Harsco Corporation ( HSC)

Q3 2011 Earnings Conference Call

October 27, 2011 10:00 AM ET

Executives

Gene Truett – VP, IR

Sal Fazzolari – Chairman and CEO

Stephen Schnoor – CFO

Analysts

Jim Lucas – Janney Capital Markets

Eric Glover – Canaccord Genuity

Jeff Hammond – KeyBanc Capital Markets

Glenn Wortman – Sidoti & Co

Scott Graham – Jefferies

Presentation

Operator

Good morning, my name is Stephanie and I will be your conference facilitator. At this time, I would like to welcome everyone to the Harsco Corporation Third Quarter Earnings Release Conference Call. All lines have been placed on mute to avoid any background noise. After the speakers’ remarks there will be a question-and-answer period. (Operator instructions)

Also, this telephone conference presentation and accompanying webcast made on the behalf of Harsco Corporation are subject to copyright by Harsco Corporation and all rights are reserved.

Harsco Corporation will be recording this teleconference. No other recordings or redistributions of this telephone conference by any other party are permitted without the expressed written consent of Harsco Corporation. Your participation indicates your agreement.

I would now like to introduce Mr. Sal Fazzolari, Chairman and CEO of Harsco Corporation. Mr. Fazzolari, you may begin your call.

Sal Fazzolari

Thank you very much. Good morning, everyone. I’d like to welcome to Harsco’s Third Quarter 2011 Conference Call. I’ve here with me today Gene Truett, our Vice President, Investor Relations and Stephen Schnoor, our Chief Financial Officer. Before we begin our call this morning, I will ask Gene to read the safe harbor statement. Gene?

Gene Truett

Thank you, Sal, and good morning, everyone. As we do at the beginning of all of our calls, we just want to let you know that we will be having forward-looking statements in our discussions with you today.

These statements relate to the future of our business, our operations, our results, economic expectations and other aspects relating to and affecting our business. What we say today is based on our best information available; it is possible the results could differ from what we tell you today.

We've listed in our SEC statements reasons and risk factors that affect our businesses and these could be the reasons for any difference that could occur. We invite you to review the SEC filings at your convenience.

I would like to remind you that replay of this call and related information are available on our website. Please take the time to assess this information at your convenience. Sal?

Sal Fazzolari

Thanks, Gene. Our call this morning will be as usual, we’ll commence with some brief comments from me, then Steve will, of course, review the quarter in a little more detail, and then I’ll make a few comments on our outlook and then we’ll take your questions. So let’s start with a few opening comments from me.

The third quarter generally did unfold as we had expected and as we outlined to you in the second quarter press release, as well as the earnings call that day, with the exception of course of the end market conditions in the United Kingdom for our Harsco Infrastructure business, which did deteriorate more significantly in the quarter than we had anticipated.

In addition, we did incur certain other headwinds during the third quarter that precluded us from exceeding our earnings guidance and mainly the $2.6 million in net contract exit costs in Metals and Minerals and higher LIFO costs of approximately $1 million in Rail.

There are a couple of salient points that I would like to make relative to the major items that impacted our results for the third quarter, starting with metals and minerals. The significant decline in stainless steel production, as we indicated in the press release of approximately 22%, greatly impacted operating income of the metals and minerals segment by $5 million and operating margins by a 130 basis points.

As you recall, with minerals being our highest margin business, the impact to segment results are, of course, amplified. That’s the mix of higher revenues in the third quarter from our traditional metals business which has lower margins and the lower revenues from the minerals business which has much higher margins, obviously had a significant net negative impact on overall operating results of both the group and the company.

Second, the metals business did incur a $2.6 million in exit costs in the quarter which also adversely affected both operating income and margins. As I stated throughout the year, we are determined to not renew contracts that do not offer the opportunity to improve our return on invested capital and our operating margins.

As you may recall, in 2008, those of you’ve been with us for a long time, I started the unprecedented action at Harsco of exiting underperforming contracts. My focus now is on contract renewals that do not offer measurable long-term opportunities for higher returns on capital and improved operating margins.

The Harsco Infrastructure segment continued the benefit in the quarter from savings generated from last year’s restructuring actions. However, during the quarter and as I started earlier, there was a significant further deterioration in operating results in the United Kingdom due to that country’s worsening economic conditions.

I’m certain that you’ve seen the announcement, the new construction orders in the U.K. are at 30-year lows and about the ongoing macroeconomic difficulties of the country. Had it not been for the U.K., our Infrastructure segment would have nearly achieved a breakeven performance into third quarter. The slowdown in western Europe due to the sovereign debt crisis is also having a negative impact on results of the business in the second half of the year due to the uncertainty that this issue is causing in making business investment decisions.

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