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Harsco Corporation (NYSE: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

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.

Due to these new headwinds, we have already begun reviewing additional countermeasures and cost reduction actions to improve future results of the infrastructure businesses we stated in the press release. In summary, given all the headwinds that we faced in the third quarter, we were pleased to achieve earnings within our range of guidance, and we are particularly pleased with our cash flow performance for the third quarter.

In a moment, Steve will provide more details on the operating results of each business segment and on cash flows for the quarter. Before I turn the call over to Steve, however, there are couple additional brief comments that I would like to make.

First, it is important to emphasize to investors that the dividend is secure and Harsco is currently yielding approximately 3.7%. And secondly, I am pleased about the Equinox announcement that we made yesterday because it expands our knowledge based environmental solutions to provide recovery services to oil, sand and the metals markets.

We are currently in discussions with a wide range of industrial customers in both Harsco Metals and Harsco Infrastructure and we are hopeful that several pilot demonstration projects will be underway by early 2012.

We will share more on this technology, this exciting technology and others such as our ethanol technology alliance with LanzaTech at the upcoming annual Analyst Meeting in New York City in December. I will now turn the call over to Steve. Steve?

Stephen Schnoor

Thank you, Sal and good morning, everyone. As reported in this morning’s press release, we recorded earnings per share from continuing operations of $0.40 from third quarter.

The result exceeded third quarter 2010 earnings per share of $0.26 by 54%. Harsco Infrastructure and Harsco Industrial improved upon prior-year earnings, while Harsco Metals and Minerals operating income was below prior-year results, principally due to lower stainless steel customers volume in the minerals business. Harsco Rail’s operating income was below prior year due to higher LIFO cost in 2011 and unfavorable sales product mix.

Overall, results in the quarter included approximately $1 million of due diligence costs for evaluation of opportunities in the rail business. In second quarter conference call, we had discussed the likelihood of incurring such costs. At this point no transaction closing is imminent.

Third quarter consolidated sales of $856 million were 40% higher than last year, (inaudible) business segments exceeding last year’s sales. Foreign currency translation accounted for 4% of the sales increase. As expected, the third quarter effective income tax rate was lower than last year. The full year 2011 effective income tax rate is now expected to be in the range of 22% to 25%.

I will now review our cash flows and our liquidity position and then discuss performance of each business segment in more detail. Historically, most of our cash from operations is generated in the second half of the year, principally in the fourth quarter. This year it’s expected to be no exception.

Third quarter cash from operations was $123 million, far exceeding the $67 million generated in the first two quarters and also exceeding the $110 million generated in the third quarter of 2010.

As a CFO, I am directly focused on continuous improvement in the cash conversion cycle, working with our customers, our Chief Credit Officer, Gene Truett and our global business management to accelerate cash generation. As a result, in the last year, we have significantly improved our working capital efficiency, reduced our bad debt expense to only 0.21% of revenues this year.

Capital expenditures increased due to required funding for renewal contracts and previously announced incremental growth projects in our Metals and Minerals business. Our debt-to-total capital ratio as of September 30 was 38%, at the same as June 30 and only slightly higher than the 37.6% at year end 2010 was the lowest debt-to-capital ratio since 1998.

Third quarter 2011 debt-to-capital ratio was significantly lower than the 43% for the third quarter of last year. So, our balance sheet still remains in great shape providing us substantial financial flexibility.

As you know, our revolving credit, as you may know I should say, our revolving credit facility matures at the end of 2012. My Assistant Treasurer and I are currently working on a plan with our bankers to renew the facility most likely in the first half of 2012.

Let’s now review the third quarter performance of each of the business groups. Third quarter sales of the Harsco Metals and Minerals segment exceeded last year by 8%, while operating income and operating margins were lower than last year due principally to substantially lower volume in our higher return minerals business resulting from lower production by our stainless steel customers.

Also in the third quarter, we recorded net exit costs of $2.6 million which included costs of exit in certain lower return contracts which we will sell or deploy our equipment to higher return projects. To that point, I’d like to – I am personally involved in review and approval process of new projects and contract renewals to ensure the returns exceed our hurdle rates and that new projects are consistent with our growth strategies.

It should also be noted that almost $1 million of start-up costs for the 25 year TISCO contract was recorded in the third quarter. Revenues for that contract are expected to commence at last 2012.

In the third quarter of 2011, steel production of our mill side customers was sequentially lower than the second quarter of 2011. This had a negative effect on sales and income compared with the second quarter.

Customer steel production for the remainder of 2011 is not expected to increase principally affected by a slowdown in Europe, particularly the U.K., and stainless steel volume is not expected to improve in the near term. This will affect the fourth quarter operating income, but will be partially mitigated by new contract start-ups and contract renewals with increased volumes. Still, fourth quarter and full year 2011 operating income for Metals and Minerals is expected to modestly exceed 2010.

The $3.3 million operating loss for Harsco Infrastructure in the third quarter, substantially lower than the $13.6 million operating loss in the last year’s third quarter and also lower than $5.1 million operating loss in the second quarter of 2011. The cost savings from the fourth quarter 2010 restructuring actions continue to be realized as expected. Had it not been for the significant deterioration in U.K. market, the business would have been close to breakeven.

The rental equipment utilization rate in the third quarter was 56.6% compared with 55.2% in the third quarter of 2010, but it was somewhat lower than the second quarter of 2011 principally due to lower activity in the U.K.

Rental rates in the third quarter were slightly higher than the third quarter of 2010 as well as the second quarter of 2011. We have been able to raise pricing in certain markets; however, the lower utilization rates, especially in the U.K. offset the benefits of a slight rental rate increase.

Harsco Rail results in the third quarter were affected by several items. LIFO costs were higher than 2010 and the mix of products sold was unfavorable compared with 2010. A $12 million sale to a customer for machines that had been in service for several years was recognized at book value. This large sale at breakeven negatively affected operating margins. Without this sale and the increased LIFO costs, operating margins for Harsco Rail would have been approximately 16.5%.

Harsco Industrial sales and operating income were higher than the third quarter of 2010. Operating margins were lower than last year due to higher commodity prices which also affected LIFO costs. That completes my comments and I will now turn the call back to Sal.

Sal Fazzolari

Thanks, Steve. Now let me summarize our outlook for the remainder of the year. While we are encouraged by the overall results for the first nine months, it remains prudent for us to presently view the outlook for the remainder of the year with a degree of caution. We do face a number of macroeconomic challenges and headwinds particularly western Europe.

In addition, the significant deterioration of the U.K. economy and related construction markets will most likely impact infrastructure business. The recent announcement by steel producers that was in the Wall Street Journal last week or this week I believe, that they plan to curtail production in the fourth quarter will obviously impact the metals and minerals business and as we indicated in the press release, the shift in rail deliveries from the fourth quarter to the first quarter will of course impact the rail business.

More specifically by business segment with respect to the fourth quarter 2011 outlook, Harsco’s Infrastructure business, as previously noted, should continue to show an improvement compared with last year’s fourth quarter.

However, unlike previous quarters, the infrastructure business will not continue to show sequential quarterly improvement as it did in the first, second and third quarters of this year. This is due principally the two factors; seasonality and the UK nonresidential construction market. We expect the loss in the fourth quarter could be in the range of about $7 million to $9 million for infrastructure which is a measurable improvement over last year's fourth-quarter loss and that of course excludes the restructuring charges.

Because of the adverse impact in the UK market and the slowdown in Western Europe and the US for that matter, we are proactively examining additional cost savings and countermeasures to improve both near-term and long-term outlook for this business. Harsco Metals and Minerals business, well, they’ll continue to be negatively impacted by the lower production volume in stainless steel as we just discussed.

Also, the general steel production slowdown in both Europe and the US will also affect results. Nonetheless, we do expect that the fourth quarter 2011 will show some modest improvement over the fourth quarter of 2010 and the improvement is driven principally by two things; new contracts have been started up and contributing and also, cost reduction actions that are well underway.

In addition, we are also proactively examining further cost savings and countermeasures to improve both the near-term and long-term outlook for the metals and minerals business as well. The Harsco Rail business should again perform well, the time measurements to China on the second phase of the Ministry of Rail equipment order will negatively impact expected fourth-quarter results.

Certain units that were planned for the fourth quarter of 2011 delivery have now shifted to the first quarter of 2012. Nonetheless, we do expect the fourth quarter performance in rail to measurably exceed last year’s comparable period.

And for Harsco Industrial, the business continues to perform well and it will perform well in the fourth quarter with expected results to be comparable to last year’s fourth quarter.

In summary, we are seeing a challenging macroeconomic environment across many of our key end markets and again particularly in Western Europe. In addition, we expect the sale of the machines and certain machines in rail as we just discussed to shift from Q4 to Q1.

Thus, as we pointed on the press release, it remains prudent for us to be cautious as we conclude the year and thus we are adjusting our full year 2011 guidance of diluted earnings from continuing ops of $1.35 to $1.45 to a new range of $1.30 to $1.35. This implies an outlook for the fourth quarter of 2011 for diluted earnings per share from continuing operations in the range of $0.28 to $0.33 which is a considerable improvement over last year's $0.15 fourth quarter performance, again, excluding the restructuring charge.

It is important to note, however, that metals and minerals, infrastructure and rail are all expected to show year over year fourth quarter improvement with industrial expected to post comparable results to the prior year. And that completes my comments.

And now, we would be pleased to take your questions.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from Jim Lucas with Janney Capital Markets. Your line is open.

Jim Lucas – Janney Capital Markets

Hi, thanks. Great, thanks. Good morning, guys.

Sal Fazzolari

Good morning.

Stephen Schnoor

Good morning.

Jim Lucas – Janney Capital Markets

I want to start first on the rail business with a two part question. One, the used equipment sales in the quarter, is this a trend that could potentially be materializing and was wondering if you could flesh that out further? And secondly, with rail, just any update on your business in China in general, given all the changes that are going on with the Ministry of Rail given what happened earlier this year in China?

Sal Fazzolari

Good question, Jim. Emphatic no on the first one that it’s not a trend. It just happened as the long customer, obviously we have some very good relationships with a lot of good customers. And simply with some equipment that have been used for about four years and they wanted to buy, they have been, we sold that at net book value for a lot of reasons, but it’s not a trend. But as we pointed out, it did impact the margins.

And regarding China, from our perspective not much has changed from the standpoint that we continue to bid very aggressively in China, there is a lot of interest in our technology and what we do. The China Ministry of Rail wants our machines, obviously, the second phase as we call it here. We just simply had a schedule shift from Q4 to Q1, but we still continue to make good inroads there on the metros. We are also looking on establishing a parts business in China as well to support and supply when all 41 one of these grinders [ph] will be up and running. So there is a lot of good things happening for us in China. So, there has been no material change as far as we – that’s affecting us.

Jim Lucas – Janney Capital Markets

Alright, that’s helpful. And then switching gears on the metal and minerals side, I was hoping you could flesh out a little bit more what specifically you saw on the stainless side of the business as it related to you and as you look across the other metals, not looking at steel, but the other metals, I mean are you seeing any trends given all of the macro concerns that seem to reemerge every other hour?

Sal Fazzolari

Yeah, and again, good question. Probably the best place to start on the stainless side, it just happens coincidentally. If you looked at Modern Metals October issue which you probably don’t read, but the headlines says the stainless steel industry is faced with nickel price volatility, overcapacity and slow growth. And that, really that headline captures exactly what we are seeing, Jim and then we are suffering as a result of that. And that’s probably the best way to really characterize and answer your question on that.

On the general metals markets in general, yeah, I mean the uncertainty in Europe has not helped. And of course, the slowdown even in the US has not helped, but – and as you saw in the October, I think it was October 19 Wall Street Journal article where global steel market is losing a little bit of strength and some steel makers have begun to slow production and that’s where we are today.

And I think we had indicated in lot of the analyst meetings that Gene and I’ve had, and Steve and Gene have had as we’ve gone around that we have seen some customers take some temporary outages and hence the slowdown in our fourth quarter for us, but we still believe we are going to be up year over year because of the things I’ve said. And new contracts and cost reductions and so forth as I indicated.

Jim Lucas – Janney Capital Markets

Okay. No, that’s very helpful and if I could sneak one more in, with regard to infrastructure taking a different approach, can you talk about, give us an update in terms of the strategic changes that are in place, any positive that you are seeing with regards to shifting the mix there longer-term?

Sal Fazzolari

Yeah, again, a very good question, Jim. If you look at the infrastructure business, maybe, we have not talked enough about this and you have to look at on a region by region basis, Jim. And if you look at our major regions of the world, Latin America for example, we are doing well there and that business has some very good long-term prospects. You look at the Middle East and Africa, we are doing relatively well there as well and again, we are seeing a little bit of orders coming from Saudi Arabia and those kind of places. So that’s generally doing well. If you look at Asia-Pac, we are gaining strength there, we are starting to consolidate our businesses there between China, India, Australia and Singapore and we think long-term that business in that part of the world is going to perform relatively well.

In the US, North America, North America market because of our strong industrial maintenance business we have in the US, it’s holding up okay, it’s holding up, I like it to be better, but it is holding up okay. Then if you go to Europe, the final part of the map and Eastern part of Europe is doing well. Poland, Russia and some of those countries were doing okay. Then you look at Western Europe, then you really have to isolate – really isolate from a few pockets. In Germany and France we’re doing okay.

And U.K. is a disaster, as we just pointed out in our comments and that’s really what’s driving the entire infrastructure business down. We have a few other small countries in western Europe that are struggling a little bit, but they don’t move the needle, it’s really down to the U.K., honestly, but nonetheless, we are considering as I’ve pointed out again in the release and we pointed out, I think, probably too many times already that we are considering further cost reductions and countermeasures.

We are in the middle of that right now. We are determined to get this business healthy as soon as possible and particularly like I said, when you look at the geographies, it’s not all doom and gloom in that business, it’s really now almost isolated down to one major country and a few smaller countries. Hopefully, that’s – I didn’t elaborate too much, but I just wanted to make that point.

Jim Lucas – Janney Capital Markets

No, that is very helpful. Thank you for the color.

Sal Fazzolari

You’re welcome.

Operator

Your next question comes from Eric Glover with Canaccord Genuity. Your line is open.

Eric Glover – Canaccord Genuity

Hi, good morning. Thanks.

Sal Fazzolari

Good morning.

Stephen Schnoor

Good morning.

Eric Glover – Canaccord Genuity

I was just wondering on sort of what percentage of the metals and minerals business is actually related to stainless steel production specifically?

Stephen Schnoor

It’s about 10%, right, yes, 10%.

Sal Fazzolari

Steve just nodded his head, it’s 10%.

Eric Glover – Canaccord Genuity

Okay, great. And I was wondering if you guys sort of agree with the general consensus about steel production globally for 2012 which is I think about 5% on a year-over-year basis, does that sound reasonable to you or your customer is telling you that could be a little shaky at this point?

Sal Fazzolari

Yes, we are still evaluating that. Our planning cycle is really November and so, we are just getting started. And so, we are still talking customer by customer, site by site throughout the world. And unfortunately, I don’t have a very good view as of this moment right now; I will, of course, by the – towards the end of November as we roll that up and based on the dialog we have with each customer at every site and that’s typically how we compile our view for 2012.

So – but, of course, as you all know, it depends on the macroeconomic environment. If we get to stability in Europe and the U.S. continues to hopefully show some signs of strength as we go into 2012, that will of course be huge. And of course, it’s back to construction again, if there is any uptick in construction because that generates a lot of business for the steel industry. So just too many unknowns at the moment and we just don’t have a very good view as of today, but we will of course at our December Analyst Meeting, we will give you a complete outlook for metals as we see it.

Eric Glover – Canaccord Genuity

Okay, fair enough. And then finally just wondering if you could talk a little bit more about metals and minerals in terms of you’ve decided to exit some lower return contracts, where is that business actually going now? Are competitors picking that up or are companies taking that business back in-house and doing themselves?

Sal Fazzolari

Yes, it’s generally competitors, regional competitors that we have, and as we – we are determined, because we hear you guys, everywhere we go, we hear that we need to improve the return on invested capital and the operating margins of metals and minerals. We are committed to doing that and delivering that.

And it all starts with – started back in 2008 with exiting, losing – where we are losing money actually. Now we have contracts particularly on the renewal side where the customers will not agree to the terms and conditions and the returns expectations we have and we’ll exit those contracts in a nice orderly fashion. And, of course, we don’t – we cooperate and we’re very professional in working out with the customers, so –. But long-term, that’s our commitment, our commitment is to improve, there is plenty of – the thing is about this business, what’s actually exciting about it, there is plenty of business that we have no shortage of opportunities. We could spend a $1 billion in capital on this business if we wanted to, that’s how many opportunities there are. So we are being very selective. We are focusing more on China, more on India where the metals is going to be produced in the next 50 years, it’s going to be more the emerging markets as opposed to Western Europe and other parts of the world. So we are focused, our energies more towards that part of the world on future work.

Eric Glover – Canaccord Genuity

Okay. Thank you very much.

Sal Fazzolari

You’re welcome.

Operator

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

Jeff Hammond – KeyBanc Capital Markets

Good morning, guys.

Sal Fazzolari

Good morning, Jeff.

Stephen Schnoor

Hi, Jeff.

Jeff Hammond – KeyBanc Capital Markets

Is there a way to quantify the impact of the rail deferral? I guess what I am struggling with is, I think you said in the release you would be comparable to 2010, which was $330 million in revenue in rail and yet, on the other hand, you say you will be north of $300 million, so that just seems like a pretty range for the fourth quarter?

Stephen Schnoor

Jeff, it’s around $3 million to $4 million impact.

Jeff Hammond – KeyBanc Capital Markets

From a revenue or profit standpoint?

Stephen Schnoor

From a profit standpoint.

Jeff Hammond – KeyBanc Capital Markets

Okay.

Sal Fazzolari

Let say, keep – it’s around $3 million.

Jeff Hammond – KeyBanc Capital Markets

Okay.

Sal Fazzolari

On the profit, so – and leave it at that. Don’t want to give you margins and all that.

Jeff Hammond – KeyBanc Capital Markets

And was shift from 3Q, out of 3Q?

Sal Fazzolari

No, we actually ended up pretty much, there is always moving pieces, Jeff, you can appreciate, there are so many machines that we ship. If you are talking about China, no, there was no shift in China. There were some other smaller machines, but we always have a – because, you are going to appreciate the number of machines we crank out of that factory in South Carolina.

Jeff Hammond – KeyBanc Capital Markets

Okay. And then, Steve, you mentioned a strong fourth quarter from a free cash flow, can you give us a sense of what you think we end the year from a free cash flow perspective and what you think CapEx ends up, given some of the moving pieces there?

Stephen Schnoor

Yeah, as far as the cash goes, I mean, as I mentioned, we had a $123 million in the third quarter which is far exceeded the $67 million in the first two quarters, so emphasizes once again that the second half is a much greater cash generation half every year, it’s seasonal and for the four quarter, it’s even higher than the third quarter. And so, we’ll have sufficient cash to cover our balance of cash outflows, including first and foremost a dividend, then any growth CapEx for the metals and minerals business and any other initiatives that we need to take care of. So, once again, the fourth quarter should be very good cash from operations wise, more than sufficient to cover our needs.

Sal Fazzolari

Yes, and we should end up with a very strong balance sheet at the end of the year, Jeff.

Jeff Hammond – KeyBanc Capital Markets

Yes. So, that leads to my next question, your stock is kind of sitting near lows you saw in ‘10, when you had a big earnings miss, ’09 where we were kind of at the bottom of the cycle and your balance sheet, as you mentioned, is best ever and as you think of kind of balance, you still have share repurchase and I just want to see how you are thinking about share repurchase these days?

Sal Fazzolari

Yes, absolutely, again, good question. Again, as you all know, we always try to do a balanced approach everything with – particularly with our cash flows. And we do expect our Board at the November Board Meeting to renew our existing two million share authorization, first of all. So, we want to – because that expires as it normally does. So, we are going to get that renewed and expect that to be renewed. And then we will consider share buybacks as appropriate to achieve balanced view of our cash flows.

Jeff Hammond – KeyBanc Capital Markets

But that program was out there and you never used it. So, I am just – are you thinking any differently about share buyback than you have been, because you kind of talk about a pretty good growth trajectory, if we can kind of look past this weak demand environment and your stock seems to reflect the weak demand environment. So it just seems like with a very strong balance sheet that that’s a good use.

Sal Fazzolari

We are, Jeff. We are seriously looking at that.

Jeff Hammond – KeyBanc Capital Markets

Okay. And then just final question on metals and minerals, I know you are still trying to gauge, I guess, overall production, but how should we think about from your new contract signings versus the stuff you are rolling off? I mean, the net of the – is the net of that growth, is the net of that flat, how should we think about that moving into ’12?

Sal Fazzolari

On the revenue side, Jeff?

Jeff Hammond – KeyBanc Capital Markets

Yes.

Sal Fazzolari

(inaudible) volume. Don’t have the full roll-up yet, but we still believe we’ll show some modest improvement in revenues year over year, and of course, you got to exclude the FX impact. We’re dump [ph] just organic. We still –

Jeff Hammond – KeyBanc Capital Markets

Right. I’m just trying to gauge, are you rolling more new wins on, or exited contracts off?

Sal Fazzolari

The net is more (inaudible) the net is more, more new ones as opposed to what we are rolling off.

Jeff Hammond – KeyBanc Capital Markets

Okay. If I can sneak one more in, is there anything from your perspective you can do to mitigate some of the volatility in the stainless business? I know you capture some benefit when the prices are high, but it seems to have added a degree of volatility to a business that was historically more stable?

Sal Fazzolari

Yeah, Jeff, actually a very good question. And we are – I think you must be in our managers meetings or something. Yes, the answer is yes. And the way you do it is by new contracts in different regions of the world. I am sure you know that the majority of this is North American based, the (inaudible) and we are making some headway. As you recall, we are starting up new contract for Slovenia and should be starting up new contracts in Austria. We are starting up a new one in China and other parts of the world. So, as we get – and we are actually bidding on a few others that we think we are going to get over the next few months or so. So, as we continue to get these new wins and spread this out, we will be able to balance that much, much better. And so the impact will not be as amplified as it has been in this year and particularly second half of this year.

Stephen Schnoor

Yes, Jeff, again the shortfall, we should upsize and stainless production was almost entirely US based. So, getting these additional contracts in other geographies should balance that out.

Jeff Hammond – KeyBanc Capital Markets

Okay. Thanks, guys.

Stephen Schnoor

Welcome.

Sal Fazzolari

You’re welcome.

Operator

Your next question comes from Glenn Wortman with Sidoti & Co.

Glenn Wortman – Sidoti & Co

Yes. Good morning, everyone.

Sal Fazzolari

Good morning, Glenn.

Stephen Schnoor

Good morning.

Glenn Wortman – Sidoti & Co

Just on infrastructure, if your infrastructure markets bounced on the bottom here or even deteriorated modestly, given the cost conversations taking place, do you think you can get that business back to profitability next year?

Sal Fazzolari

Well, as we indicated, again – and I hate to keep going back to the press release, we are reviewing additional countermeasures on cost reduction action to improve the results. And so, we have not, I would emphasize that we have not given up on the infrastructure segment being at or near break even, excuse me, I’m losing my voice, in 2012. But the results still mean, even if we were to get close to breakeven, it still shows a measurable improvement year over year.

Glenn Wortman – Sidoti & Co

Okay. And then can you just also help us better understand what’s driving the industrial business, sales were up 46% in the quarter, based on your commentary you are looking for a comparable performance year over year in the fourth quarter which does imply a pretty significant sequential decline, can you just help us better understand what’s the prospect [ph]?

Sal Fazzolari

Yes. One of the main drivers is the international expansion. This year we opened up in Brazil, China and Australia. And so, that’s a lot of the revenue coming from there and some of those locations are still in a start-up mode, so, they are not contributing as much to – again, we don’t want to make excuses, but I’m just trying to explain. So, there is some cost associated with that. And so, the margins are not as high as they will, as we – particularly as we get into the future, but that’s where the – what’s accounted for part of that revenue growth.

Glenn Wortman – Sidoti & Co

Okay

Yes, and how should we think about revenue in the fourth quarter relative to the third.

Sal Fazzolari

I believe the – we were forecast, if I recall, about comparable revenues as well as operating income and the margin should be comparable as well. In fact – yes, I think that’s what we were

Stephen Schnoor

Yes, in the industrial business? Yes, the industrial business should be higher revenues, a little higher than the – largely than last year’s fourth quarter, but a little down from third quarter due to seasonality, this year’s third quarter.

Glenn Wortman – Sidoti & Co

Okay. All right. Thanks for taking my questions.

Sal Fazzolari

Sure.

Operator

(Operator instructions) Your next question comes from Scott Graham with Jefferies. Your line is open.

Scott Graham – Jefferies

Yes. Hi, good morning.

Sal Fazzolari

Good morning, Scott

Stephen Schnoor

Good morning, Scott.

Scott Graham – Jefferies

So it looks like working capital, you did a nice job there in improving the turns. I wanted to maybe, revisit a previous question, hopefully you can answer about capital expenditure expectations for the full year 2011?

Stephen Schnoor

Yes, the CapEx, it all depends on the growth projects with metals once again. I would expect the trend from the first three quarters to be about the same with the growth CapEx for metals and minerals. So, it’s similar to the trend in the first three quarters for the year.

Scott Graham – Jefferies

Okay. Then as that’s case, given that there is a growth CapEx component and I’m not sure was fully contemplated in the December Analyst Meeting, I am just wondering with this very large contract with Cisco ramping up as we speak, what does that mean for CapEx in 2012, you think?

Stephen Schnoor

Well, that contract, it’s not in the ramp-up now. I mentioned earlier some start-up costs and the CapEx will be a part of the fourth quarter this year, as well as the first half of next year. But we are – it’s 40%, 60%-40%, joint venture, we have 60% and 40%, so 40% of the cash will be coming from our partner. So, CapEx will be partly the fourth quarter and the first half of next year for that project.

Scott Graham – Jefferies

And then we should see CapEx drop back down?

Stephen Schnoor

Well, I mean, CapEx, we’re still rolling it up for the next year. Our plans are in process. We are looking at various projects available to us, the capital allocation judgment. We are going to allocate that capital to highest return projects. So, the specific amounts for 2012, I don’t have yet, but it’s a balanced capital allocation approach and we have opportunities, we’ll take advantage of them. I am sorry, we don’t have next year’s number yet.

Scott Graham – Jefferies

Okay. That’s fine.

Sal Fazzolari

Scott, from a strategic standpoint, you got to appreciate our situation. We have an incredible opportunity right now; window is open, and the window is closed. There is a window open for us right now in two very important markets, India and China. Those markets – the majority of the metal is going to be produced in those markets in the next 100 years. And we are uniquely positioned to take advantage of those markets. There is no other company on the planet that has that opportunity than us. And we just hate to miss that window, because it will close. And when that window closes, it’s going to be very difficult to get in those markets. So, some short-term pain, not only from spending growth CapEx, but also start-up costs, but we think for the long-term health of this company, and we are here to build an enduring enterprise. We are not here to build a quarterly [ph] enterprise. So, I know you may not like it, that’s – my judgment is that we need to do this, because that’s where the future of the metals is going to be produced for the world. And so, we are committed to doing it.

Scott Graham – Jefferies

Separate question, you guys have talked a lot about the opportunity to improve sourcing and things along sort of the – within the operations, forgive me, I forgot the things that you cited there, but you said you have a fairly large opportunity to lower costs and really on – I think I am pretty much on the purchasing line if I remember correctly, plant improvement benefits, that kind of thing. The plan was to do this over a five-year period, and I am just wondering if, given some of the weakness in some of the markets that you are seeing right now, is anything being contemplated to pull some of that forward?

Sal Fazzolari

Absolutely, Scott. We are working very aggressively to see if we can pull some of that forward, not only obviously in the fourth quarter here as we speak, and – but just as importantly for next year. We are trying to optimize, maximize. It took us two-and-a-half, almost three years now to get this global supply chain group up and running. They are now a live breathing entity and I think they are going to have a very significant impact in both near term and long term on how we operate across the globe and particularly not just on the sources, but also just putting together a very strong supply chain to help us compete more effectively throughout the world. So, yes, we are trying to do that.

Scott Graham – Jefferies

Okay. I guess my last question, could you talk about kind of where the pension expense maybe projects out next year to be, does – you guys [ph] project to be a little higher next year, just a little bit of an idea, and I am not asking for specifics per se, whatever you can give me, great.

Stephen Schnoor

Yes, Scott. This is Steve again. The pension, obviously the measurement date, December 31. So, we are – as part of our planning process with our actuaries to get what that [ph] still may be, we don’t have it yet. This year’s pension expense is total the five benefits [ph] $30 to $50 million. We think it will probably be higher next year based upon the market returns in general and the interest rates that I will have the amount.

Sal Fazzolari

And we expect it to be higher, Scott. (inaudible) at some point, it’s going to be – it will, probably will be higher.

Stephen Schnoor

Yes.

Scott Graham – Jefferies

That’s fine. That’s what I thought. All right. That’s all I really have.

Thank you.

Sal Fazzolari

Thank you.

Stephen Schnoor

Thanks, Scott.

Operator

(Operator instructions) There are no further questions at this time.

Sal Fazzolari

So, thank you. In closing then, just to make the final comment here, despite the rising headwinds that we saw throughout the third quarter and obviously continues for the fourth quarter, we are focused on execution and cost reduction initiatives that will continue to drive the breakeven point of each of our businesses down. Also, we believe we are making very notable progress in our emerging market strategy and we continue to reshape our portfolio businesses to higher value solutions, and some have [ph] been announced recently. So, again, we believe that the Harsco has a very bright future and we would like to thank you for your ongoing support and of course, thank you for joining us on this call today.

Operator

Thank you. This concludes today’s conference call. You may now disconnect.

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