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Harsco Corporation (NYSE:HSC)

Q4 2008 Earnings Call

January 29, 2009 10:00 am ET

Executives

Salvatore Fazzolari - Chairman and CEO

Gene Truett - VP, IR

Steve Schnoor - CFO

Analysts

Jeff Hammond - KeyBanc Capital

Bill Fisher - Raymond James

John Emrich - Ironworks Capital

Ted Wheeler - Buckingham Research

Operator

At this time I would like to welcome everyone to the Harsco Corporation fourth quarter release conference call.

(Operator Instructions).

Also, this teleconference presentation and accompanying webcast made on behalf of Harsco Corporation are subject to copyright by Harsco Corporation and all rights are reserved. Harsco Corporation will be recording this teleconference. No other recordings or redistributions of this teleconference by any other party are permitted without the express written consent of Harsco Corporation. Your participation indicates your agreement.

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

Salvatore Fazzolari

Good morning, everyone. Good morning everyone. I would like to welcome you to Harsco's fourth quarter 2008 conference call. I have here with me that today, Gene Truett, our Vice President of Investor Relations and also by the way our Chief Credit Officer, and Steve Schnoor, who is our Chief Financial Officer.

Before we begin this morning, I would like to ask Gene to read the Safe Harbor statement.

Gene Truett

Thank you, Sal. Good morning, everyone. As we do at the beginning of all of our calls, we just want to let you know that we'll 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 that the results could differ from what we tell you today. We've listed in our SEC statements reasons and risk factors that affect our businesses, and these could be the reasons for any differences that could occur. We invite you to review the SEC filings at your convenience.

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

Salvatore Fazzolari

Thanks Gene. I would like to start this morning by making few comments on the fourth quarter, and then I will make comments regarding the year in total, and then finally conclude with overall comments on the current environment and the outlook as we see it.

We were pleased to achieve our earnings target for the fourth quarter, excluding the restructuring charge. As the month of December progressed, the financial and economic crisis deepened. Due to this deterioration in the macro-environment, we determined towards the end of December that it was necessary to aggressively expand our counter measures.

In early December you may recall, we expected a restructuring charge of about $20 million with an estimated savings at that time of approximately $30 million. As a result of our proactive counter measures, we ended up with a restructuring charge of approximately $36 million in the fourth quarter. More importantly, we now expect savings of approximately $50 million or $0.45 per share from these actions.

We believe that the majority of the savings will be realized in 2009, with the full effect starting sometime in the middle of the first quarter. This is due principally to notice periods and other timing issues that precluded all the benefits from being realized starting January 1.

With respect of the year 2008, we are of course proud of our record achievements, excluding the restructuring charge. As we said in the press release, sales did approximate $4 billion for the first time in the history of the company, diluted EPS from continuing operations of $3.20, and something we are very proud of, I know Steve is, and that is our cash flow from operations reached and impressive $574 million for the year.

Our execution in 2008, positions the company well, we believe, to weather what is arguably the most challenging and turbulent period of our generation. We are not in a normal economic cycle. We concluded the year with a very healthy balance sheet, a strong liquidity position, and a much lower cost structure. Our strong balance sheet underpins our ability to selectively target key growth opportunities throughout the world. We believe that there will be opportunities this year. We also believe that we will emerge from this turbulence an even stronger company.

Finally, several points on the outlook for 2009. We expect 2009 to be a very a challenging year, particularly in the first half. The major headwind of the soaring US dollar has reduced sales by 11% and EPS by $0.12 per share in the fourth quarter of 2008. We will have an even greater impact in the first quarter of 2009 across almost all of our business units.

For example, some of our major currencies such as Poland, Australia, and the Europe countries in the month of January alone devalued a further 11%, 7%, and 6% respectively since the end of the year. These same currencies, along with, say several other key currencies of ours, like the Brazilian real and the UK's sterling, all these currencies together devalued since October 1, from a range of close to about 10% to the size 30%.

These are incredible changes in currencies in such shorter period of time, and of course its all driven by the risk factor, the US dollar been a safe haven. We don't believe long-term that's going to be sustained.

In addition to currencies, the steep reduction in global steel production that has deteriorated even further in the first quarter will also be a major headwind to both the Metals and Minerals businesses where sales and income will be down sharply.

With the respect to steel production for example, in the fourth quarter of 2008, our universal mill locations operated at a blended utilization rate of about 50% capacity. In January, and we believe further pretty much in the entire first quarter, they are operating at a rate of about 40% capacity. This further 20% reduction in capacity utilization has an exponential negative effect on our performance.

As a result of these dramatic changes, we are in a process of taking additional counter measures, centered on further costs reductions and targeting growth initiatives. Although we do not expect any additional cost reduction, counter measures will result in further restructuring charges. We are expecting, however, positive benefits above the $50 million level that we've already believed is pretty much done.

I just wanted to let you know that there are further opportunities for us to improve cost structure and thus our performance, and we're very much into that right now.

With respect to the growth initiatives, we are looking at projects in the emerging markets, and we're also looking at several small bolt-on acquisitions. In fact, one final point of clarification, about what we said in the press release, about several new projects that we expect will benefit the second half performance, I wanted to give you specific examples these are not dreams, these are reality.

In our Metals business, for example, we do expect two new contracts to be operational, one in the Middle East and one in India, in the second half of the year. And you should see press announcements on those as we go through the first quarter, early second quarter.

In our Infrastructure Group, we expect a new joint-venture in the Middle East to contribute to our performance as well. And that is going to be in Saudi Arabia. There will also be other new projects throughout 2009 that we've targeted, that we believe we have a very good chance, and good probability of having some of those positively affect our performance in the second half.

While 2009 will be a very challenging year, we believe our solid portfolio businesses, our strong balance sheet, our healthy liquidity position, and our excellent cash flows will provide us the opportunity to weather the current storm. As such, Harsco will have considerable resources for acquisitions and other growth initiatives to support our future growth.

I would like now to turn the call over to Steve, our CFO, to give you a little more detail on our performance for the fourth quarter. And then I will make some additional comments on our outlook, particularly as it relates to the first quarter and the year, and then we will, of course, take your questions. So, Steve?

Steve Schnoor

Thank you, Sal. Good morning, everyone. I will briefly discuss the fourth quarter and 2008 full-year performance, and then more importantly, extensively discuss the numerous strategic actions and counter-measures that the company has taken to enhance performance in 2009 and future years. I will also discuss the company's strong financial position, cash flows, and liquidity.

Fourth quarter of 2008 was the most challenging macroeconomic operating environment the company has ever faced, especially for the Harsco Metals business. However, the company's performance did meet our expectations. Fourth quarter earnings per share from continuing operations were $0.46, excluding the previously announced restructuring charge of $36 million. Fourth quarter 2007 earnings were $0.74.

The 2008 restructuring charge will result in annual savings of approximately $50 million or more beginning progressively in 2009. Including the restructuring charge, fourth quarter earnings per share from continuing operations were $0.18.

The stronger dollar significantly affected sales and earnings in the fourth quarter, reducing sales by $107 million and operating income by $15 million, compared with fourth quarter of 2007. Therefore, foreign currency translation reduced earnings per share by $0.12.

Despite the deterioration in global economic conditions in the fourth quarter of 2008, full-year earnings per share from continuing operations are record $3.20, excluding the fourth quarter restructuring charge. This is a 6% increase from 2007 earnings per share of $3.01. Additionally, in 2008 the company achieved record sales of close to $4 billion with all three major business segments posting records as well.

As CFO, I'm also very pleased to report record cash from operations of $574 million, in 2008, including record fourth quarter cash from operations of $192 million, compared with $99 million in last year's fourth quarter. Discretionary cash flow; that is cash from operations less maintenance capital expenditures, was a record $365 million in 2008. A true measure of a company's success is its ability to generate consistently strong discretionary cash flows. Harsco has once again achieved this measure of success.

The company's balance sheet, liquidity and discretionary cash flows remain strong. The company's financial strength, combined with the record capital investments of recent years, put the company in a very strong position to execute its strategic initiatives and take advantage of growth opportunities, including strategic acquisitions as they arise. Of course, the company will be extremely prudent in the execution of any such opportunities, remaining intently focused on our core strategies.

Under the current economic conditions we will also be extremely prudent in our capital investment strategy. We are not constraining growth opportunities of the business. Over the past three years, we've invested over $1.2 billion in capital expenditures. Given the mobile nature of our capital investment pool, we could redeploy those investments throughout the world, taking advantage of the highest return opportunities.

As communicated at the annual analyst conference last month, the company's 2009 capital investments are estimated at $300 million, including $100 million for growth initiatives, and $200 million for maintenance of current revenues.

Let's now turn briefly to the fourth quarter performance of each of the business groups. Harsco Infrastructure performed as expected in the fourth quarter. Foreign currency translation reduced fourth quarter sales by $443 million compared with 2007. Excluding, the effect of foreign currency translation, sales only declined by 2% from 2007.

Operations in emerging markets and our global industrial maintenance markets performed well in the fourth quarter. This is more than offset by expected revenue declines in the UK, Ireland, and some other parts of Europe. Additionally, sales to export markets declined due to the reduced availability of customer financing.

Despite the global economic conditions facing us, recurring maintenance activity continues in petrochemical and power plants, additionally, activity remains sound in emerging markets in the Middle East and Asia.

In 2008, the Infrastructure Group achieved record sales of over $1.5 billion and record operating income of $190 million excluding the fourth quarter restructuring charge. This result, in such challenging times, reflects the global and customer diversity of this business, as well as the breadth of its service offerings to customers.

The long-term outlook across the global footprint of our Infrastructure business remains stable. The company will leverage its global breadth and mobile asset base to focus on emerging markets, as well as market segments that remain strong, such as industrial maintenance and global infrastructure work.

Beginning in the second half of 2009, we anticipate global government stimulus packages to fund much needed infrastructure projects throughout the world. Our Infrastructure Group is well-positioned with its engineering and logistics expertise, as well as the capital investment base to take advantage of these expected opportunities.

Going on to the Harsco Metals business; as expected, global steel mill production declines reached unprecedented levels in the fourth quarter of 2008, especially, in November and December. The volume declines, as well as foreign currency translation, had a significantly negative effect on operating income for the Harsco Metals in the fourth quarter.

Production volume declines are further accelerated in the first quarter of 2009. This will further adversely affect the performance of the Group in the first quarter of 2009. To ensure the Metals business will operate at optimal efficiency in 2009 and beyond, a significant fourth quarter restructuring charge was recorded in this segment. Restructuring charge include, headcount reductions, contract exits, asset disposals and charges resulting from defined benefit pension plan changes, all of which will result in future cost savings.

Minerals & Rail Group also performed as expected in the fourth quarter. Harsco Rail posted exceptional results. Certain sales, originally planned to ship in the first quarter of 2009, were shipped in the fourth quarter. This will reduce sales somewhat for the business in the first quarter of 2009, but continued growth is expected for the balance of 2009 for Harsco Rail.

Harsco Minerals was affected by lower volumes in metal prices, and Harsco Industrial performed as expected with higher LIFO steel costs, negatively affecting the grating business.

I will now comment on the company's financial position, cash flows and liquidity, as well as countermeasures and strategies that will affect our future performance. The company continues to maintain a very strong financial position, with significant cash flow generation and liquidity.

Despite record investment in growth capital expenditures in 2008, our debt-to-capital ratio is a very healthy 41.7% as of December 31. Cash flows from operating activities in 2008 were a record $574 million, exceeding 2007 cash flows of $472 million. 2008 cash flows increased despite the first quarter of $20million income tax payment related to the 2007 Gas Technologies divestiture.

Our discretionary cash flow for 2008, that is cash from operations less maintenance capital expenditures, was a record $365 million. This consistently high level of free cash flow provides us with a significant flexibility in managing the business, and the ability to capitalize on prudent strategic growth opportunities.

In 2009, we will remain extremely prudent in our use of cash. As we will leverage and redeploy the significant mobile capital investments that have been made over the last several years before spending additional cash.

As a reminder, the company also successfully executed a $450 million 10-year bond issue in the second quarter of 2008 at a very favorable interest rate. This issue extended the average maturity of our long-term debt providing us with even greater financial flexibility, and less exposure to variable interest rates.

The company continues to have significant available liquidity of over $700 million, with balance sheet cash of $91 million and backup revolving credit and overdraft facilities more than adequate for our needs. In the fourth quarter, we successfully renewed a revolving credit agreement as well as a credit facility in Europe. As you can see, we remain well positioned from a financial flexibility perspective.

In 2009 we also expect to benefit from the following actions or trends. Cost savings of approximately $50 million or more resulting from the fourth quarter restructuring actions that we took, lower fuel costs, earnings per share benefit of our share buybacks that we made in 2008, the effects of the resolution of nonperforming Mill Services contracts, the benefits of our Lean Sigma Continuous Improvement Program, lower LIFO steel costs for our products industrial business.

Global government stimulus packages would affect beginning in the second half of 2009. Foreign currency exchange rates, if they remain at current levels, will mitigate most of these previously mentioned benefits, as will higher defined benefit pension expense. Additionally, we expect dramatically lower steel production volume to continue during the first half of 2009, especially in the first quarter, where volumes remain at unprecedented low levels. Steel production in Q1 is expected to be even less than the record low levels of Q4 of 2008.

We will continue to focus intensely on achieving our strategic priorities and capitalize on our financial flexibility and strong balance sheet. However, due to the continuing effects of the global financial and economic environment, the first half will be much weaker than the second half.

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

Salvatore Fazzolari

Thanks, Steve. Let me now summarize our current outlook for the first quarter of 2009 and our current view of the year. Due to the most recent events with the US dollar continuing to gain momentum against most of our major currencies, and the further unprecedented steel production reductions or decline in global steel production, as well as the continued difficulties in credit markets, we have prudently modified our view of 2009.

As a consequence, we are taking a more guarded view and we are adjusting our full year 2008 guidance for diluted EPS from continuing operation to a new range of $2.80 to $3, from a previous range of $3.20 to $3.30. For the first quarter we are forecasting earnings for continuing operations in the range of $0.15 to $0.20 per share, and that compares with $0.67 from last year's first quarter.

The guidance for the first quarter is based again on the significant strengthening of the US dollar, the unprecedented and steep reduction in global steel production, the continuing tight credit markets, and the timing of the full benefits from the restructuring actions.

I would also like to remind you that our first quarter is our seasonally low quarter, and traditionally substantially lower than all the other quarters in the year. Additionally this year particularly, the winter in a lot of our key countries has been much worse than it was last year. So we're also having adverse effects from weather in January here.

And then finally, as Steve mentioned, there were a few timing issues in our Rail business. Units shipped in the fourth quarter that were originally scheduled for the first quarter, and that's also having a little bit of an effect on the first quarter as well.

So, that completes my comments, and we will now be very pleased to take any questions you may have.

Question-and-Answer Session

Operator

(Operator Instructions). The first question comes from the line of Jeff Hammond from KeyBanc Capital. Your line is open.

Jeff Hammond - KeyBanc Capital

Hi, good morning, guys.

Salvatore Fazzolari

Good morning, Jeff.

Jeff Hammond - KeyBanc Capital

I just wanted to zero in on infrastructure. It looks like the margins in the fourth quarter came under some pressure. Can you speak to what's driving that? Maybe talk specifically about rental rates and if you expect that to persist here on a go-forward basis?

Salvatore Fazzolari

Jeff, if you look at the fourth quarter, the majority of the margin decline was foreign exchange. If I recall right, it was about 110 basis points due to the "crisis and the economic conditions." And a lot of it is due on balance of two things. One is these export sales that we mentioned before, have pretty much dried up, because there's no credit available to lot of our customers throughout the world, so that's having somewhat of an effect.

And the other one, in certain markets there are some pressures on pricing, no question about it. Our utilization rate, by the way Jeff, is very high. We thankfully saw a lot of this coming, as you may recall, and in the early summer we did start positioning some equipment to various markets throughout the world. We are still in fact in the process of moving additional equipment to other parts of the world, where we were hoping to have some additional work in the second half of the year.

But nonetheless, I don't want to say there's none, there's some pressure on rental rates. Utilization rates are still holding very, very high, but in certain market we are seeing a little bit of pressure there. Does that answer your question?

Jeff Hammond - KeyBanc Capital

Yeah, that's helpful. Just speaking to the second half, given that construction in Infrastructure projects have a longer cycle, and I understand you have got this stimulus coming on, if maybe the credit markets get better some of that gets unlocked, but just walk me through your visibility of projects that maybe are still ongoing in the first half, and maybe start to roll off? Is there risk that there's more rolling off than coming online into the second half of the year?

Salvatore Fazzolari

The good news about our business model in our geography and the type of services we do Jeff, we are so diverse. First of all, we do thousands and thousands of projects. So I couldn't point to you in all honesty the one project, say, that's going to have any material effect. And we're still seeing very strong activity in the Gulf region of the Middle East. There's certainly a little bit of a slowdown in Dubai, but again we knew that was coming.

We're seeing a lot of activity in Abu Dhabi for example, though Qatar is very strong. Saudi is particularly strong and we're hopeful to have our new joint venture up and running there no later than the middle of the second quarter, and certainly be fully operational by July 1, which we believe will have a pretty good contribution to our results in the second half, as well as allow us the ability to move additional equipment into that country.

In Asia, Singapore is going very strong. We're looking at some opportunities in China. Hopefully by the end of the year we'll have something going there, in Australia and a few other parts. Certainly Europe, the UK and Ireland are in bad shape no question about it, but don't forget our industrial work. That's about almost getting up to close to 30% of our business is power plants, petrochemical refineries, and those pretty much are still continuing on and holding in.

So you look at the geography, you look at the diversity of the services, you look at the fact that again last year thankfully we started repositioning our business more to the infrastructure side, like the rail, and airports, and power plants, and those kind of things in a way, as much as we could, away from commercial type, particularly like the condominiums, and the hotels, and office buildings, and so forth. That continues on today.

So we think we're pretty well positioned, and if the stimulus packages, which we believe will happen, of course it's already happening in China, for example, we think we will benefit, because we are well positioned there. We don't want to be overly optimistic, but we think on balances, best we can see for the year, the Infrastructure segment should hold up. Obviously, we've got the pressures of the foreign exchange.

Jeff Hammond - KeyBanc Capital

Okay. And then just back to the foreign exchange dynamic, help me understand the decremental margin impact from the FX headwinds, because I would have thought that you have natural hedges just given that you're doing business in those countries.

Salvatore Fazzolari

We do it on the balance sheet, Jeff, but not on the P&L. And I don't want to get into specifics, because of the competitive reasons, what's happened some is some of our most profitable business has been the most dramatically affected from foreign exchange. Just to give you one example, I don't want to give too much away, Brazil, for example, Brazil is down, almost close to 20%. That has quite an effect on our margins. There are many other countries, I'm not going to mention them, but you can figure out, if you look at the universe of the countries we operate in, that's what's really driving it.

Jeff Hammond - KeyBanc Capital

Okay. That's helpful. I'll get back in queue. Thanks.

Operator

Your next question comes from the line of Bill Fisher from Raymond James. Your line is open.

Bill Fisher - Raymond James

Good morning.

Salvatore Fazzolari

Good morning, Bill.

Bill Fisher - Raymond James

Actually following up on Jeff's question a bit, when you look at your $100 million in growth CAPEX this year, is still a fair bit of that going to Infrastructure?

Steve Schnoor

Bill, yes. $100 million will go to Infrastructure. As we need it. However, first, we're going to take the mobile equipment, which we already purchased over the last few years and use that, and redeploy it. So the $100 million is a target. It may wind up being somewhat less than that, because we have invested substantial CAPEX over the last several years. The infrastructure projects would be a top priority.

Salvatore Fazzolari

Bill, don't forget, as I mentioned, we do expect two new contracts, one in India, and one in the Middle East on the mill side that will require some of it, so that's in the growth CAPEX numbers as well. So there will be some mill projects as well, but there's quite a bit in Infrastructure as well. So it's more balanced. And there's a little bit in the Minerals & Rail.

Bill Fisher - Raymond James

Okay. And then on the Infrastructure again, the US, Patent Scaffolding, how is that business been doing?

Salvatore Fazzolari

To be honest with you, it's holding up well. Of course, we're seeing a little bit of pressure on rates, but again we were proactive. We moved equipment earlier last year, in the middle of last year. We took some costs out in anticipation of a little bit of a slowdown, thankfully our US business is actually the best balanced business of all the Infrastructure businesses. It is truly the most balanced. They have the most in, for example, in industrial, in infrastructure, and they still do a little bit on the commercial side, but I would say geographically and service wise they are very well balanced.

Bill Fisher - Raymond James

Okay. Globally, it's clear that you have some infrastructure, core infrastructure projects coming on in the second half, that's the expectation, but does your model have that picking up and some of the implicitly commercial business falling off a bit or how do you think about that?

Salvatore Fazzolari

Yes, absolutely. I think if I'm not mistaken, we sent a press release or Steve said in comments that, we expect the results for infrastructure in '09 to approximate at least on the earnings side to approximate 2008. It's now on the topline; we're going to get pressure of course, because of the foreign exchange, if they continue at this rate.

Bill Fisher - Raymond James

Okay. Just last thing real quick. Given the UK, which assumes high tax market is weaker, and Middle East sounds like it's doing better in the lower tax, what's kind of embedded maybe in the midpoint of the 290 estimate, is it tax rate, could that be lower for the year?

Steve Schnoor

The Tax rate, as we said at the conference, is between 27% and 28%.

Bill Fisher - Raymond James

Okay. Is it still in that range?

Steve Schnoor

Right.

Bill Fisher - Raymond James

Okay. All right, thank you.

Operator

Our next question comes from the line of John Emrich from Ironworks Capital. Your line is open.

John Emrich - Ironworks Capital

Thanks. First, can you just walk through and allocate the charges to either SG&A or cost of goods sold for me?

Steve Schnoor

Did you see in the press release? There is a chart in the back; I know it doesn't show the categories for example, cost of sales, G&A.

John Emrich - Ironworks Capital

I can see that add up to the $36 million, and some other stuff, but I am trying to get to a normalized COGS and SG&A number. So I'm trying to figure out what in there are the charges?

Steve Schnoor

Most of the charges are on a separate line item, not all of item, because there are other categories affected, but if you look at the income statement, the other income line?

John Emrich - Ironworks Capital

The other expense of $28 million?

Steve Schnoor

The other income and expense line?

John Emrich - Ironworks Capital

Yes.

Steve Schnoor

That's where most of them appear. There are some other charges in other categories, but that's where the bulk of them are.

Salvatore Fazzolari

Which are probably split evenly, the other $8 million is probably split evenly between SG&A and cost of sales if you wanted a rough estimate.

John Emrich - Ironworks Capital

That's an all I was looking for, that's helpful. Lastly, can you quantify a little bit the pension expense outlook? What it was in '08 and what we're looking for in '09?

Steve Schnoor

We're estimating at this point in time that the defined benefit pension expense will affect our earnings in '09 by about $0. 25.

John Emrich - Ironworks Capital

Relative to '08?

Steve Schnoor

Right.

John Emrich - Ironworks Capital

Got you. Thank you.

Steve Schnoor

You're welcome.

Operator

Your next question comes from the line of Ted Wheeler from Buckingham Research. Your line is open.

Ted Wheeler - Buckingham Research

Hi, good morning.

Steve Schnoor

Good morning.

Ted Wheeler - Buckingham Research

Couple of things, your comment on the outlook of the manufacturing businesses being I guess collectively about flat for the year, I just wondered if you could go through some of the pieces, because some of those feel like late-cycle businesses, and I just wondered how you get to that outlook?

Salvatore Fazzolari

Ted, I'm sorry, we had a little by of interference on our call. Would you mind please repeating that?

Ted Wheeler - Buckingham Research

Sure. The manufacturing businesses outlook for flat performance, I wondered if you could give the pieces of those businesses, those businesses to me seem late-cycle and maybe have some risks to them. I just wondered how you got to that flat outlook?

Salvatore Fazzolari

When you say the manufacturing, are you talking about the Minerals & Rail Group as a Group?

Ted Wheeler - Buckingham Research

Yes, if I'm interpreting your comments correctly, I think you said those Minerals & Rail manufacturing units collectively would be flat for the year?

Salvatore Fazzolari

Yes.

Ted Wheeler - Buckingham Research

Okay. That's what I was asking about.

Salvatore Fazzolari

The issue there is really the Minerals business, principally the old what I call excel business, and that's due to the unprecedented steel production cuts. Again, we're operating at 40% capacity, which in my 30 years has never happened. Also, due to severely depressed metal prices as well. That's what's driving the performance down. If you take them out, all the other businesses, the Rail business is going to be up year-over-year, both sales and income.

The only three manufacturing businesses are really Air-X-Changers, Patterson-Kelley, and IKG, which we call Harsco Industrial now. Harsco Industrial is going to be pretty much flat year-over-year. There are some softness in markets, no question about it, but we think on balance they are going to be relatively flat. Part of it, they are going to get a benefit, the reasons they are going to be relatively flat is, because they are going to get no LIFO expense to speak of this year.

Ted Wheeler - Buckingham Research

Okay. That's an income comment, not a revenue comment?

Salvatore Fazzolari

Right. Yes, right.

Ted Wheeler - Buckingham Research

Okay. Just out of the three, would Air-X-Changers, IKG or Patterson-Kelley would they be all uniform in terms of revenues or would you have a ranking there?

Salvatore Fazzolari

Air-X-Changers should be about flat year-over-year, where IKG will be down a little bit. They had a record year. It's all relative. They did actually have a record year in 2008 and given the economic conditions it's going to be very tough to duplicate that. IKG will be down year-over-year. PK should be pretty much flat year-over-year. Air-X pretty much flat year-over-year, IKG down, our old Excel business down.

Ted Wheeler - Buckingham Research

Okay. Thanks for the caller. One another one, on the pension side, do you have a cash contribution that you could share with us for '08 and '09.

Steve Schnoor

Like I said, I don't have any specific information, but I can tell you that we don't expect any significant increases in contributions in '09 from what we paid in '08.

Ted Wheeler - Buckingham Research

Okay. Thank you.

Operator

Your next question comes from Jeff Hammond from KeyBanc Capital. Your line is open.

Jeff Hammond - KeyBanc Capital

Hi guys, just a couple of follow-ups on the metals business. The utilization rates that you are thinking about for the first quarter, should I assume that, that business on an operating basis is loosing money?

Salvatore Fazzolari

No, believe it or not Jeff, we still believe, at least our forecast, and we will hit that forecast, is that they will show a very small amount of income. Again that speaks to our geography and it speaks to the way some of our contracts are structure, but certainly had not been for of course, there restructuring actions, they would have lost money, no question about it, but we do expect small contribution in the first quarter.

It will be the absolute worst quarter in the history of the company, the first quarter, because again we have never seen utilization rates of 40%. Now, of course, I would exclude restructuring charge of the fourth quarter, but we do expect to make a little bit, it's very little, but we do expect to make positive contribution.

Jeff Hammond - KeyBanc Capital

How are you thinking about utilization rates into the second quarter and second half of the year, underpinning your guidance?

Salvatore Fazzolari

We are hearing anecdotally from some customers that they do expect some uptick due to little bit of restocking at some point in mid-year. The big question that everyone has is, like in the US particularly, what impact will the stimulus packages have on steel production? At one point, do you see in any uptick in production? No one really knows. We are assuming that the first half is going to be really bad Jeff. We are not modifying much of the 40% range.

That's why we are looking again at additional countermeasures, if you will. We see some further opportunities for cost reductions in the first half and some of it, and hopefully quite a bit of it coming from the Metals Group.

And secondly, as I mentioned earlier, we do see some additional opportunities in other markets. I didn't mention India and the UAE. We are also flowing up on several countries where we will hopefully get some additional work. We can improve performance, take it in our own hands, if you will and try to grow the business, even in this difficult market.

Jeff Hammond - KeyBanc Capital

Okay. The guidance revision for '09, I think you specifically mentioned the FX headwind and mill. I am just wondering if the new guidance reflects any incremental weakening in either Infrastructure or Mineral & Rail or are those basically unchanged from the December meeting?

Salvatore Fazzolari

There is a little bit on the Infrastructure, Jeff, but I would like to say, if you exclude the FX, the majority is FX, there is not much but a little bit on the infrastructure and there is a little bit not on the Rail. The reason on the infrastructure, I guess here is, we are not seeing much on the loosening of the credit yet, so that's being the factor.

Rail; don't forget it's another reason we had to modify. They did have that timing issue in the fourth quarter, although benefited the fourth quarter, but it's adversely affecting the first quarter performance, even though year-over-year Rail's going to be up in both earnings to sales, it would have been up more had those shipments occurred say January 2, instead of late December. It just the way it happened. Whenever happens that happens it happens, and we were expecting it to happen in '09, but it happened in '08.

Jeff Hammond

Okay. Finally, any changes to your pension expense assumptions or tax rate assumptions within the guidance? The medium term bond kind of move at the end of the December, I didn't know if that impacted that $0.25 pension expense set? And then just if you could update us on the tax rate?

Salvatore Fazzolari

No, actually the additional $0.25 expense is what we expected in December, so the assumptions have not changed significantly from what we had seen in December. There are some offsets there, as well as the tax rate. It set back in December between 27% and 28% and that's the risk worth taking now.

Jeff Hammond - KeyBanc Capital

Okay. I thought that the December meeting had a 29% number in the presentation, but we can follow up on that offline.

Salvatore Fazzolari

I think Jeff we may have said it in the comments, I have to go back and look. I thought we may have said that's it's going to be in the area of 28% and 29%, now we are looking it's going to be merely within the 28%.

Jeff Hammond - KeyBanc Capital

Okay. Thanks.

Operator

Your next question comes from the line of John Emrich from Ironworks Capital, your line is open.

John Emrich - Ironworks Capital

Thanks, last one I was just wondering if you had a free cash flow outlook to go with your earnings guidance for the calendar year '09?

Salvatore Fazzolari

Well we have targeted $525 million in cash from operations and we had said that we are going to do $200 million in maintenance CAPEX, so that would imply about a $325 million free cash flow. Then of course, we are going to spend about a $100 million in growth CAPEX. We think that we can trim those CAPEX numbers are little bit, I am hopeful that we don't spend $300 million. I am hopeful that it's less than that, but yet still achieve because of the equipment that we are moving.

As Steve said, we are positioning equipment to fund some of these projects. So we think we may be well positioned to take advantage of this equipment, so, we don't have to spend the money. We are hopeful that we will have actually much better free cash flow number in '09. We are working hard, of course, you saw what we did in '08, and we even exceeded our expectations. We are hopeful of doing the same thing here in '09 as well.

John Emrich - Ironworks Capital

Great, thanks.

Salvatore Fazzolari

You are welcome.

Operator

At this time we have no more questions in queue.

Salvatore Fazzolari

Thank you. Just want to thank everyone for your participation today. I also thank you for the excellent questions. Rest assured that this Management team is very, very committed to improving the performance of the business. I think you have seen that fact that we are very proactive in taking action and we are going to do everything in our power to continue to position this business to not only weather this storm, but hopefully when we come out of this, we believe, we will be a very, very strong company, and that we have an excellent future ahead of us. Again, thank you. Thank you for your support. We look forward to speaking with you in the future.

Steve Schnoor

Thank you very much.

Operator

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

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