience. A more comprehensive safe harbor statement is on page one of your program booklet.

Also, this conference presentation and accompanying webcast on behalf of Harsco are subject to copyright by Harsco and all rights are reserved. Harsco Corporation will be recording this conference. No other recordings or distributions of this conference by any other party are permitted without the express written consent of Harsco. Your participation is indicated in your agreement. I’d like to finally remind you that replays of this conference and other related information are available at the Harsco website, www.harsco.com. And probably the latter part of next week, I would hope to have a written transcript of the program on our website as well.

Harsco Corporation continues to operate in four primary business segments. Harsco Metals and Minerals, Harsco Infrastructure, Harsco Rail and Harsco Industrial. Each has a leading position in its end markets. Further, each has an expanding global presence, especially in key developing and emerging economies as will be discussed further today by our senior management team. For those of you with us today, that may be a bit newer to Harsco, please let me know if you have further questions. Just give me a call, drop me an e-mail, and I’ll certainly do my best to further inform you about Harsco, its strategies, its businesses and just general outlook.

Before beginning our management presentations, I would ask that you hold your questions, as we do for all conferences, until the formal question-and-answer session at the end of the program. There will be ample time at the end to address any questions you may have. I would now like to introduce Sal Fazzolari, Chairman, President and CEO of Harsco. Sal will share with you his outlook for the next several years and initiatives he and the senior management team of Harsco have implemented that have returned the company to earnings growth in 2011 and will allow us to keep growing in 2012 and beyond. Sal?

Salvatore Fazzolari

Thanks, Gene. Good morning, everyone. Welcome, both to the people in the room here as well as the webcast audience. It’s certainly a pleasure to be here with you today. Since we do have quite a bit of information to go over with you today obviously we want to get moving immediately. So without further ado let’s get started with our program here.

I do want to start my presentation this morning, though, showing you Harsco’s core values and core purpose. In fact, at Harsco, each presenter, whenever we meet with customers, employees, partners, board members, whomever, we always start off with this slide. And what we also do is we give anecdotal story about our experience with the core ideology or the core purpose. So I’d like to share one story with you here this morning.

In one of the key technology agreements that we signed this year, and in fact Galdino will talk about later, we were chosen by the owner of this technology over many blue chip names that you would recognize as the preferred partner, to basically scale and globalize this technology because they were very impressed by our core values and our core purpose. So we believe that’s very powerful testament to this, to our core ideology. What I’d like to do is give you a report card, first today, on some of the objectives that I laid out for you when I was here in front of you last year. And I believe if you look at this, there was some measurable progress made this year that does better position the company for improved performance in the future.

So let’s look at the item one on the list here. With the Infrastructure business, as we indicated last year, we wanted to stabilize it. We believe we did stabilize the business. We did show $21 million year-over-year improvement through the nine months. Unfortunately, as we indicated even in our third quarter release, some of these benefits are clearly being eroded, due to the significant headwinds of the UK market and Europe in general. Thus, in order -- and you will hear me use this word quite a bit today, to accelerate the path, accelerate the path to breakeven and ultimately to profitability of this business, we have taken a strategic decision in this quarter to implement further substantial cost reduction actions in our Infrastructure business, particularly in regard to equipment and particularly in regard to Europe. Ivor will get into this in great detail later when he gets in front of you.

On item two, we expect the other three businesses to continue to perform relatively well in 2011. In fact, the Industrial segment will show strong year-over-year improvement in operating income. Metals and Minerals this year is expected to post operating results that approximate or are comparable to last year, and that’s due principally due to the one thing, that is the significant slowdown in stainless steel production, which has greatly -- negatively impacted our Minerals business. And, again, Galdino, will share this with you later.

In Rail, as we discussed in, I think the last two or three quarterly conference calls, is expected to have another very strong year but, obviously, will fall behind last year’s record performance, and that’s due principally to the timing of unit deliveries. Most noteworthy this year in our performance really is our growing backlog and our emerging markets expansion. However, again, in order to accelerate the Metals and Minerals business path to double-digit operating margins, we are implementing substantial cost reduction actions in this business as well. And, again, Galdino will give you a little more color on this when he gets up. So, as I mentioned earlier, you’re going to hear me use the words, accelerate the path. There are two very strategic objectives here with the restructuring actions we just announced. And that is to accelerate the path of the Infrastructure business, to breakeven and then profitability, and to accelerate the path of the Minerals & Metals business to double-digit margins. So we’re determined to get those two things right.

On item three, with the addition of Janet Hogan this year from Monsanto as our Chief Human Resource Officer, I can now say that after four years of reshaping the senior management team that I now have all the key positions filled with the right people. And this is my team, and we are all very focused on delivering improvement in the overall results of the company, particularly the return on invested capital as well as improved operating margins. With respect to item four up there, we continue to realize the expected benefits from prior restructurings. However, as I indicated earlier, with Infrastructure, the economic slowdown in Europe and particularly the UK and the continued sluggishness, I may add, of the U.S. economy, and that’s evident in our Minerals business with the significant slowdown in stainless steel production, are clearly offsetting some of these benefits.

With respect to item five, I am very pleased to report that we do expect improvement this year in revenues, earnings and EVA excluding, of course, the restructuring charge. And with respect to items six and seven, we do expect to end the year with a strong balance sheet. We are, however, going to fall short of our free cash flow target that we outlined last year. And that’s due principally to the significant new growth opportunities that were presented to us in China, India and several other emerging economies. We made a strategic decision this year to pursue these opportunities by investing our higher level of free cash flow. As I mentioned, I think it was one of the conference calls, you know windows open and windows close. We’ve had a window open this year where we seize very significant opportunities particularly in China and India which is clearly a focus of ours to grow those two markets, and we took advantage of those.

As such, if you look at our 2011, which has kind of been lost in all this noise of Europe and everything else, this was a record year for Harsco with respect to contract awards and strategic alliances. And we’ll, obviously, touch on this as the day progresses. So, as you can see from what I just said, 2011 is a mixed report card. That’s the reality. What has happened in 2011 was recently captured, I thought, extremely well by a report I just read from KPMG, and I quote what they said in that report. At the end of 2010, it looked like the long awaited economic recovery was finally underway but a series of global shocks throughout 2011 have taken the steam out of the positive momentum, casting doubt on the wider market recovery. The KPMG report goes on to say that, despite these challenges, diversified industrial companies are clearly preparing themselves for the long haul.

I believe these statements articulate very well our position and our recent actions. I do want to spend a little bit of time on this slide because it’s important to just where we are in our journey. When we started our business model transformation exactly four years ago today in front of you here, besides upgrading the global leadership team, which obviously now we have in place as I just mentioned, we set forth on what we call an optimization, globalization and innovation strategy. I would like to review with you just where we stand on that and how much we’ve accomplished.

With respect to optimizing the company, we have already reduced the breakeven point of Harsco by about $165 million with, of course, significant additional cost reductions expected in 2012-2013 as a result of the actions we announced this morning. In addition to the cost reductions, we have developed two key and strategically important global capabilities that, frankly, did not exist at Harsco four years ago. And they are our global supply chain skills and our continuous improvement skills using Lean Six Sigma. These initiatives are now well developed in Harsco and deployed throughout and, we believe, will generate substantial, measurable savings as we go forward. The scale of our restructuring actions is unprecedented in Harsco’s history. In fact, if you were to have said to me four years ago right in this room, December 2007, that I as the new CEO coming in -- great timing of course, right, that I would have to reduce Harsco’s cost structure by approximately $230 million by the end of 2012. Five years. I would have said to you that was impossible task. We are now, I believe, in the process of completing the impossible.

Let me quote some numbers for you to summarize and capture well the scale and depth of our restructuring when it’s fully completed by the end of the next year. First, our global headcount. We’ll have reduced our global headcount by almost 5,000 people, 20% of the global workforce. Second, this is a very staggering number, our global footprint you may recall back in December 2007, we were in well over 450 locations throughout the world. By the end -- probably by the middle of next year, I should say, we will be down to about 300 locations. That’s a 35% in our global footprint, physical locations gone. 35% of our physical locations throughout the world gone. So from well over 450 down to about 300 locations.

And, third, our global asset base will be reduced by about $150 million. This is audacious. It would end also, I may add, it would not have been possible had it not been for what we call our OneHarsco initiative that we commenced four years ago. Our OneHarsco initiative has provided the mechanisms for achieving the significant right sizing of the business that aligns well with current market conditions or realities. These restructuring actions are designed to not only dramatically lower our cost structure in response to global market conditions, but they’re also focused on accelerating, again, that word accelerating, the Infrastructure business back to profitability and accelerating the Metals and Minerals business path to double-digit operating margins, I should say.

So moving on to the globalization of the business. Many of you that have followed us for a long time know that we were principally a European company, and I recognized that obviously very clear. Some of you that have known me for a long time, I’ve been screaming about our concentration in Europe for a long, long time. I was very concerned about it. And, unfortunately, my worst fears have come to reality. I tried -- I started doing something about it in December of 2007. I believe our progress in globalizing the business over the last four years has been prodigious. We should end this year with almost 30% of our revenues now coming or being generated from what we call the rest of the world/emerging markets. That is, as opposed to Western Europe and North America. This is a 50% improvement over where we were four years ago. What is most important, however in my mind, is the progress that we have made in China and India, probably our two most important emerging markets. And let me pause here a moment and tell you a little story about these two countries.

Four years ago, we had zero revenues in India. Given the contract wins that we have already announced about India, and we expect quite a few new ones over the next 12 months and expect future announcements. India, by 2015, should be about a $100 million business which, I think, is very substantial, to build it for nothing. China, four years ago, was a $12 million business and, frankly, we were on the verge of losing that contract we had in our Metals business. In the last four years we have made tremendous progress in China, I believe. And by 2015, China should be about $150 million run rate business. So I am obviously very proud of what this team has accomplished in growing these two very key markets. And that’s just the beginning. We see tremendous opportunities in both those countries as well as many other emerging markets as well that we’re focused on.

So I can now say that we finally have a sustainable, long-term revenue and earnings stream in both China and India and we can expect to continue to grow in future years. And the final strategy on innovation, again, very significant progress has been made here in the last four years. And you’ll hear some of that this morning. Four years ago, Harsco, we had no global coordinated strategy on innovation and knowledge based solutions. And, again, I’m very pleased to report that tremendous progress has been made on the innovation front. From our Global Innovation Network to the strategic alliances involving technology, we believe we are very well positioned to take the business forward with respect to innovation. And, in fact, you will hear both Galdino and Scott Jacoby, particularly, talk about that quite a bit this morning.

Looking at the geographies that I just mentioned, this slide, obviously, supports what I just said. That is, in rebalancing our geographic footprint. And, as I mentioned, four years ago, Western Europe, alone, accounted for just a little bit under 50% of our revenues; staggering. This year, it’s down to about 39%, and will continue to shift away from Europe and more to the rest of the world. North Americas has been holding fairly steady at about 32% and we kind of like it right there because North America is a very important market for us in all of our businesses. It’s really Europe is the problem. Just as important as the consolidated view or geographic balance of Harsco, as you can see, also if you go across each one of the businesses, we’ve made tremendous progress in globalizing each business. Four years ago, Rail was essentially a North American business. Industrial was 100% North American. Infrastructure was essentially a European business. Our Metals and Minerals business was really the only global business out of the four. And, as you can see, in four years we’ve managed to globalize all four of the segments.

But it’s all about earnings, isn’t it. And this is an updated slide of what I showed you last year. In substance, our overall target for 2015 of a range of $3 to $4 in earnings per share is unchanged. However, the roadmap on how we get there has changed due to significant turbulence in the European markets and also given, what I mentioned earlier, the sluggishness we’re seeing in North America and some other developed economies as well. So let’s briefly look at this chart in more detail. And, as you can see, our estimated range of EPS contribution for each of the major categories provides the opportunity for consistent double-digit earnings growth in the next four years. And, again, this is unchanged from what we said last year.

The restructuring benefits in the chart are self explanatory, as are the organic growth initiatives, and will be discussed further by the team here today. And, obviously, I’m sure it’ll come up in the Q&A as well. I do, however, I do want to just expand a little bit and comment on the OneHarsco initiative. Over the past years, past four years, as I’ve just said earlier, we have been building key capabilities such as global supply chain and lean. In addition to these, though, we have established two key global shared services centers. One in India and the second in Costa Rica. We have also invested in global ERP computer systems and we implemented global standards that you will hear all the business guys talk about today. These capabilities, again, did not exist four years ago. And these capabilities now provide us the -- provide the effective mechanism, as I call them, for us to further significantly lower our cost structure. So, in summary, when you look at the OneHarsco initiative there, it’s principally the benefits from our global supply chain, our global shared services centers and the benefits from our lean program.

So the main message here is that we are confident that we can still deliver consistent earnings growth by executing the key levers that we can clearly control and are within our control, as you can see from the chart here. The majority of the items here really meet that definition. We have factored in our EPS range some gradual improvement in our key end markets, starting in 2013, they’re very gradual. And, of course, no improvement, we expect no improvement in any of our key markets in 2012. I think 2012 is going to be a very tough year and particularly the first half of 2012 we believe is going to be a very tough year. Thus, we believe that we can execute our strategy and deliver consistent double-digit earnings growth in the next four years without any significant improvement in our global markets. Should we get a significant improvement, that would be a plus.

Let me touch a little bit on cash because, obviously, I know there’s a lot of interest on cash. And we believe -- and many of you have heard us say recently, we believe that the best metric for Harsco and Harsco’s cash flow that is, is discretionary cash. We define discretionary cash as follows. Cash from operations plus assets sales minus maintenance CapEx. We add asset sales because it is an ongoing, normal part of both of our Infrastructure businesses as well as our Metals and Minerals business. And they’re the two primary users of CapEx. Maintenance CapEx is deducted -- again, because it is the normal part of our business and it is the amount of capital that we need to sustain the current revenue stream. But when it comes to growth CapEx, we do not need to spend growth CapEx if we choose not to. It is truly discretionary. Even without spending on growth CapEx, our business is still capable of growing, obviously, in an environment where markets are growing.

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