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Harsco (NYSE:HSC)

Q4 2012 Earnings Call

February 14, 2013 10:00 am ET

Executives

James Jacobson - Director of Investor Relations

Patrick K. Decker - Chief Executive Officer, President and Director

Barry E. Malamud - Interim Chief Financial Officer, Principal Accounting Officer, Vice President and Corporate Controller

Analysts

Jeffrey D. Hammond - KeyBanc Capital Markets Inc., Research Division

Robert F. Norfleet - BB&T Capital Markets, Research Division

Glenn Wortman - Sidoti & Company, LLC

Bhupender Bohra - Jefferies & Company, Inc., Research Division

Operator

Good morning. My name is Andrea, and I will be your conference facilitator. At this time, I would like to welcome everyone to the Harsco Corporation Fourth Quarter Earnings 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 redistribution 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. Jim Jacobson, Director of Investor Relations. You may begin your call.

James Jacobson

Thank you, operator, and welcome to everyone joining us today. I'm Jim Jacobson, Director of Investor Relations for Harsco. With me are Patrick Decker, our President and Chief Executive Officer; and Barry Malamud, our interim Chief Financial Officer. This morning, we will discuss our results for the fourth quarter of 2012 and provide our outlook for the first quarter of 2013, then we will take your questions.

Before our presentation, let me take care of a few administrative items. First, our fourth quarter press release was issued this morning before the market opened. The release has been posted to the Investor Relations section of our website. Second, as a convenience to all of the participants on the call today, we have prepared a slide presentation that accompanies our formal remarks. A PDF of the slides has been posted to our website as well. We encourage you to access these slides as we will be referring to them during our remarks. Third, this call is being recorded and webcast, and a replay will be available on our website later today. And 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 description 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 statement. And last, in this call, all references to adjusted operating income or loss, adjusted operating income margin, adjusted diluted earnings per share and free cash flow are on a non-GAAP basis. These non-GAAP measures exclude restructuring charges and other special items. A description of the special items and reconciliation to U.S. GAAP results are included in our press release issued today, as well as in our slide presentation, and both of those documents are on our website.

And now I'll turn the call to Patrick Decker, our President and CEO.

Patrick K. Decker

Thanks, Jim, and good morning, everyone. I'll provide an overview of our fourth quarter performance and then share with you an update on my perspective on 2012. Barry will then discuss our consolidated and segment financial performance in more detail. I'll then come back and provide you with a brief overview of what we expect and where we will be focused in 2013, as well as our outlook for the first quarter. Then I will discuss my observations of each of our businesses heading into 2013 and open the call to your questions.

Let me start with Slide 3 where I will review our fourth quarter results. We reported another quarter of year-over-year operating margin improvement and adjusted earnings per share at the midpoint of our guidance, despite further deterioration in the metals end markets during the quarter. These expanded margins were achieved despite a decline in total revenues that was expected. Our fourth quarter results benefited from accelerated equipment deliveries in Rail, as part of our large multiyear order with the China Ministry of Railways. I would like to note that this acceleration was according to the customer schedules. We also benefited, as a company, from the savings delivered from our cost reduction strategies. These favorable factors were mitigated by a reduction in our Metals & Minerals customers' production volumes and lower Infrastructure revenues. Furthermore, our decision to exit contracts in Metals & Minerals that do not deliver acceptable margins and returns on capital reduced our revenue and reported earnings. We also experienced an uptick in tax expense due to factors Barry will explain. Foreign currency translation had a slightly negative impact. As we disclosed in our press release this morning, we recorded a $265 million noncash goodwill impairment charge related to the Infrastructure segment in the quarter as part of our annual goodwill impairment testing. While the business is demonstrating improved operating performance in the face of a prolonged market recovery, particularly in Europe, it was determined that a goodwill impairment charge was required at this time. Barry will provide more detail on our fourth quarter performance, as well as additional color on the technical aspects of the goodwill impairment charge momentarily.

Now please turn to Slide 4. If I look back on 2012, I am encouraged by our initial progress on a number of fronts. We improved free cash flow, excluding restructuring payments, from $27 million to $60 million despite lower revenues and earnings. This early progress towards sustainable improvement in cash flow and cash returns came from tightening our discipline around capital allocation and focusing on better working capital management. While we lowered CapEx spend in 2012, we consider this to be a healthy level of investment that allows us to continue to invest in attractive growth opportunities. We improved our operating leverage. We grew adjusted operating income and expanded adjusted operating margin despite a decline in revenues due to challenging market conditions and currency headwinds. This was accomplished due to the successful completion of the previously-announced restructuring program, a focus on cost management, and early progress in our continuous improvement and lean journey.

We continue to win new business and demonstrate our value to customers. We successfully commenced operations on the 25-year environmental services contract with TISCO in China late in the fourth quarter. And we won new significant Metals & Minerals contracts and renewed contracts in key emerging markets all above our higher hurdle rates. We leveraged our prior success in Rail and secured a number of attractive international orders. And we are encouraged by the pipeline of projects we are now bidding in Infrastructure as a result of our efforts to focus on more global accounts through our recent organization realignment. These are just a few examples which will contribute to our growth and expanded margins over the course of 2013 and beyond.

Now while I'm encouraged by our early progress and by the dedication and commitment of the Harsco team around the world, challenges clearly remain and we have significant work to do in order for us to drive sustained cash flow and earnings growth. I will speak to this more after Barry covers the financials.

Now I'll turn the call to him for a more detailed review of our financial performance.

Barry E. Malamud

Thanks, Patrick, and good morning, everyone. I'll start on Slide 6 with consolidated revenues. Revenues declined to $766 million in the quarter from $793 million in the fourth quarter of 2011. During the past year, we took several actions to increase long-term returns and invest capital more effectively. Two of these were exiting underperforming contracts in Metals & Minerals and ceasing operations in certain countries in Infrastructure, which together accounted for nearly $30 million of the year-over-year revenue decline. This revenue performance also reflected an acceleration of equipment deliveries in Rail, which was partially offset by lower volume in metals and commercial construction. Foreign currency translation negatively impacted revenues by $8 million in the quarter.

Now turn to Slide 7 and I'll cover adjusted operating income. We grew adjusted operating income by 5% to $46 million in the quarter from $44 million in the prior year quarter. Adjusted operating margin increased 50 basis points to 6.1%. The primary drivers for our operating improvement were the timing of equipment deliveries in Rail and benefits from our cost reduction actions. These gains were partially offset by lower results in Metals & Minerals. Foreign currency translation negatively impacted operating income by $2 million in the quarter. I'll review each of the segments in more detail momentarily.

Next, turn to Slide 8 and I'll cover adjusted earnings per share. We reported adjusted earnings per share of $0.30 in the quarter, which was at the midpoint of our guidance range. These results were lower than the fourth quarter of 2011 due to higher year-over-year income taxes. Excluding special items, our effective income tax rate was 34% in the quarter.

Let me explain this higher-than-normal reported tax rate on Slide 9. We operate profitably in many countries. We also currently operate at a loss in certain countries for which we receive no tax benefit. Looking at the example on the slide, if we use a 33% tax rate for profitable countries, the actual reported tax rate would be 44% because of the impact of the loss countries where no benefits are received. While this higher reported rate has an adverse impact on our earnings per share, it will not impact our cash payments for taxes. Please note this is an illustrative example only and is not necessarily reflective of our specific results.

Now please turn to Slide 10 and I will discuss our segment performance, starting with Metals & Minerals. This segment's revenues declined 10% to $334 million in the quarter from $372 million in the prior year quarter. Exiting certain contracts accounted for $15 million or about 40% of the year-over-year revenue decline. Our revenue performance also reflects lower volumes due to further deterioration in the global steel industry. Our customer steel volume declined 10% in the quarter. Foreign currency translation had a negative impact on the quarter, reducing revenues by $6 million. Metals & Minerals adjusted operating income declined 36% to $18 million from $28 million. Its adjusted operating margin decreased by 220 basis points to 5.2%. This performance was primarily due to lower steel production at our customers and, to a lesser extent, the impact from exiting underperforming contracts where earnings were less than our required hurdle rates. These factors were partially mitigated by our previous cost reduction actions and our continued discipline to manage costs in the current challenging market conditions.

Next, turn to Slide 11 and I'll cover Infrastructure. Revenues declined 12% in the quarter to $235 million from $266 million in the fourth quarter of 2011. Nearly half of the revenue decrease was attributable to our decision to cease operations in certain countries, which reduced revenues by $14 million in the quarter. Our revenue performance also reflected lower industrial maintenance services in North America, reduced equipment sales in Europe and continued softness in the commercial construction markets. Foreign currency translation reduced revenues an additional $2 million in the quarter. This segment reported an adjusted operating loss of $3 million in the quarter compared with a loss of $12 million in the prior year quarter. These results primarily reflected the benefits from our prior cost reduction actions, partially offset by almost $2 million of foreign currency translation.

Now turn to Slide 12 and let me review the goodwill impairment charge. As Patrick said, we recorded a $265 million noncash goodwill impairment charge related to the goodwill in our Infrastructure segment in the fourth quarter of 2012. Accounting rules require companies to perform an annual test of their goodwill. As we've previously disclosed, for the past few years we have been monitoring the Infrastructure business for potential goodwill adjustment given the market conditions. As I'm sure you're aware, step one of the goodwill testing requires an analysis to determine if the fair value of each business exceeds its book value. As part of the step one testing for Infrastructure, we considered the prolonged recovery in the European markets and its impact on the timing of near-term cash flows versus expectations a year ago. Based on the overall step one results, we determined it was necessary to go to step two of the goodwill testing. The second step included valuation assistance from a third-party expert who assigned values to both tangible and intangible assets. As a result of this rigorous analysis, it was determined that a goodwill impairment charge was necessary. It is important to note this is a noncash charge, and we remain encouraged by the improvement in the operating performance in the business despite the prolonged recovery in Europe.

Now please turn to Slide 13 and I will review Rail. This segment delivered a strong fourth quarter. Revenues grew 57% to $113 million. Operating income increased 26% to $21 million. However, operating margin declined 450 basis points to 18.4%. Rail's performance was primarily due to the timing of equipment deliveries to the China Ministry of Railways and the overall mix of equipment and parts sales. Margins were impacted by a lower quantity of replacement parts compared with the prior year. Our margin performance also reflects the structure of the contract with the China Ministry of Railways. As we near completion of this large contract, the mix of deliveries now shifts, as expected, to a greater percentage of lower margin content compared with the early stages of the contract.

Now turn to Slide 14 and I'll cover Industrial. Revenues increased to $84 million in the quarter from $82 million in the prior year quarter. Operating income declined 5% to $12 million, and operating margin decreased 100 basis points to 15% due to unfavorable mix. Industrial's fourth quarter performance primarily reflects soft demand in the Industrial boiler business, which was partially offset by strong demand for grating products. Our air-cooled heat exchanger business was essentially flat in the fourth quarter.

Next, I'll turn to cash flow on Slide 15. Free cash flow for the year, as defined on the slide, grew 121% to $60 million in 2012 from $27 million in 2011. This increase was primarily due to lower capital expenditures and also reflected an improvement in our accounts receivable collections, which is a key part of our working capital strategy. Total CapEx was $265 million in 2012, down from $313 million in 2011. This reduction reflects our proactive actions to allocate growth capital more effectively. We will continue to invest in high-return projects to support our future growth, and we believe CapEx for 2013 will approximate 2012 levels.

Now let's turn to Slide 16 and I will review a few balance sheet metrics. Cash and equivalents totaled $95 million at December 31, 2012, down from $121 million at December 31, 2011. Total debt was $969 million at December 31, 2012, up from $909 million at December 31, 2011. The year-over-year changes in both cash and total debt balances largely reflect the cash payments for restructuring in 2012. Our debt-to-capital ratio was 52.9% at year end, which was up from 42.7% at December 31, 2011. This increase is primarily due to the noncash goodwill impairment charge. It is important to note we remain in compliance with all debt covenants. Before I turn the call back to Patrick, I'll also mention we maintained our dividend in 2012. We understand the dividend's importance to many of our shareholders, and just a few weeks ago, we announced the 252nd consecutive quarterly dividend.

With that financial review, I'll turn the call back to Patrick.

Patrick K. Decker

Thanks, Barry. Let me turn to 2013 and I'm going to begin with Slide 18. Since our last call, I've spent a considerable amount of time traveling around the world, seeing our operations firsthand, meeting our leaders and Harsco team members and spending time with our customers. I've also had the chance to spend important time with a number of our shareholders, as well as other key stakeholders. This on-boarding process was a valuable learning experience for me and it serves as a basis for our key focus areas I'll discuss momentarily. It also provided me with a deeper sense of the commitment from our Harsco team members to the proven principles to which the company committed itself last summer. Those principles, again, are customer centricity, continuous improvement, innovation, employee engagement, and ultimately, real value creation. The key to our success will be our ability to consistently execute against these principles.

Looking ahead in the near term, we do expect to see continued volatility in our end markets and in certain geographies. As a result, we will heighten our focus on the elements of our business that we can control. Improving our cash flow generation and enhancing cash returns will remain key focus areas in 2013 and beyond. In order to achieve this, we need to, and will, improve our working capital because there remain notable opportunities to improve in this area, particularly in inventory and payables. We will build a robust and measurable continuous improvement and lean culture throughout the company. We will grow revenues by pursuing global Infrastructure projects, winning new and attractive Metals & Minerals contracts, growing our international Rail business and capitalizing on our strong industrial position in the energy market. All of this will be done without compromising our capital allocation discipline. Over time, our financial objective is to move this company to the point where we more than cover our cost of capital at the bottom of the cycle and generate attractive returns on investment for our shareholders. Achieving these objectives requires a multifaceted approach and will take time. But we believe this heightened cash flow focus, coupled with a focus on prudent and disciplined investments for growth, is a very responsible strategy for both the near and long-term health of this company. With this focus in place, we expect 2013 to be a year where we demonstrate further free cash flow improvements and expand our operating margin despite the challenging end markets we continue to face.

Now let me provide you with our outlook for the first quarter, which is summarized on Slide 19. The first calendar quarter has historically been our lowest EPS quarter of the year. We anticipate the first quarter of 2013 will reflect this same trend, which is driven by normal seasonality due largely to much lower levels of commercial construction in the winter months. This is particularly acute this winter season given the weather patterns we've seen in Europe and North America. This year's first quarter will be further impacted by a difficult year-over-year comparison in our Rail business. Rail's first quarter operating income is expected to decline approximately $9 million from the same period a year ago. This is principally due to a highly favorable mix of equipment deliveries last year and the expected shift of certain high margin equipment deliveries from the first quarter to the second quarter of this year. These delays are driven by changes in customers' delivery schedules, and will shift roughly $4 million of operating income to the second quarter. As you know, our customer's delivery and acceptance schedules are very fluid, and they change from quarter-to-quarter. Given the profit margins on these deliveries, it can have a significant impact on our overall company EPS in any given quarter, and we're certainly seeing the effects of that in our first quarter outlook.

Metals & Minerals revenues in the first quarter are expected to be approximately 6% to 8% lower than the prior year quarter. This is due to overall lower expected steel production at our customers and the carryover impact of contracts we exited this past year. The impact of these exited contracts will not yet be fully offset in the first quarter by the start-up of significant new contracts we've recently won. These new contracts, which have much more favorable return profiles than those we've exited, will positively impact our results in the latter part of the year. Despite this expected revenue decline, operating margin percentage is anticipated to be in line with the prior year quarter due to our company's cost reduction actions and the early stage impact of higher-return contracts entering our mix.

Infrastructure's revenues in the first quarter are expected to be generally in line with the prior year quarter. The business is expected to deliver year-over-year reduction in operating loss due to the benefits from prior restructuring actions. While this does reflect a sequential increase in the operating loss in the fourth quarter, it is due to the normal seasonality in this business. We are encouraged by the increased levels of quoting activity on global projects, and we feel we are better suited to pursue and win these projects because of the organizational realignment late last year.

Industrial's revenues and operating margin in the first quarter are expected to be in line with the first quarter of 2012. This outlook reflects similar volume for air-cooled heat exchangers and slightly increased order activity for grating and industrial boilers compared with the first quarter a year ago. We expect our effective income tax rate to approximate 30% for both the first quarter and the full year 2013. This modest increase from historical levels is due to the factors Barry outlined. Based on the aforementioned factors, most notably the mix and timing of equipment deliveries in Rail, we expect diluted earnings per share from continuing operations to range from breakeven to $0.05 in the first quarter, excluding special items. The company reported diluted earnings per share from continuing operations of $0.07, excluding special items, in the first quarter last year.

With that review of our outlook for the first quarter, please turn to Slide 20 and I'll provide you with my thoughts on each of our businesses heading into 2013.

In Metals & Minerals, we are encouraged by the availability of and our ability to win new contracts in emerging markets. This is particularly important as we expect to continue to see a global shift in steel production to emerging markets. Those customers are placing a real value on the environmental solutions we are bringing to them. While we have seen, and will continue to see, earnings pressure from having exited underperforming contracts, we are replacing them with new higher-return contracts that will benefit results late in 2013 and beyond. Another area of focus that is commencing this year, and we believe will increase margins over time, is a strong focus on the effective procurement, deployment and maintenance of our fleet of mobile equipment around the world in Metals & Minerals. Recognizing this fleet is deployed over hundreds of sites today, and this is the single largest area of our capital deployment, this initiative will take time but it's a very responsible thing for us to do.

In Infrastructure, we are encouraged by the steady improvement in operating performance of the business and the focus and alignment of the team around a few key initiatives. Examples of these initiatives include better coordination on global projects, improved yard management and progress being made leveraging our engineering and design capabilities across regions.

In Rail, we expect to complete the large order with the Ministry of Railways in China in the first quarter. As a result of this order completion, we expect to see roughly $50 million less revenue in 2013 compared with last year. Now we feel very confident about the outlook and attractiveness of this business. We've leveraged our growing international presence to secure several new orders in new markets such as Saudi Arabia and Brazil, as well as continue to expand our presence in China. And I'm also personally pleased by the focus the team is also placing on expanding our spare parts and aftermarket capabilities.

In Industrial, we have 3 niche businesses, each well positioned in very attractive end markets, most notably energy. As you know, these businesses have grown considerably the last 2 years. While we've seen some near-term market softness, I do believe strongly in the attractiveness of the energy markets. And because these businesses generate very attractive margins and return on invested capital, our primary focus will be to look to make the necessary investments to accelerate our top line growth in these businesses.

Before we open the call to your questions, let me update you on our CFO search. Heidrick & Struggles has identified a strong pool of highly qualified candidates and we are progressing very well in the selection process. And I'm very confident we will be able to announce the appointment in the near future. I want to publicly recognize and thank Barry for his continued effort and dedication in the interim CFO role. He is doing a tremendous job of leading the financial organization, particularly through our 2013 planning process and the year-end close, as well as helping us maintain our capital allocation discipline. And he's been a very strong partner for me as well.

And so now we'd be happy to answer questions so, please, operator, would you open the lines for Q&A?

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Jeffrey Hammond with KeyBanc Capital Markets.

Jeffrey D. Hammond - KeyBanc Capital Markets Inc., Research Division

Just want to hit some things on the first quarter guidance. I guess, one, if I look at Rail, it looks like you're implying a breakeven kind of quarter for 1Q '13 and, I understand, moving pieces and dynamics there. But we really haven't seen anything even close to that in a number of years. So I just want to understand that better. And then on Infrastructure, I think that the restructuring savings was, all-in from the late 2011 restructuring, was going to be like $40 million annually. And my understanding is you didn't get much benefit in 1Q '12, so I'm just wondering why we're not seeing more benefit from that restructuring like we saw 4Q to 4Q.

Patrick K. Decker

Sure. Thanks, Jeff. So let me start with Rail. Certainly, Q1 is going to be a tough quarter for the Rail business because we are working off the end of the China order. And as we indicated in our prepared comments, the mix of content that we have in these remaining equipment pieces we're offering up to them are lower content. So it's going to be lower margin in the first quarter. And we've got a bit -- we've got a little bit of a trough here for a couple of quarters before we begin to see some of the new larger Rail orders come online that we have announced recently internationally. So it is a bit of a transition phase here for the Rail business, but we're very optimistic over time. I would point out that's about $0.09 of impact year-over-year for the total company. Secondly, on Infrastructure, we did recognize the benefits that we had expected to see before, but we saw those really pulled into 2012. So the carryover impact for '13 in Q1 is expected to be a few million dollars.

Jeffrey D. Hammond - KeyBanc Capital Markets Inc., Research Division

Okay. And I guess, we've been asking questions on Rail for a number of years, what happens after the China contract. And the consistent message is, we're kind of filling the pipeline, filling the pipeline and there's good visibility, and I think you mentioned good growth. So I mean, are you surprised by this transition period in Rail? Or is this something you kind of anticipated all along?

Patrick K. Decker

I think that -- I don't think we're surprised by the transition period. These, as you know, Jeff, these are very long lead time certification jobs that we work on. The specification time is lengthy. And then of course, the manufacturer deliver time is lengthy as well. We've got pretty good visibility to late stage '13 and '14 because of the orders that we announced here recently in Saudi and India and Brazil, et cetera. So we are encouraged. There's still work to do to continue to build out our international footprint and presence. There's additional work to be done in China. There will be additional project to be bid there coming down the line. And as I said in my comments, the team is also really focused right now on building out our aftermarket and spare parts business, which posts a very high margin and keeps us intimate with those customers over time. So it's a transition, but I don't think we're surprised nor are we at all discouraged by the outlook in that business.

Jeffrey D. Hammond - KeyBanc Capital Markets Inc., Research Division

Okay. And then just finally, on free cash flow, did you say -- you thought free cash flow would be flat year-on-year?

Patrick K. Decker

Are you talking about 2013, Jeff?

Jeffrey D. Hammond - KeyBanc Capital Markets Inc., Research Division

Yes.

Patrick K. Decker

No, we would expect to continue to see improvements in free cash flow.

Jeffrey D. Hammond - KeyBanc Capital Markets Inc., Research Division

Okay, yes. Because I just want to -- can you maybe hit on where you think working capital is in terms of a source of cash in '13 and just how you're thinking about maintenance CapEx and growth CapEx on a full year basis in '13?

Patrick K. Decker

Sure. Yes, certainly, and let me speak first to the CapEx. On the CapEx side, as we indicated, we think our CapEx for 2013 will be pretty much in line with what we spent in 2012, and we believe that to be a healthy level of spending. It's enough there to really go after a number of attractive contracts we either won or expect to win over the course of the year. Within the Metals & Minerals business, the question around mix between growth and replacement, pretty consistent with what we've seen over the last year or 2. It's roughly about maybe 60% to 2/3, 60% to 2/3 of our spending will be on growth, with the balance being on maintenance. With respect to working capital, you heard me say this in the last quarter call. Certainly, as I come on board and you heard this from Henry before, working capital is an area of big opportunity for us. I'm encouraged by what I've seen the past 3 to 4 months, that when the team really focused on the receivables side, we were able pull those past dues down to historically low levels. Therefore, I'm encouraged that when the team focuses on these areas, we do see the improvement. I think there are areas of opportunity that remain in inventory and payables. And those will be 2 areas that we have a particularly heightened focus going into '13. So I do see working capital as continuing to be a source of cash flow opportunity for us.

Jeffrey D. Hammond - KeyBanc Capital Markets Inc., Research Division

And with -- I mean, growth CapEx, that number's kind of -- a little bit surprisingly high. But as you kind of refresh and you really take a hard look at returns on capital and cash-on-cash returns, I mean, are you seeing that level of new contracts and growth CapEx to support a much higher return on -- profile?

Patrick K. Decker

Yes, actually, Jeff, I stand corrected. I got those switched around for you. So it's actually roughly 60% to 2/3 is on maintenance, with the remainder on growth. So my bad there.

Jeffrey D. Hammond - KeyBanc Capital Markets Inc., Research Division

Okay. So growth is ramping down and maintenance is ramping up?

Patrick K. Decker

Yes, I think we, again, we've continued to renew some of these attractive contracts we've got around the world in the emerging markets. Those require, obviously, us to continue to spend on the maintenance side. And again, the growth phase here is these are contracts that are multiyear. So it takes us the better part of a year to ramp up the spending. And so we're, again, not at all surprised to see a little bit of a downtick there.

Operator

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

Robert F. Norfleet - BB&T Capital Markets, Research Division

Just a couple quick questions. One, Patrick, on Infrastructure, I know we haven't really gotten into any more details in terms of the restructuring versus what you've done. But do you still believe that, that segment can reach profitability without any improvement in market conditions, meaning rental rates and utilization rates, just based on the restructuring that we've put into place? And secondly, since you've had time, to obviously visit those operations and look at market conditions, do you think any additional initiatives or restructuring efforts are going to need to be taken to rightsize that business?

Patrick K. Decker

Sure. Thanks for the question. I'd say, first of all, certainly, it'll be much more helpful if we see recovery in our end markets. That would certainly help quite a bit. And while we are seeing some signs of stabilization there, it's still too early to declare victory anywhere in terms of an uptick although we are encouraged by some of the increased project activity that's out there, particularly in the Middle East, parts of the U.K. and certainly, South America. We see opportunities there. I think that I am encouraged by what I see in terms of the focus that Mark and his leadership team are bringing to a few key initiatives across the business. And I am confident that as we continue to execute those, that we will be able to drive improved operating efficiency in that business. I -- again, just to remind, I think those 3 key areas are really, again, focusing on improved yard management, which speaks to operational efficiency. Secondly, again, winning our fair share, if not more, of some of the multi-region or global projects that are out there now that we've realigned ourselves internally to be able to sell across region. And then certainly, third, we've got a fair amount of technology in this business that isn't necessarily always leveraged around the globe or across region, and so Mark has organized the team on the engineering side to be able to leverage that more effectively. So I'm encouraged. I'm optimistic that we can drive further improvement -- necessarily without end markets getting better. But certainly, to get to profitability, we're going to need some help from the end markets to do so.

Robert F. Norfleet - BB&T Capital Markets, Research Division

Okay, that's fair. And secondly, when you look at the Metals & Minerals business, understandably it's still challenging. It's a big part of the portfolio that's in Europe. But when you look at your production levels from your customers in Q4 versus the industry, even in Europe, you were down considerably more. And when I look at 2013, look at forecasts like the World Steel Institute, even in Europe they're showing a 2% uptick in production. So is it more of a function of some of the underperforming contracts that we've exited that's having an impact on production? Or is it more of a mix this year? I just trying to understand your portfolio versus what we're seeing on a geographic basis around the world.

Patrick K. Decker

Sure, good question. I think it speaks more to the mix of contracts that we're in and where our customers reside in those markets. I wouldn't tie that variation to the nature of the contract themselves because they're all volume-driven. So in terms of what we're seeing for 2013, your point is valid. The views are mixed, depending upon the regions around the world. We certainly, as we look at 2013, we think there will still be some modest downside pressure from a volume standpoint in places like Europe. But we're also encouraged by what we're seeing in certainly Asia, Latin America and the Middle East. So those 2 probably effectively offset, negate each other.

Robert F. Norfleet - BB&T Capital Markets, Research Division

Okay, great. And my last question is just, obviously, having time, as I mentioned earlier, kind of reviewing this business. I mean, one of the criticisms on Harsco over the years has been you got a very disparate group of assets that really don't interlink and have that many synergies. I mean, when you look at the portfolio, where do you see opportunity to develop cross synergies between the businesses and maybe get investors to more better understand the model and the operating leverage that exists with upside throughout your earnings?

Patrick K. Decker

Yes, I appreciate the question. I mean, I'd say recognize that I am still early in my tenure, so I don't want to be too definitive here on those early views. I do see -- based on what I see, there is much to like about each of the 4 businesses. I think they each have their opportunities and their challenges. Certainly, as we are working together as a leadership team here to really focus in on those handful of initiatives that are really going to drive great value across the company, we are being selective in which of those truly cut across the 4 businesses and can create value. And so still studying that as we speak. I think there are some opportunities across each of the businesses from an engineering and development standpoint because engineering is at the lifeblood of what we do here. There are, I believe, some opportunities in terms of cross-selling between a few of our businesses as well, where we do have some overlap in customers. But again, too early to tell for me to put any definitive marker out there for you.

Operator

Your next question comes from the line of Glenn Wortman with Sidoti & Company.

Glenn Wortman - Sidoti & Company, LLC

Just focusing again on the projected sequential performance in Infrastructure in the first quarter versus the fourth quarter. Looks like you're implying about flat revenue growth from 4Q to 1Q, but the operating loss is expected to be much larger. Is that just a geographic mix issue?

Patrick K. Decker

Yes, it's geographic mix in terms of impact on earnings.

Glenn Wortman - Sidoti & Company, LLC

Okay. And then just looking at the margins in Metals & Minerals. You had posted year-over-year improvements in 2Q and 3Q despite the sales declines. 4Q, the margin was down. Can you just maybe provide a little color there and then just give us your expectations in 2013 on margins for that business?

Patrick K. Decker

Sure. Speaking first to Q4, what really drove the margin rate down in Q4 was the bigger sequential move downward in LFT volumes that we saw from the midpoint of the year to Q4. As we mentioned earlier, that was down as much as 10% year-over-year in the quarter. So that really had the biggest impact on bottom line leverage. And our cost actions, while aggressive, didn't fully mitigate that. As we go into 2013, I want to stop short of giving any explicit guidance annually for that business, but I think it's fair to say that what we see happening in overall dynamic is that the revenue that we will see that we are -- from the contracts that we're exiting, that revenue that goes away will effectively be offset over the course of 2013 by the revenue that we're getting from the new contracts that we're entering. And so certainly, you'll see an uptick in margins there for Metals & Minerals based upon that more favorable mix of contracts. Now the big wild card out there for all of this, obviously, is what happens to LFT volume and that can have, certainly, a meaningful upward or downward impact on margins. So that's the one variable that's out there right now that I hold back from giving you any kind of explicit guidance.

Operator

Your next question comes from the line of Bhupender Bohra with Jefferies & Company.

Bhupender Bohra - Jefferies & Company, Inc., Research Division

I'm Bhupender Bohra sitting in for Scott here. First question on Infrastructure. Could you give some color on how pricing was in the quarter and if you can discuss some projects actually which you've talked about?

Patrick K. Decker

Sure. I'll start first with pricing. Looking at rental rates, rental rates really stabilized from Q3 after having trailed down for the previous 2 quarters. It was still down 60 basis points from a year earlier, but the encouraging part was that it's actually stabilized from Q3 into Q4. Still, tough pricing environment so I don’t want to suggest that there's a meaningful recovery there, but it was at least encouraging to see it stop the decline. On the project side, I'd say we see a growing pipeline of a dozen or so projects. It's kind of above and beyond our base day-to-day business. We feel reasonably confident about winning our share of more of those contracts. But that really begins to benefit the second half of the year. And as I mentioned in my comments earlier, that's really primarily in the U.K., Middle East and parts of Latin America.

Bhupender Bohra - Jefferies & Company, Inc., Research Division

Okay. And you just talked about the margin for 2013 on Metals & Minerals business. I just wanted to get some color. As you said, we will see some favorable mix and the operating margin might be better in 2013 versus 2012. Now what actually is driving that? I mean, mix is one thing. Are you doing something with the business like -- you mentioned something about like lean, some product of lean measures or something, if you can just talk about those things?

Patrick K. Decker

Sure, yes. There's really, I'd say, 3 primary drivers of that expected improvement. One is the favorable mix of contracts as we bring the new ones online. Second is we are expected to see notable benefits in 2013 from our procurement efforts as we go after the early stages of managing that sleeve equipment on a more global scale. And then certainly third, as we expect to begin to see benefits in latter part of '13 around our real lean continuous improvement efforts across each one of these businesses, the Metals & Minerals asset deployment, obviously, is a rich area of opportunity for us.

Operator

[Operator Instructions] And your next question is a follow-up from the line of Jeffrey Hammond with KeyBanc Capital Markets.

Jeffrey D. Hammond - KeyBanc Capital Markets Inc., Research Division

Just wanted to -- and you gave a little bit of color here. But if we look past 1Q, and I know you're kind of limiting guidance to 1Q, but can you give us any kind of framework for how you're thinking about overall growth in each of the businesses on a full year basis, particularly Rail, given some of the transition, and Infrastructure, which seems to be stabilizing, but there seems to be some good contract opportunities?

Patrick K. Decker

Sure, Jeff. I -- let me give you some flavor here. I mean, we've given you a feel, I think, already for Rail in terms of what we think the year-over-year impact would be of having completed the China order and obviously not having that benefit in 2013 versus '12. If I speak to the other 3 businesses, for Metals & Minerals, the top line, obviously, the big wild card there is what we expect to be happening in terms of LFT volume. So that's hard for us to predict right now. But we say it's -- we'd say it's flat to modestly down based upon our current outlook. We hope we're being overly conservative, but that's where we're looking at right now. If you then look at the other drivers in that business, we expect that, effectively, the revenue that we would be losing from the contracts that we exited this past year would effectively be neutralized by what we pick up in terms of the new contracts coming online. So I'd call those kind of flat year-over-year but transitioning to more favorable returns and margins. And then in Infrastructure, we do expect to see modest growth in Infrastructure in 2013. But again, the caveat being there, it will be helpful to have a little bit of end market recovery to boost that. But we feel that, again, through some of the projects we're going after and some spots of recovery around the world, that we would see some modest growth in 2013 for Infrastructure. And -- now, I'm just going to say, just round it out, for Industrial, it's a very short cycle business. So we kind of -- can kind of see it quarter out in terms of what the order activity is. Right now, we're saying that may be kind of flat year-over-year. But it really depends on what happens in the energy markets, and as I said before, I'm generally encouraged by what we're seeing there. So I think that could have a -- it could be flat to a modest uptick in 2013.

Jeffrey D. Hammond - KeyBanc Capital Markets Inc., Research Division

Okay. And then just to go back to Rail, and maybe I missed this, but what's kind of the commensurate revenue hit in 1Q with this $9 million op income decline. And I don’t know if you framed the China contract wrapping up, what the full year revenue impact would be from that? Are you guys there?

Operator

[Operator Instructions]

Jeffrey D. Hammond - KeyBanc Capital Markets Inc., Research Division

Can you hear me?

Patrick K. Decker

Yes. Hey, Jeff, this is Patrick. We're back. We lost power there for a nanosecond.

Jeffrey D. Hammond - KeyBanc Capital Markets Inc., Research Division

Okay. So my question was on Rail, maybe I missed this. But it looks like in the explicit guidance for 1Q, you did not give a revenue impact, just an op income. Can you frame kind of how you think the revenues play out in 1Q for Rail and quantify some impact on the revenue side from this China transition?

Patrick K. Decker

Yes, so we expect Q1 to generally be flat with a year ago from a revenue standpoint. And what we're getting impacted by really is the lower margin on the remaining China equipment that we're shipping out. And there might be a little bit of pressure on that revenue number just given the fact that, again, these equipment deliveries, as you know, can move from one month or week to the next. But again, over the course of 2013, you're then really looking at kind of flat to down over the balance of Q2 and Q3, and then we'd expect to see some uptick in Q4 as we begin to see some of the early deliveries on some of the new orders that we just won.

Jeffrey D. Hammond - KeyBanc Capital Markets Inc., Research Division

Okay. And just on the Metals, can you -- is this -- I mean, as we look at these exited contracts, are we -- do we essentially have 2 more quarters of this kind of $15 million drag? Is that the way to think about exited contracts' headwind?

Patrick K. Decker

Yes, I think it's -- I would say I don’t want to get too precise in the quarter because, obviously, some of these start-ups go sooner or go faster or slower than expected. But I would -- I'd say it's a fair assumption to say, it really is the second half of 2013 that we begin to see the real ramp-up in benefits from those new contracts.

Jeffrey D. Hammond - KeyBanc Capital Markets Inc., Research Division

Right. But the exit run rate of the stuff that you're backing out of is the last 2 quarters has been around $15 million. So we have 2 quarters, 2 more quarters of that?

Patrick K. Decker

That is correct.

Jeffrey D. Hammond - KeyBanc Capital Markets Inc., Research Division

Okay. And then on Infrastructure, we just have kind of one more quarter of kind of the exited countries' headwind. Is that fair?

Patrick K. Decker

Yes, that is correct.

Operator

And we have no further questions at this time in queue. I'll turn the call back over to the presenters for any closing comments.

Patrick K. Decker

Well, thank you. So before we conclude the call, I want to leave you with a few thoughts. Obviously, while we face several challenges in 2013, as I mentioned earlier, we're going to remain intensely focused on the elements of the business we can control and that is notably our cash flow. And I'm definitely encouraged by the level of commitment throughout the company to align around the key focus areas that we spoke to earlier. So thank you very much, and I look forward to our next call.

Operator

Ladies and gentlemen, thank you for your participation in today's teleconference. You may now disconnect.

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