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Harsco Corporation (NYSE:HSC)

Q4 2011 Earnings Call

January 26, 2012 10:00 am ET

Executives

Salvatore D. Fazzolari – Chairman, President and Chief Executive Officer

Eugene M. Truett – Vice President of Investor Relations and Credit

Stephen J. Schnoor – Senior Vice President, Chief Financial Officer, Treasurer and Chief Accounting Officer

Analysts

Michael Worley – Janney Capital Markets

Bryce Humphrey – BB&T Capital Markets

Glenn Wortman – Sidoti & Company

R. Scott Graham – Jefferies & Co.

Timothy Hayes – Davenport & Company

Operator

Good morning. My name is Michele, and I will be your conference facilitator. At this time, I would like to welcome everyone to the Harsco Corporation Fourth Quarter 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 behalf of Harsco are subject to copyright by Harsco and all rights are reserved.

Harsco will be recording this teleconference. No other recordings or distributions of this telephone conference by any other party are permitted without expressed written consent of Harsco. 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.

Salvatore D. Fazzolari

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

Eugene M. Truett

All right. Thank you, Sal. Good morning, everyone. As we do at the beginning of all of our calls, we just want to let you know that we 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 that the results could differ from what we tell you today.

We've listed in our SEC statements reasons and risk factors that affect our businesses and these could be the reasons for any 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 access this information at your convenience. Sal?

Salvatore D. Fazzolari

Okay thank you Gene. Our call this morning will commenced with some brief comments from me about the fourth quarter and the year and as well as the outlook for 2012. And then I'll turn the call over to Steve for some brief comments and details on the fourth quarter and then of course we will take your questions.

As noted in our press release this morning we were certainly pleased with our fourth quarter operating results. All four business segments actually posted improved fourth quarter performance exceeding the prior year of course excluding the restructuring charge. Considering the continued end market challenges that we faced in 2011, we are also pleased with the $1.38 in diluted earnings per share for the year and this is an improvement of some 50% from 2010 results again excluding all the one-time charges.

Now reflecting back on the year, we end our 2011 with cautious optimism and new momentum. At the end of 2010, we established a roadmap as you may recall at the December Annual Analyst conference to deliver $3 to $4 in earnings per share by 2015, and we look forward to 2011 as a transition year to a new period of growth and relative stability for Harsco. While we enjoyed some success in 2011, the European debt crisis created an interim roadblock in the amount of growth we could achieve in the year. We responded however by changing our path as the year progress, so that we could remain true to our long-term 2015 EPS roadmap.

We took a number of preemptive and substantive actions in 2011 to further drive our cost structure significantly lower, so we could achieve to critical mileposts. Accelerate Harsco Infrastructure's return to profitability and accelerate the return of Harsco Metals & Minerals to double-digit operating margins. These proactive measures culminated in a fourth quarter restructuring charge that we’ll carry-over to 2012 as well.

With respect to 2012, we again expect double-digit earnings growth excluding the carry-over restructuring charge, as we build momentum towards our 2015 EPS roadmap of $3 to $4 per share. As such, we are reaffirming the earnings guidance for 2012 we provided last month in the range of 155 to 170 and diluted EPS from continuing ops. However, as we clearly stated in December, and you may recall, the results for the first quarter of 2012 will be lower than those of the prior year due to several key factors that I will summarize in a moment.

First, however, I want to emphasize that, 2012 needs to be viewed as a year of three quarters of earnings progress year-over-year that is, and not simply a year of totally dependent upon the second half for growth. We expect our growth performance to be fairly balanced over the second, third and fourth quarters. The second quarter is expected to show considerable sequential improvement over the first quarter.

Now more specifically to the first quarter performance, our current view is diluted earnings per share from continuing ops to be in the range of $0.01 to $0.06, and that compares with last year’s $0.15.

There is a confluence of factors adversely impacting our expected first quarter performance and I would like to summarize those for you, it’s important to understand. First, Metals & Minerals last year posted their best performance in the first quarter. As a (inaudible) this year, where it is expected to be the worst quarter of the year due principally to reduced steel production in Europe. In fact, I may be correct in saying that the first quarter of 2011 was one of the strongest quarters of the year for the steel industry in general.

Now second, infrastructure continues to be negatively affected by poor end-market conditions in the UK and Europe in general, as you all know. Third, pension costs. Our pension costs are substantially higher on a comparative basis year-over-year by about $2.5 million for the quarter and obviously on an annualized basis about $10 million.

Now fourth, the timing of real shipments are the weakest in the first quarter, 2012 with the majority of the earnings expected more evenly over the remaining three quarters of the year, thus just like Metals & Minerals, the first quarter will be the weakest for Rail as well.

Fifth, and as expected, restructuring savings will begin to be realized in the second quarter and sequentially improving in importance to earnings that is, as the year progresses. I may also add that our restructuring initiatives are currently on plan.

And finally, the stronger dollar is also negatively impacting our translator results in the first quarter compared with last year’s comparable period, and they substantially hired tax rate will also negatively impact the first quarter as well, which Steve will provide a plenty of details on.

I would like to take a moment and recognize the strong performance of Harsco Industrial and Harsco Rail in 2011, and also point out the very strong performance of the Metals group.

Harsco Rail and Harsco Industrial recorded strong revenues in operating profits as they continue to capture new opportunities with global customers. Both businesses are benefiting from solid, well-run operating platforms and Lean processes. We believe that both platforms are developing into strong global brands with solid growth prospects.

Excluding the Minerals part of the business, Metals posted a very strong year in operating income, which is being matched by the under performance of the Minerals business in 2011, and this is something obviously we’re working diligently to correct. I may also add that both Metals & Minerals combined for the year outperform the prior year as well. So even with the weak performance of Minerals in 2011, the combined group outperformed 2010. So it’s very important to note that as well, and we believe obviously that in 2012 we’ll even show a more improvement over that.

And finally, I’d like to mention that the company repurchased about 287,000 shares in December and also I may add, that I personally purchased that 2000 shares and swapped a 10 year option that was about to expire into an additional 6000 shares.

I will now turn the call over to Steve Schnoor, our CFO who will give you more details on the quarter and then, we’ll take your questions. Steve?

Stephen J. Schnoor

Thank you, Sal and good morning, everyone. As reported in this morning’s press release, excluding previously announced pre-tax restructuring charges of $101 million and a non-cash non-operating UK tax charge of $37 million. We recorded earnings per share from continuing operations of $0.36 for the fourth quarter, result exceeded fourth quarter 2010 earnings per share of $0.15 excluding restructuring charges by 140%. Excluding the restructuring charge all operating segments improved upon prior year fourth quarter sales and operating income.

Fourth quarter consolidated sales of $793 million were 5% higher than last year. The full year 2011, excluding restructuring charges, all operating segments except Harsco Rail exceeded 2010 sales and operating income. Harsco Rail was below the 2010 record results due to the timing as well as drop in shipments.

Full year 2011 consolidated sales of $3.3 billion exceeded 2010 by approximately 9%, fourth quarter effective income tax rate of 13% excluding the restructuring charges was lower than last year's rate of 17%. The lower tax rate reflects a change in statutory income tax rates in certain international jurisdictions as well as other international tax benefits. For the year, the effective tax rate excluding restructuring charges was 21% compared with 25% for the year 2010.

As previously indicated the effective income tax rate for the full year 2012 is expected to be in the area of 27.5%. However a much higher tax rate in the area of 50% is expected in the first quarter, this compares with 25% in the first quarter of 2011. The higher first quarter 2012 rate results from a lower UK tax benefit.

As previously announced that our Annual Analyst Conference in December will show the continued successful transformation of our Infrastructure and Metals & Minerals businesses, especially in light of the European economy, they’re executing a restructuring program, which began in the fourth quarter and will continue through 2012.

Total pre-tax restructuring charges are estimated at $200 million to be recorded in both 2011 and 2012. We reported a pre-tax restructuring charge of $101 million in the fourth quarter of 2011 with the balance of the charge to be recorded during 2012.

Of the $101 million recorded in the fourth quarter of 2011, $88 million was recorded in the Infrastructure segment and $13 million in the Metals & Minerals segment. Of the $101 million fourth-quarter charge, $67 million was non-cash. Approximately $112 million of the total $200 million charge to be recorded in both 2011 and 2012 is expected to be non-cash.

The restructuring charge includes a further streamlining of our European presence, exiting underperforming locations and rationalizing our worldwide asset base. Total 2012 savings are expected to be approximately $36 million with full-annualized savings estimated in the area of $65 million beginning in 2013.

In the fourth quarter, a non-cash, non-operating tax reserve of $37 million was recorded against UK deferred tax assets. this results from the recent results for our UK infrastructure business as well as associated restructuring charges. Accounting rules require that this reserve we recorded in income despite most of the deferred tax asset being originally recorded in equity. As the UK business recovers over the next few years, as we expect, the charges will be reversed into income.

I will now review our cash flows and our liquidity position and then discuss performance of each business segment. Fourth quarter, cash from operations was $114 million excluding cash paid for restructuring activities. Cash from operations for the year was $321 million excluding cash paid for restructuring.

Cash from operations is lower than 2010 due to the timing of working capital turnover. Certain significant cash receipts occurred in December 2010 that normally would have occurred in early 2011. additionally, due to bank holidays in certain countries in late December 2011, a substantial amount of cash was received in the first week in January 2012. That was expected to be received in 2011. Due to such fluctuations in timing of cash receipts it is relevant to consider the average cash from operations over several periods as a true performance indicator for the company.

For example in 2010 and in 2011, we averaged $370 million in cash from operations per year excluding our restructuring payments. Since 2008, we have averaged $440 million in cash from operations per year. This is indicative of our cash generation power.

Discretionary cash flows for the year were $167 million that is defined as, cash from operations plus cash from asset sales plus maintenance, capital expenditures. Discretionary cash flow provides us the flexibility for multiple potential users including dividends, debt pay down, [growth] CapEx and so on.

In the last year, we have significantly reduced our bad debt expense to only 0.24% of revenues; this is an indication of the stability of our customer base and the associated cash flows.

Capital expenditures increased compared with 2010 due to required funding for renewal of contracts and previously announced incremental growth projects in our Metals & Minerals business. It is important to note that, cash from asset sales also increased to 2011, $43 million compared with $23 million in 2010. Such asset sales are routine part of our business and cash is used to offset capital expenditures, thus it is appropriate to recognize that our net CapEx in 2011 where $270 million.

Our debt to total capital ratio as of December 31 was 42.7%, this compares to a 38% as of September 30. The higher ratio at year-end results from the restructuring charges and an increased pension liability due to lower discount rates, which also lowered our shareholders equity.

Despite that, our balance sheet remains in good shape providing us with substantial financial flexibility. Net debt to capital was 39.2% as of December 31, 2011. At December 31, 2010 net debt to net capital was 34.1% the lowest level since at least 1998. From a historical perspective, in 2005 as an example our debt to capital ratio was 50.4%, and our net debt to capital ratio was 47.2%, as you can see that our balance sheet has improved over that time period. As you may know, our revolving credit facility matures at the end of 2012. We are currently working with our bankers to renew that facility most likely in the first quarter.

Let’s now review the fourth quarter performance of each business group. Fourth quarter sales of the Harsco Metals & Minerals segment was slightly higher than last year. Operating income excluding restructuring charges and operating margins were also higher than last year due principally to income from new contracts in India, China, and elsewhere. Additionally income was higher in the roofing granules and abrasives business partially offsetting that was continued lower volume by our U.S. stainless steel customers. In the fourth quarter, we recorded restructuring charges of approximately $30 million in the Metals & Minerals segment.

In the fourth quarter of 2011, steel production of our mill side customers was sequentially lower than the third quarter of 2011, but higher than the fourth quarter of 2010. The $12.1 million operating loss excluding restructuring charges for Harsco Infrastructure in the fourth quarter was lower than the $14.4 million operating loss in the fourth quarter of 2010. Results in the quarter reflect improved performance in Germany, in Middle East and Latin America and continued weakness in the UK.

The rental equipment utilization rate in the fourth quarter was 57% compared with 55.8% in the fourth quarter of 2010, approximately equal to the third quarter of 2011. To provide a valid year-on-year comparison going forward beginning in the first quarter of 2012, utilization rates will be adjusted to the equipment rationalization that occurred as part of restructuring. Rental rates in the fourth quarter were slightly higher than the fourth quarter of 2010 and approximately equal to the third quarter of 2011.

Harsco Rail results in the fourth quarter were significantly higher than 2010, the better results reflect higher machine and spare parts segments in 2011. The higher margins reflect the increased volume, especially the increased spare parts shipments.

Harsco Industrial continued to perform well. Sales and operating income were higher than the fourth quarter of 2010. Operating margins were lower than last year due to higher commodity prices.

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

Salvatore D. Fazzolari

Thanks, Steve. We would now be please to take your questions.

Question-and-Answer Session

Operator

Okay. (Operator Instructions) Your first question comes from Jeff Hammond from KeyBanc Capital Markets. Your line is open.

Unidentified Analyst

Hi, good morning guys. This is (inaudible) showing in for Jeff.

Salvatore D. Fazzolari

Good morning.

Stephen J. Schnoor

Good morning.

Salvatore D. Fazzolari

You sound like Jeff.

Unidentified Analyst

Yeah, just question on Infrastructure, I mean as you look across the different pockets of the business, where you’re seeing strength, it sounds like the UK is still pretty soft. And then, maybe just an update in terms of bidding and coding activity and some of the other ancillary markets that you guys have been competing at from the last couple of quarters.

Salvatore D. Fazzolari

Yeah. That’s a good question. As we – I think even (inaudible) commented on this at the last conference call. If you look at the geographic balance of the business and take it in big bytes, Latin America, the Middle East and the Asia-Pac, they’re all doing relatively well. They’re all profitable; they’re all doing well and they’re gaining momentum as we go into 2012.

North America is stable. We’re essentially a break-even last year and we expect North America to be profitable in 2012. So it’s really all about Europe and particularly the UK, but even if you break Europe down, Germany, which is one of our biggest countries, is doing well, is making money continues to do well. France is one of our largest countries, same thing doing well. It’s principally the UK, the countries that we’re exiting and obviously, we’ll be out of those as the year progresses. It will really be isolated to one country, and that said and then we’re hopeful to make some [substrative] progress in the UK as well.

Now as far as coding activity, we had actually a very good January. we were able to book some pretty good orders throughout the globe and lot of those things that were construction type orders in the forming side, rental business and they were scattered not only throughout the emerging markets, but also a few wins in Europe as well.

So hopefully, we can gain some momentum as the year progresses in that business. It’s going to be a tough first quarter. I’m sure this question may come up and I’ll just be preemptive about it. If we look at the first quarter for infrastructure it’s going to be essentially flat with last year’s first quarter and now that of course, excludes any restructuring charges, so year-over-year and the reason it’s going to be flat is because if you look at last year actually last year Europe excluding the UK actually did pretty well in the first quarter, and that was before obviously the European crisis really hit in the summer. So you have all those ins and outs, but on balance Infrastructure is going to be flat.

Unidentified Analyst

Okay, maybe sticking with Infrastructure just in terms of breakeven, I mean is this something that’s achievable in the second quarter or are you assuming this is more of a back half event?

Salvatore D. Fazzolari

Yeah the view and we know we articulated this that our goal is to breakeven for the year, certainly you will see progress in the second quarter. I’m not ready to predict that that the business will be a breakeven in the second quarter, but for the year we are working very hard to deliver a year of breakeven.

Unidentified Analyst

Okay, great. I'll go and jump back in the queue. Thanks guys.

Salvatore D. Fazzolari

You're welcome.

Operator

Your next question comes from Michael Worley from Janney Capital. Your line is open.

Michael Worley – Janney Capital Markets

Good morning, guys.

Salvatore D. Fazzolari

Good morning.

Stephen J. Schnoor

Good morning, Mike.

Michael Worley – Janney Capital Markets

I was just wondering if you could talk a little bit about the margins in Metals & Minerals seem to be a little bit stronger than we were expecting.

Salvatore D. Fazzolari

Yeah, good question. I was hoping someone would ask that. We did make some good progress as I indicated if you look at the Metal side of the business particularly, we had a very good year, despite the all the turbulence out there. And so it is just executing new contracts, cost reductions, we are being more selective on contracts or starting to exit contracts that are not just delivering the return on capital and we will fix the Minerals thing, so again with the restructuring actions we started in Q4. Again as I pointed out, the miles close for us is to get this business back to double-digit margins.

Now in 2012, we expect this business to be around to 9% area and on our way to 10% by 2013. So that’s the goal that’s where we’re working towards, and you’ll see sequential improvement in that business. As I indicated, Q1 is going to be their weakest quarter of the year due to shutdowns in Europe. We’re still seeing that quite a few mills that have not comeback, where their operating a very low levels. And secondly, continuing problems we’re seeing with the stainless steel side in the U.S. were nobody is buying appliances unfortunately.

Michael Worley – Janney Capital Markets

Okay. And what is actually did you do with the restructuring charges in Metals & Minerals?

Stephen J. Schnoor

It’s principally people. Its officers and those kind of things that we did during the course of the year, did exit a few contracts, but that was in the other numbers. But as far as specifically for the restructuring there was the focus was on SG&A.

Michael Worley – Janney Capital Markets

Okay. And then just going back to industrial since that has been a strong segment in the past couple quarters, I’m just wondering, are there some more lacks there or is that going to taper off this year, how do you see that?

Stephen J. Schnoor

No, no they are going to post hopefully a record 2012 where we have high expectations of that group for 2012. That business is doing extremely well and we are now positioning that business globally. So that was the business that historically only focused on the U.S. and pretty much ignored the rest of the world.

Last year, we successfully started up business in Brazil, China and Australia. We are looking to expand this year to the Middle East and possibly one other side in Asia as well. So that business is being globalized, so to get better balance regarding any potential cycles and Lean, we haven’t talked much about Lean, but both our Rail and our Industrial businesses, the Lean impact is dramatic; it’s really helping the performance of that business. So I don’t want to understate that as well. and we’re becoming more of an important solutions provider to our customers and as we – as they expand across the globe, particularly our Air-X-Changers business, we’re following customers now globally as they tap into the natural gas markets throughout the globe.

Michael Worley – Janney Capital Markets

Okay. Thanks a lot.

Salvatore D. Fazzolari

You’re welcome.

Operator

Your next question comes from Scott Graham from Jefferies. Your line is open. Scott Graham your line is open.

Salvatore D. Fazzolari

Scott, are you there?

Operator

No. (Operator Instructions) Your next question comes from Bryce Humphrey from (inaudible) Capital Markets. Your line is open.

Bryce Humphrey – BB&T Capital Markets

Hey, guys, it’s Bryce at BB&T on for Rob.

Salvatore D. Fazzolari

Good morning.

Stephen J. Schnoor

Hey Bryce.

Bryce Humphrey – BB&T Capital Markets

Another question on infrastructure, aside from your restructuring efforts asset sales efforts though it is your footprint are there any other operators, your competitors doing the same things rationalizing assets, taking capacity out of the market?

Salvatore D. Fazzolari

We’ve seen a few companies that I believe one or two actually filed for bankruptcy, but unfortunately now there is nobody goes out of business. It’s some private equity guys from what I understand and pick them up. we know that particularly the ones that are focused more on the construction side is opposed to the industrial maintenance side, the industrial maintenance guys are doing okay. But the ones that are focused solely on the construction side and as you recall, we have a balance between the industrial maintenance and the construction. We’re one of the few companies that are actually balanced that way. But, so that’s about what we could tell you, is really they are not going away unfortunately.

Bryce Humphrey – BB&T Capital Markets

Yeah. Okay, that’s helpful. And then in the Rail business regarding margins, up really strongly year-over-year and even more sequentially, can you discuss the reason for the strong performance in the quarter and is that 23% sustainable?

Salvatore D. Fazzolari

No. I mean as far as we have been saying, they’re sustainable margins for Rail, and you are going to get quarters where they have higher than normal and sometimes a little lower than normal, but we’ve been staying the high-teens is a more sustainable rate for that business.

Bryce Humphrey – BB&T Capital Markets

Okay.

Salvatore D. Fazzolari

Then particularly what happened in the fourth quarter, again Lean is having a huge impact on this business, they are doing very well, but we had a very good mix of orders that’s really what drove the margins in Q4. There are mix of orders with [Park’s] shipments of the equipment to the overseas market for sales force.

Bryce Humphrey – BB&T Capital Markets

Okay. And then maybe one last one if I could, regarding capital allocation, would you discuss your thoughts on continued share buybacks versus growth projects say in Metals & Minerals?

Salvatore D. Fazzolari

Well, two comments on that. One is that as we always say, as we try to run a very balanced view with respect to our ease of discretionary cash. Also, may I add, as you may or may not recall, the first quarter historically and actually the first half cash flow was our weakest period. We generate substantially most of our cash in the second half of the year.

Bryce Humphrey – BB&T Capital Markets

Right.

Salvatore D. Fazzolari

So, I’ll leave at that.

Bryce Humphrey – BB&T Capital Markets

Got you. Okay, thank you very much.

Salvatore D. Fazzolari

You’re welcome.

Operator

(Operator Instructions) Your next question comes from Glenn Wortman from Sidoti & Company. Your line is open.

Glenn Wortman – Sidoti & Company

Good morning.

Salvatore D. Fazzolari

Good morning, Glenn.

Stephen J. Schnoor

Good morning, Glenn.

Glenn Wortman – Sidoti & Company

Just two questions, following in the restructuring actions, can you just breakdown your European exposure by country as possible?

Salvatore D. Fazzolari

Yeah, Steve, you want to maybe….

Stephen J. Schnoor

Give a little color? And I can give a little color on that. Are you referring the both Metals & Minerals and Infrastructure or principally Infrastructure?

Glenn Wortman – Sidoti & Company

Well, I guess Metals & Minerals; I mean Metals & Minerals, Infrastructure company wide and whatever numbers you…?

Stephen J. Schnoor

Just to set the broad stage about 39% of our revenues come from Western Europe.

Salvatore D. Fazzolari

Yeah, okay. So as a broad statement, our biggest countries are the UK, Holland, Germany, France, okay, and Poland. Those are our five biggest [countries]. Actually three of the five France, Germany, and Poland, are doing okay. And they’re making money and there is no issue there. There is actually very little to none as far as restructuring there.

The majority of the restructuring in Europe centers around the UK, Holland some of the other countries that we’re exiting that we have not actually mentioned by name for a – I don’t know if we want to do that yet, but and so we’ll be out of those anyway.

So what we’re going to be left with really is the UK and that’s just again on the Infrastructure and the Metal side UK is doing fine. Now we have a few selective slowdown in mills and (inaudible), but UK business in metals is doing fine and they’re making money and so forth. So it’s really keeps getting back to the UK and the countries we’re exiting. Steve, I don’t know if you want to add anything that…

Stephen J. Schnoor

Pretty much [sums in the core].

Glenn Wortman – Sidoti & Company

Okay. Okay and then just one bright spot in construction really has been a multi-family housing construction in the U.S. Can you just maybe discuss any exposure you have there? I mean what percentage of sales for your Infrastructure segment drives from multi-family?

Salvatore D. Fazzolari

Yeah, not much I mean we had some back in 2008, but we’ve gotten out of most of that. Our business in North America is focused roughly 50% on industrial maintenance. We operate quite a bit in the power sector, the energy sector. And then the other 50% is in construction, but we’re focusing more and more now on the big infrastructure projects or the similars whatever you want to call them.

So we’re going after the airports and the bridges and the tunnels, water treatment those kind of things and not so much the condominiums and apartments and so, although we do some of that, but it’s very limited.

Glenn Wortman – Sidoti & Company

Okay.

Stephen J. Schnoor

Yeah, Glenn, I think a couple of important things there are that we always look to top off in that industry whereas appropriate and also still I would say, it’s fair to say, it’s lower end of our value proposition of the core values we offer a degree of incubate of engineering expertise of site management of E&D erect and dismantle, labor et cetera. And it still tends to be a bit on the more competitive on the pricing point of view side of the market. So if you have a less value add because more price competitive, the more value-added the better we can do that apply Glenn, more to the UK.

We had a pretty sizable exposure to that in the UK and that’s the rationalization plan that’s going on in the UK is that we’ve been shutting all those branches down and we’re refocusing the UK business pretty much almost like the U.S. business, where it’s industrial maintenance and formwork more towards the big complex engineering projects.

Glenn Wortman – Sidoti & Company

Okay. Okay, thank you very much.

Salvatore D. Fazzolari

You’re welcome.

Stephen J. Schnoor

You’re welcome.

Operator

Your next question comes again from Scott Graham. Your line is open.

R. Scott Graham – Jefferies & Co.

Hi, can you hear me this time?

Salvatore D. Fazzolari

Yes, sir.

Stephen J. Schnoor

Yeah, we absolutely can.

Salvatore D. Fazzolari

We were worried about you.

R. Scott Graham – Jefferies & Co.

Yeah, me too, I’m having technical issues this morning. So I had two questions for you, I think that the first quarter guidance, which is indicative that you guys think it will be profitable, in the phase of this like (inaudible) of headwinds including – well I did not expect to say 50% tax rate is, I mean is it possible that well, maybe I ask you at this way in the positive way. What drives first quarter profits if Infrastructure, M&M and Rail are all down year-over-year?

Salvatore D. Fazzolari

Well, one thing, Scott, obviously is the industrial is going to have a good first quarter, so that helps. Rail, although it’s going to be down, it’s going to be okay. It’s not going to be great, but it’s going to be down year-over-year, so that helps. Metals & Minerals are still not bad. I mean it’s going to be down from the very strong first quarter of last year. But it’s still going to be a pretty decent quarter. And then cost savings, dramatic cost savings throughout the company and that’s really it’s only going to be $0.01 to $0.06, so as opposed to $0.15 last year.

R. Scott Graham – Jefferies & Co.

Yeah. No, well look I’m just saying I think that’s a good number given those headwinds. My next question as you know I have asked this question before, the company has signed on a lot of new business in the Metals & Minerals business. And obviously in 2011, we signed on some business and there was a pretty meaningful cash flow impact. I’m just kind of wondering, how you are managing that for 2012 particularly, you guys are about to execute the largest contract in the company’s history. So how are you managing cash flow, while still keeping the customer happy?

Salvatore D. Fazzolari

Yeah, I’ll just make one comment and I’m going to let Steve to give you some more details on that. But Scott, I’ll just say that 2012, is all about earnings and cash flow. The senior management team is very focused and very committed to delivering as much cash as we possibly can and obviously delivering our earnings for the share.

And hopefully nothing is going to get in our way, irrespective of what, the headwinds are, the markets are. We believe we are in control of our own destiny. We’re taking things in our own hands that’s why we took these very preemptive and substantive actions last year to ensure that we can continue, remember we’re heading towards, our march towards is 2015 EPS goal.

And I think we’re still on track. We’ve had some things getting in the way. But the customer is very important and we’re obviously not going to loose side of that and I can assure you, Galdino and Ivor and the two Scott’s are very focused on each of our customers, and particularly on the Metals & Minerals, because quiet a bit of the CapEx is going in there.

As you know, we are starting up this year in China, the largest contract history of the company that’s on track, everything is progressing as planned. And we will have revenues coming in, in the fourth quarter and so we’re very optimistic about that. And that will have a pretty good contribution in 2013.

India is also in the startup phase as well, and that will contribute in 2013 more than 2012. And so, we think we’re very positioned, we’re focused on the customers and we’re being again very selective on projects. Steve, I don’t know if you want to make some comments about...

Stephen J. Schnoor

First of all, we are extremely focused on maximizing our cash and operations. As I mentioned in my comments before, we have average of $400 million over the last several years, and our intention is to get it back to that. So we’re working the balance sheet very, very hard as far as the CapEx.

We’re very – We’re focused on basically only those projects, which first of all, exceed our cost in capital and highest return projects. We have a plenty of opportunities available to us, but the key thing is following more strategies. The highest return in emerging markets, reducing customer concentration, reducing concentration in Europe and things such as that. The other thing we, as I mentioned also, the opportunity to with the restructuring helping us offset some of that capital expenditure has been the sale of assets, the non-core assets. So that will be also part of our strategy. And as far as the joint venture, we also – we are with Cisco, we do have 60% ownership, 40% partner, which provides us with an offset. The key thing here with everything, with everything we’re doing is to remain extremely disciplined in our capital allocation approach. That’s part of my job and that’s part of what I’m assuring is going to happen.

Salvatore D. Fazzolari

Hey Scott, one other thing to Steve reminded me when he talked about Cisco. In our Metals & Minerals business, we are pursuing the projects with joint venture partners and we think that’s a great way to mitigate risk, that’s a great way to reduce the actual cash outflows now. So we can have our cake and eat in two. And I think the Cisco models are very good model where we still control the business by and our partners contributing 40, 45, everyone’s different operations, you can appreciate, but nonetheless the point is that the share, the cash flow burden if you will with our partners and we have some very good partners, not only in China, but also in the Middle East and that’s surely the future model. So when you see additional announcements and you will see some additional announcements this year, for example where we think we’re going to win a couple more contracts in India for example, possibly another one in China and one or two others in key markets. all those are going to be funded in part by our joint venture partners. So, it’s a very important distinction there. Now, you’ve got to watch where the ins and outs on a cash flow statement, but nonetheless on a net-net basis, the cash comes in.

R. Scott Graham – Jefferies & Co.

Very good. Thanks very much.

Salvatore D. Fazzolari

You’re welcome.

Operator

(Operator Instructions) Your next question comes from Tim Hayes from Davenport & Company. Your line is open.

Timothy Hayes – Davenport & Company

Hi, good morning.

Salvatore D. Fazzolari

Good morning, Tim.

Stephen J. Schnoor

Good morning, Tim.

Timothy Hayes – Davenport & Company

Two questions on the rental rates and infrastructure, how are those trending, I guess what are your expectations for Q1 rental rates versus what you saw on Q4?

Stephen J. Schnoor

We expect the rental rates to be pretty much stable as to where they are, where they’ve been in the last several quarters. So no, and we don’t see a significant increase and that’s one of reasons why we took the restructuring was to make sure that we get those cost savings and get the earnings, but the rental rates are pretty stable.

Timothy Hayes – Davenport & Company

And did it stable also in Europe or is there any erosion there?

Stephen J. Schnoor

Obviously Tim, (inaudible) we’re talking about weighted average, I mean any average is made up of a bit of highs and bit of lows. But I think it generally, we’re more conscious of not chasing business that’s why we rationalized equipment, that’s why we have a second stage of an aggressive cost restructuring program so that we don’t feel compelled to do that. So I think that clearly one talked about an average, but the average is made of extreme highs and extreme lows everything is nearly averaged.

Timothy Hayes – Davenport & Company

Okay. And then on the pension expense, how much of the increase of the higher $2.5 million that you’re going to see in the first quarter. How is that allocated between the segment and corporate?

Salvatore D. Fazzolari

That’s pretty much, most of that pension expenses are Metals & Minerals and Infrastructure and is mostly in the UK, I mean it’s pretty much in the UK that’s another reason why (inaudible) in the UK.

Stephen J. Schnoor

Yes. Probably $1 million each roughly if I remember right and about $0.5 million of corporate or something like that.

Timothy Hayes – Davenport & Company

Yeah.

Stephen J. Schnoor

And rough numbers.

Timothy Hayes – Davenport & Company

Yeah.

Salvatore D. Fazzolari

And again that will be $2.5 million a quarter.

Stephen J. Schnoor

Right. $10 million for the year.

Salvatore D. Fazzolari

Equal to the quarter.

Timothy Hayes – Davenport & Company

Okay, that’s helpful. Thank you.

Stephen J. Schnoor

You are welcome.

Salvatore D. Fazzolari

Thanks, Tim.

Operator

I have no further questions in queue. Mr. Fazzolari, I’d turn the call back over to you for closing remarks.

Salvatore D. Fazzolari

Well, thank you very much. Upon closing, while we expect 2012 will bring a cheer of challenges as we navigate the still uncertain economic environment particularly in Europe, as all of you will know. We do again expect to show as I mentioned earlier, double-digit earnings growth of course exclude in the carryover restructuring charge for the year. We do believe that the additional investments in restructuring both our infrastructure and our Metals & Minerals platforms will further improve the earnings of both businesses and yield permanent improvements in operating efficiency and lower break-even costs. I could thank you for your ongoing support and thank you for joining us on the call today.

Operator

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

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