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Harsco Corp. (NYSE:HSC)

Q3 2007 Earnings Call

October 24, 2007 2:00 pm ET

Executives

Derek Hathaway - Chairman and CEO

Mark Kimmel - General Counsel and Secretary

Sal Fazzolari - CFO

Analysts

Curt Woodworth - JP Morgan

Jeff Hammond - KeyBanc Capital

Ted Wheeler - Buckingham Research

Matt Goldfarb - GSO Capital

Bill Fisher - Raymond James

Trey Snow - Priority Capital

Timothy Hayes - Davenport & Company

Operator

At this time, I would like to welcome everyone to the Harsco Corporation Third Quarter Earnings Release Conference Call. (Operator Instructions) I would now like to introduce Mr. Derek Hathaway, Chairman and CEO of Harsco Corporation. Mr. Hathaway, you may begin your call.

Derek Hathaway

Thank you very much. Good afternoon, ladies and gentlemen and thank you for joining us on today's third quarter conference call. I have with me today Gene Truett, who directs our Investor Relations efforts; Ken Julian, who does Communications, both internal and external, on behalf of the Company; Mark Kimmel, who is General Counsel and Secretary of the Board, and also joining us today is Stephen Schnoor.

It was recently announced that Steve would become the Chief Financial Officer succeeding Sal Fazzolari in that job from January 1, and this is the first of the such meetings that he is attending. And I thought it would be a good idea for him to start to get a feel for these lion's den experiences. Also, obviously, with me today is Sal Fazzolari.

It was recently announced that Sal will be succeeding me as the Chief Executive Officer from January 1 and as Chairman of the Board, it's expected after the annual general meeting, which will take place in April of next year, April the 22nd to be precise. So those are the welcome and introductions and I'm going to ask Mr. Kimmel if he would, please read to us the Safe Harbor Statement.

Mark Kimmel

Thank you, Derek. Good afternoon, everyone. Let me just take a moment to remind you that our comments today, including our responses to your questions, will likely contain forward-looking statements.

These statements relate to the future of our business and may address operations, results, economic expectations, and other aspects of, or factors affecting our business. Our statements made today are based on the best available information, future results could differ materially from what we tell you today. Possible reasons for these differences may be because of the occurrence of one or more factors that are discussed and listed in our periodic filings with the Securities and Exchange Commission. We invite you to review this information at your convenience.

I would also like to remind you that replay's of another information relating to this call are available at our website, www.harsco.com. You can access telephone replays of this call by dialing the numbers provided in this morning's press release. Derek?

Derek Hathaway

Thank you very much, Mark. Well, as reported this morning, we achieved another record quarterly performance. We are pleased with the balance of the growth achieved through our major operating groups. This balance resulted in diluted earnings per share from continuing operations being up 30% over the corresponding period last year. I'm going to ask Sal Fazzolari now to give you more details on our performance for the third quarter. We'll then take your questions and followed by any closing comments that we may deem to be appropriate. Thank you, Sal.

Sal Fazzolari

Thank you, Derek. Good afternoon, everyone. It is certainly a pleasure to be here with you again. Please bear with me here, I do have quite a few salient points that I would like to make. So, hopefully by the end, you'll realize why. We were, of course as Derek indicated, very pleased with our third quarter performance. Sales, income, diluted earnings per share, and operating margins were all records. We are also pleased, that was not mentioned in the press report, with the improvement in EVA and the return on invested capital for the first nine months. In fact, our year-to-date numbers for return on invested capital, we've had a 140 basis point improvement year-over-year and our EVA improvement, again year-over-year, is substantially ahead of our target.

So we believe we are well on our way to another record year of strong EVA growth as well as our return on invested capital. Let's look at some of the performance of the third quarter, as well, I'll make a few comments on the nine months performance as appropriate.

Overall, the third quarter operating margin for the Company was a record 13.4%. That is 70 basis point improvement over last year's 12.7%. Again, as we probably say to you every quarter, we'd like to remind you that margin improvement has been and will continue to be one of our primary management objectives.

Also stated in previous conference calls, which I believe, again, warrants repeating, the continuing overall strong performance of the Company is underpinned by a well-constructed and well-balanced global portfolio of mainly industrial services businesses. We believe that this third quarter, particularly, manifests this balance especially well. For example, operating income for the nine months for the Company was $347 million. Again well-balanced between the three business groups. Access Services accounted for $132 million or 38%, Minerals and Rail Technologies accounted for $112 million or 32%, and Mill Services accounted for $103 million, or 30%. I think that is pretty good balance.

Sales for the third quarter grew by a strong 20%. Organic growth contributed over 9%, while acquisitions contributed approximately 6%, and foreign currency translation accounted for the remaining 5%. We are very pleased with the organic part of the growth story, as we have been telling you all along that we will continue to invest, and we do have the opportunity as a Company invest in organic projects and this is augmented by our ongoing acquisition strategy. Again, the third quarter results really manifest this well.

For the first nine months of the year, the sales have grown 22%. Organic growth contributed 10% of that growth, while acquisitions contributed 7% and foreign currency translation accounted for the remaining 5% of the growth in sales. Again, exactly the point I was just making about the balance between organic growth as well as in augmented by acquisitions. For the quarter, our industrial services portfolio accounted for 85% of total sales, while our international sales accounted for almost 70% of total revenues.

Cash flow from operations for the quarter was a record $176 million. This compares with $95 million in last year's third quarter, an improvement of 86%. Based on this strong cash flow performance, we are quite confident that we will exceed our cash flow target for 2007 of $445 million. It continues to be evident that Harsco's operations are prolific generators of cash flow and do add to Harsco's ability to self finance a considerable amount of its growth.

Consistent with our growth initiatives, we invested a record $326 million in CapEx in the first nine months of the year. This is an increase of approximately 27% over last year's $256 million. Importantly, over 55% of this year's CapEx, or about $180 million, has been invested in strategic growth initiatives, with the remaining 45% allocated to sustaining the current revenue stream. As a point of interest, approximately 72%, or $129 million, of the growth capital for the first nine months of the year was invested in our fast-growing Access Services business. Naturally, these investments are all evaluated under our conservative and prudent EVA discipline.

Another important metric for us is our debt-to-capital ratio, which decreased, I'm pleased to say, by 200 basis points during the quarter to 48.4%, and that's from 50.4% at June 30th. The debt-to-cap ratio, in fact, is now only 30 basis points higher than it was at the end of the last year, at 48.1.

With the expected strong free cash flow for the year augmented by the anticipated proceeds from the sale of our Gas Technologies business, we expect our debt-to-cap ratio to continue to improve during the fourth quarter and return to more normal historical lows. At the same time, we are confident that we will be able to continue funding our global growth initiatives.

Now, let's turn just briefly to the performance of each business group. Our global Access Services business, again, set new quarterly records for sales, operating income and margins. Third quarter performance was again broad based. We were especially pleased with the excellent 19% organic growth of this business in the third quarter. This follows about a 20% organic growth rate in the second quarter. Also noteworthy is the fact that operating margins in Access Services improved by 100 basis points to a record 13.7%. The industry outlook across are large and expanding, I may add, global footprint for Access Services, remains quite positive. We continue to see favorable market conditions for both the fourth quarter, as well as 2008.

Let's move on to Mill Services. The lower Mill Services performance in the third quarter compared with last year is due principally the two factors; unplanned and unexpected lower steel production, particularly in North America, and higher maintenance costs. The lower steel production is driven by the steel industry strategy of maintaining prices by controlling supply. Clearly, we are not satisfied with the recent performance of our Mill Services business. As such, we are implementing a margin improvement strategy that we expect will lead to more normalized margins in 2008 back in the area of 11%.

Some of the key components of this margin improvement plan, in no particular order of importance, include the following. First, we will renegotiate and if unsuccessful, exit several older, underperforming contracts, principally in North America. We also intend to divest a low margin transport business in Europe by the end of this year. We will continue to execute our geographic expansion strategy in Eastern Europe, Middle East and Africa, Latin America, and Asia-Pacific, where we generally achieve higher returns than we do in North America and Western Europe.

An example of this strategy is the late third quarter acquisition of Alexander Mill Services in Eastern Europe, principally Romania and Poland. This acquisition is expected to be followed later this year, as well as next year, with new contract announcements in key previously noted targeted areas. That is the rest of the world outside of North America and Western Europe.

We are also quite focused on cost optimization initiatives, which are also key components of this strategy. We are closely examining shared services opportunities and other cost reduction initiatives, including fewer administrative centers, improved procurement practices, and site optimization. Site optimization simply means and includes, among other things, reducing maintenance costs and improving overall site efficiency.

Senior management is optimistic that these actions can be largely completed by the end of the year and that they should restore margins to more historical levels. This should provide, we believe, the foundation for further margin improvement in 2008 and beyond. In fact, our optimism is further underpinned by the projected rise of 6.8% in global steel consumption in 2008, and this is recently according to the International Iron and Steel Institute.

Moreover, just coincidentally today, CIBC issued a report on the steel sector that we -- is encouraging, we believe, and also underpins exactly what we're saying. They state in their report two things. One is that U.S. service centers' inventories are at multi-year lows, which should lead, quote, unquote, to a strong start to 2008. They also state in the same report that certain Chinese steel mills are shutting down capacity due to high input costs, which, again, quote, should result in lower exports and this bodes well for North American producers.

We also believe that this could positively affect the European producers as well. One final comment on the third quarter of Mill Services margins of 9.2%. I would remind you that in the third quarter of 2005, we experienced a similar quarter with 9.1% margins. The next year, the Mill Services business came back and posted 10.8% margins for the year. We are confident that we will have a repeat of this scenario in 2008. And we are also quite confident in the 11% target margins for next year.

Finally, the Minerals and Rail Technologies Group. The extraordinary performance exceptional results led by the minerals business, that is both Rested and Excell Minerals. In addition to the two minerals businesses, all businesses in this group posted record margins.

This is the first time that all six businesses in the group posted record margins. As a result of this, the group as a whole reported 21.1% operating margins. That is a 410 basis point improvement over last year. We believe that both the short and longer term outlook for the Minerals and Rail Technologies Group is favorable. We expect a strong fourth quarter and we expect a strong 2008.

Based on our continuing strong end-markets and encouraging global growth opportunities, we are raising slightly our EPS guidance from continuing operations for 2007 from a range of $2.90 to $2.95 to a new range of $2.93 to $2.97. This is the third time this year that we have raised our guidance. Using the midpoint of the guidance, our expected result will represent a year-over-year improvement in diluted EPS of 33%.

I would also like to remind you this is the fourth consecutive year of significant EPS growth for the Company. Our outlook for the fourth quarter, same thing. We expect very strong fourth quarter and another record quarter. Using the midpoint of our guidance for 2007 to calculate the fourth quarter diluted earnings per share from continuing operations forecasted to be $0.67 and that compares with $0.55 in the fourth quarter of '06. This will represent, again using the midpoint, an increase of 22% year-over-year. The high end of the range will represent a 26% increase in year-over-year fourth quarter performance.

Finally, I would like to reiterate what we've said in the press release today about our outlook for 2008. We expect 2008 to be another year of growth, another record year. Access Services and Minerals and Rail Technology should continue to perform well, as they have done this year. This, coupled with the expected improvement in Mill Services, should provide the foundation for another strong year.

Our expected growth in 2008 is further underpinned by the investments that we've made in 2007, as well as our cost optimization initiatives. We will provide much more details on our 2008 outlook at the Annual Analyst Conference that's coming up in New York City on December 7th and we look forward to seeing you there.

That completes my comments, Derek, and thank you for your attention.

Derek Hathaway

Well, thank you, Sal, for that comprehensive and very informative analysis of the performance of the quarter and of the year-to-date so far. It's now time to receive your questions, if you are so inclined. Thank you.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Your first question comes from the line of Curt Woodworth of JP Morgan.

Curt Woodworth - JP Morgan

Yes, hi, good afternoon.

Sal Fazzolari

Good afternoon, Curt.

Curt Woodworth - JP Morgan

You know, Sal, you expressed a fair amount of confidence in getting back to 11% margins in Mills in '08 and I guess I'm just wondering: how exactly are you looking at it? And: do you think it's going to be kind of a staggered rise in margins over the course of '08? Or: do you feel like entering the year you're going to have your cost structure pretty much optimized as you see it? And maybe: just explain some of the moving pieces in terms of either the dollar volume -- the dollar amount of benefits you're going to get from maybe exiting some of these weaker contracts, as well as some of the one-time costs they are taking this year to add headcount, maybe make some selective hiring, as well as some other cost issues.

Sal Fazzolari

Well, it's a cumulative effect of two things. One: is the cumulative effect, Curt, of all the actions that I outlined in my comments. And, like I said, we're confident we'll have either all of them or most of them implemented by the end of the year. So that sets the stage. And the second point is: the production. We did have some very unusual production outages this year that we certainly don't expect next year.

That is further now, we even have more confidence now based on what we're seeing as far as the inventory levels, the Chinese thing that I mentioned, and consumption and production outlooks that we're seeing for next year from our customers, as well as the Institute. So all the metrics are pointing to higher production, higher consumption. Also if you look at the things that I've mentioned, we are going to be announcing some new contracts signings in some key countries outside those two, North America and Western Europe.

Also, like I said, there is a couple of problem contracts that we have in North America that we're going to sort out one way or another and some of these other cost initiatives gives us considerable confidence that we can get the business back to more historical levels.

Curt Woodworth - JP Morgan

Okay, great. And then in terms of thinking about the new contract signings coupled with adding more content per mill, do you feel like -- I mean: this quarter you were down organically by about a point. In an environment where do you think that, say, production growth is going to be 6%, do you feel that, with the new contract signings, as well as kind of the content story which has always been a part of the growth rate here, high single-digits to the even low double-digit growth in Mills is possible? Or: is that going to be kind of countered by maybe getting out of some of these contracts that you're talking about?

Sal Fazzolari

Like for example: I mentioned we're going to exit out of transport business that we have.

Curt Woodworth - JP Morgan

Yeah.

Sal Fazzolari

They do about $30 million plus in revenues, that will go away. There is a couple contracts we may or may not renew. So forth and so on. We're more interested, in all honesty to get in the margins going back up to where we think we can get them and we're certainly not going to be satisfied at 11% either. We're still shooting for much higher margins over the long-term. Personally I would like to see them back at 12% and on. And so, I think maybe we'll suffer a little bit on the revenue side, but we still should see some reasonable revenue growth. But you're not going to see high single-digit or double-digit revenue growth.

Curt Woodworth - JP Morgan

Okay. And then on Excell: can you comment on your capacity expansion plans for 2008? How many maybe new plants do you expect to open? And give us a sense for how that -- what your plan is for Excell for 2008?

Sal Fazzolari

We would like probably defer that one until December, Curt, because I think that maybe a better forum for us to really articulate our strategy. What we are doing here.

Curt Woodworth - JP Morgan

Okay.

Sal Fazzolari

But the only thing I will say is that, we are quite focused on two areas of the world, some key parts of Western Europe and Asia, okay. More Asia than anywhere else.

Curt Woodworth - JP Morgan

Okay.

Sal Fazzolari

So, hopefully, we'll give you a little more color on that in December, because we're still working through that right now as we speak.

Curt Woodworth - JP Morgan

Okay. And in terms of growth CapEx, it's been pretty, pretty balanced for the company in the past year. Do you feel that that's going to continue to be kind of the hallmark of the Company, where it's going to be kind of equally distributed? Or: do you feel that maybe Excell or even Access is, kind of the areas where you see the most opportunity on growth CapEx going forward? Thank you.

Sal Fazzolari

Hopefully you should see a balance, because, I mean: that's one of the points I was trying to make earlier. We really believe in this portfolio thing, that if we work very hard at getting the three groups well balanced, and I think the operating earnings for the nine months really demonstrates better. And you're going to see going forward, hopefully a good balance in the growth CapEx as well, because we see a lot of opportunities in Rail which good opportunities have Excelled, particularly on the minerals side. Of course, you know, Mill Service see some good opportunities and then of course Access. So we think we'll continue to do very well, because we do have quite a few opportunities there.

Derek Hathaway

I think, also, in regards to it, if I may just interject for a second, the Company has gone through really, by our standards, an extraordinary growth spurt and what we're looking for, as I understand Sal's strategies are going to be and I endorse them, and that is that quantity is not going to be so important next year as quality. The growth spurt clearly has brought and its wake and its trying, obvious inefficiencies, which can be improved upon. And I think that, if I could just summarize, Sal, I think your goals are very clear, which is that investments have been made.

Clearly there are some inefficiencies that have followed the growth spurt and greater deal of attention will be given next year. We are actually talking about a 100 basis points in Mill Services. You've seen the margins in the other. And so no one can deny that we're very, very margin conscious in this business and we see opportunities which have been enunciated by Sal, and 100 basis points improvement on a small revenue improvement may be, even in Mill Services, will have a serious impact on the EPS in a very positive way.

Curt Woodworth - JP Morgan

Great, okay. Thank you.

Sal Fazzolari

You're welcome.

Operator

Your next question comes from the line of Jeff Hammond with KeyBanc Capital.

Jeff Hammond - KeyBanc Capital

Hi, good afternoon, guys.

Sal Fazzolari

Good afternoon, Jeff.

Jeff Hammond - KeyBanc Capital

So on Minerals and Rail, we've had two quarters now with Excell in there with operating margins north of 20. I guess, just trying to understand: if that's a sustainable run rate in your mind?

Sal Fazzolari

Well, Jeff, again, you got to remember what we said. All six businesses had record margins and don't want to comment on each specific one for a lot of reasons, but I can assure you it's certainly not just Excell.

Jeff Hammond - KeyBanc Capital

Okay, so I guess, if underlying demand remains solid for the businesses, I mean: is that a sustainable, kind of near-term?

Sal Fazzolari

Yes, we think it is and we're looking at expansions in key parts of the world to grow the business.

Jeff Hammond - KeyBanc Capital

Okay, great. And then, I guess, as of, maybe to ask the Excell question a little bit different way, you did $42 million last quarter, $30 million this quarter. Is this a more reasonable, at least, run rate?

Sal Fazzolari

It is, Jeff. Remember, we said at the last quarter that that was a highly unusual quarter for them. They literally ran 24/7 every single day of the quarter, which probably never to be seen never again, unfortunately, but that's the reality. This is the more normal rate. I think they actually did about $29 million to be exact. I'll give you the number, but that's what they did for the quarter, so that should be more the norm, more normal run rate, yes.

Jeff Hammond - KeyBanc Capital

And then, as you add new contracts, etcetera, you would see some growth from that run rate?

Sal Fazzolari

That's correct.

Jeff Hammond - KeyBanc Capital

Okay. On Access: any signs of slowing in any geographies? Maybe, particularly, domestically?

Sal Fazzolari

No. In fact, I could tell you, I mean: if you look at the three brands we have; Hunnebeck. Patent and SGB, and all in their respective geographies, I mean: you couldn't have ordered better the balance. I mean: all three of them performed extremely well, well balanced between the three as far as margins and returns, revenue growth, earnings, and etcetera, etcetera. And it was not seeing any slowdown at all. And the investment is going proportionally to them as well. So -- and we're not seeing any indications of any slowdown in any of our key markets.

Jeff Hammond - KeyBanc Capital

Okay. That's great to hear. And then finally, I guess the one surprising thing is that the stubborn maintenance costs within Mill Services. I think, last quarter you mentioned some one-time issues and some unplanned maintenance, but that seems to be stubborn issue into this third quarter, I just wanted to get a better sense of: what you think are kind of near-term issues? And: what needs to be changed maybe longer term to better address the maintenance cost issue?

Sal Fazzolari

It's actually a simple answer. We've narrowed it down to a handful of mills, if you will, our sites, and what we've done is we sent a team of people in and we're re-engineering the site, if you will. Part of it will involve new equipment, okay, that can do the job more efficiently, more effectively.

So, we'll have to invest in capital to get that done, but we think the EVA is going to pay for itself on this. So, we are well into it and, hopefully, we won't be having this conversation too much longer relative to maintenance. You're always going to have some maintenance issues, because they come up, but certainly not to the level that we've had the last two quarters particularly.

Jeff Hammond - KeyBanc Capital

Okay. Perfect. Thanks, guys.

Operator

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

Ted Wheeler - Buckingham Research

Good afternoon, all.

Derek Hathaway

Hello, Ted.

Ted Wheeler - Buckingham Research

Just on the Mill Services issue: what was the production in your served markets in the quarter for steel? The project was steel, you mentioned U.S. was weak, but I guess-- .

Sal Fazzolari

Up -- I don't remember the exact numbers, Ted, but I mean that as we said that, North America was down, particularly at the sites we were at, was down about 4% and production was, but in total the U.S. was down 4%. But if you look at the specific sites some were down a lot more, obviously. I know, for example, Mittal took some quite drastic cuts in some of their production in the U.S.

Ted Wheeler - Buckingham Research

In the U.S., okay. And: outside the U.S.? What had production -- ?

Sal Fazzolari

In the U.S., it's a site here and a site there. And so it's really country-specific.

Ted Wheeler - Buckingham Research

If we look at the 11% potential margin for next year and kind of slice there and issues that seem to be effecting now, production cuts, poor contracts, maintenance, and then the initiatives, those four. What would be the relative contribution of each of those to getting the margin back to 11?

Sal Fazzolari

Well, it's a good question, but I would say they are all important. They are all very important. Certainly production's important. Certainly the maintenance cost and the site optimization issues are important.

Ted Wheeler - Buckingham Research

Well, if you were successful with the -- ?

Sal Fazzolari

Let's say, proportionately, one third/one third for the top three, let's say, or something like that.

Ted Wheeler - Buckingham Research

Okay. In other words: the contracts themselves could be a 30-basis point, 40-basis point issue if you were -- .

Sal Fazzolari

Well, I think the combination of new contracts and exiting out contracts including the, exiting out that small business product line that we mentioned. The combination of that would certainly is going to make that one third contribution. Production will be the other one third. And then the other one third would be the cost issue. So if you had the proportion, they would all be in those equal buckets, if you will, the three -- .

Ted Wheeler - Buckingham Research

Okay. Thanks for the call. What do you think growth CapEx will be next year?

Sal Fazzolari

Well, I don't see a material change from their run rate of this year, in all honesty. If you look at our crystal ball and you look at the opportunities that we have, our Access Service business is constantly demanding more capital or holding them back, in honesty. The Mill Services business, I think you will see some new signings, some new opportunities there and then, again, the Rail and Excell as well you'll see. So we don't see any material change in that picture at all.

Ted Wheeler - Buckingham Research

Okay. And then, so that the China rails work starts to accelerate and that won't push the CapEx up unusually?

Derek Hathaway

No, those are sales. Those are direct sales. You're talking about the China order?

Ted Wheeler - Buckingham Research

Correct.

Sal Fazzolari

Yes, that's a direct sale. You're talking about HTT, right?

Ted Wheeler - Buckingham Research

Yes, yes, yes. I just wondered -- so you don't need a capital infusion?

Sal Fazzolari

That's not CapEx, that's inventory. That goes against inventory and we have the capacity for that, so we don't really need--

Ted Wheeler - Buckingham Research

That's what I meant, yes.

Sal Fazzolari

Yes.

Ted Wheeler - Buckingham Research

Okay. Thank you very much. Good quarter.

Sal Fazzolari

Thank you.

Operator

Your next question comes from the line of Matt Goldfarb GSO Capital.

Matt Goldfarb - GSO Capital

Hi, guys, how are you doing?

Derek Hathaway

Good afternoon.

Matt Goldfarb - GSO Capital

Can you just speak to any material contract activity on the Mill Services side in third quarter? And beyond that, maybe a bit about your relationship with Mittal and the impact of [Fannie] and the broader relationship from any decision to cease work in an individual mill.

Sal Fazzolari

Well, as far as any material contracts, if they were material, we would have announced them. And certainly we can't disclose them here without announcing them. So, as I indicated, we do expect to announce some new contracts in the fourth quarter as well as next year. So, it will just have to play out through the press releases, so we can't really comment further on that. Derek, I don't know if you want to talk about the Mittal or I'd be happy to.

Derek Hathaway

Yes, it's been a very interesting year and part of the margin issue that we've talked about is that, to be frank, we're finding that the consolidation and the competition that's taking place amongst mills in general has caused them to become much more effective in the way that they manage their way to market and how that they control their production. Previously, we were given always plenty of warning as to what might happen and therefore we could run our businesses accordingly, being servants of the mills on their sites.

The amount of notice we get these days for modifications in production requirement has shortened, because they simply don't wish to telegraph that information themselves to the markets. And that enables them, I guess, as part of their overall strategy, which I think is a very credible and all credit to them, it has enabled them to maintain in fierce competition, their prices in the marketplace. So we're seeing a healthier steel industry.

We, for a short period of time, have needed to look at how we serve that industry and how we now are to respond to what has become a state and not an occasional circumstance. And that's why I don't think that -- I think, not I don't think, that's why I think that we are in 2008 going to be perfectly prepared for the new state of things in the steel industry and how we serve it, with an appropriate cost base, an appropriate level of service, with well maintained plant.

And that's why I think I take, I personally take, a great deal of heart to what Sal and his colleagues have been doing these past several months, in preparing for that. I know that our financial plans for 2008 have taken that particular phenomenon into account and that's why I think Sal could speak with such confidence.

Matt Goldfarb - GSO Capital

I just -- the reason -- I don't mean to put you guys on the spot. I just heard anecdotally that you guys were out at Sparrows Point and that is kind of what I was getting at to see if that was real or not.

Derek Hathaway

It's a tiny, tiny contract that we were pleased about the outcome of that. It's one we inherited previously from acquisition of a firm called Langenfelder.

Matt Goldfarb - GSO Capital

Sure.

Derek Hathaway

It was absolutely a waste of time and was given frankly to two guys in a start-up situation. That's what happened to it. We fought with all kinds of problems and we're very happy to cooperate in handing that over.

Sal Fazzolari

And one thing we've been saying, I know recently I've been out quite a bit with Gene on investor relation's visits and we're making it very clear that the status call is no longer acceptable. We will walk away and this is a case where we walked away. It was a mutually agreed thing. Contracts that either have no EVA or negative EVA or have very little prospects for improvement and this is one of those contracts. And we're working through one or two others right now in the U.S, because that's no longer acceptable to us.

Matt Goldfarb - GSO Capital

All right, great. Thank you very much.

Derek Hathaway

Thank you. And thanks for asking the question. That enables us to put things in perspective and put them straight. It was a good question, thank you.

Operator

Next question comes from the line of Bill Fisher with Raymond James.

Bill Fisher - Raymond James

Good afternoon.

Derek Hathaway

Good afternoon, Bill.

Bill Fisher - Raymond James

Just on the growth spending on Access, where you're obviously devoting a lot of capital. Can you just give some maybe broad color on where it's maybe being weighted, whether it's forming and shoring or pretty broad-based and then also maybe geographically, if it's more in some of these overseas markets you've been trying to expand.

Sal Fazzolari

Bill, it's very well balanced. Like I was implying with the earlier question, as you look at all three businesses, it's evenly spread through all the geographies, it's evenly spread between forming, shoring, scaffolding, commercial/industrial and so forth. And again, that's how we're running the portfolio, because we want to maintain that balance. For example, about 25% plus roughly of that business is industrial, repeat type business. It's not commercial -- non-res construction and so forth. Then within the non-res, you look at the forming and shoring as capital as well. But there's really no one concentration in any particular geography or service level or anything like that. It's well, well dispersed and we're trying to keep that discipline.

Bill Fisher - Raymond James

Okay. And, I guess, maybe a similar answer on the margin improvement you're seeing there? Is that pretty broad based or is there a bigger mix of forming and shoring or anything like that?

Sal Fazzolari

Again, it's very broad based. It's consistent, though, with our geographies, like we've said. We do a little bit better in the markets outside North America and Western Europe, but in this business it's not as pronounced as it is, for example, in the Mill Service side. It's a little better balance between the two. But, nonetheless, we're seeing good investments in the Middle East, as well as Eastern Europe and Latin America and other parts of the world.

Bill Fisher - Raymond James

Okay, great. Thank you.

Sal Fazzolari

You're welcome.

Operator

Your next question comes from the line of Trey Snow, Priority Capital.

Trey Snow - Priority Capital

Hi, thanks. Question I had was, I think it's been sort of answered in parts here, but I just want to ask it to make sure. And it's about the restructuring or the improvement in Mill Services. Trying to figure out how sensitive that 11% margin goal would be to your global steel production forecast.

So, if you were to hit on your improvement targets, just absolutely knock them out of the ball park, but your baking in like 6.5% increase in global steel and it comes in at 5.5%: does that throw the 11% margin target out the window? Or: how sensitive is it to the top-line?

Sal Fazzolari

Well, we build sensitivity into our projections for production. So, really the big part is more the cost issue than, like I say, we think we're getting a very good handle on the cost issues and those are the things that we can control. And so as we optimize the sites as we take some of these other actions, reduce some administrative costs, reduce maintenance costs, and do some other things a little better than perhaps we've done this year, we can control quite a bit of that.

Certainly we can't control production, but, again, our strategy of investing across the globe and so forth and spreading the investments out, again, and some of that, more of that will become forthcoming with recent press announcements. We'll see, we'll see that improve. So hopefully that answers your question but --

Trey Snow - Priority Capital

It does. Let me follow-up with one other thing. The divestiture of the transport business in Europe, if it's only doing $30 million in sales in a slow margin, I assume, that's probably the smaller of the projects for improvement. Is that?

Sal Fazzolari

Right, right. What I said was the combination of several new contract signings as well as the divestiture of the transport business and a few other miscellaneous contracts we may exit. The combination of those as a whole will contribute about one third, if you will of that improvement.

Trey Snow - Priority Capital

Right, okay. That's definitely clearer. All right. Thank you.

Sal Fazzolari

You're welcome.

Operator

(Operator Instructions). Your next question comes from the line of Timothy Hays of Davenport & Company.

Timothy Hayes - Davenport & Company

Hey good afternoon.

Sal Fazzolari

Good afternoon.

Timothy Hayes - Davenport & Company

I have a question on Reed Minerals. I was a little surprised that the operating margin is at a record high. We know that some of that or a large portion of that business goes into residential construction here in the State. Could you talk and give more color on how that business has improved, despite some challenging end markets?

Derek Hathaway

Yes, well, thank you for that question. I'll take it and answer it. We anticipated a very long time ago that we needed to shift the use of the limited resources in Reed, limited raw material sources to higher margin activities. And so what has happened is that we've slowly overtime, almost imperceptibly to the outside markets; we have transferred the usage of the limited availability of the raw material into abrasives. We've now become the best known manufacture of non-carcinogen abrasive materials.

That has gone well, so we've seen a market decline clearly and anticipate it would happen in non-residential construction. And quietly and stealthily, we have just shifted that emphasis. And what has happened is that, of course, we got that right. Our marketing people and the management team there got that exactly right. What we've actually seen is a very, very considerable improvement in the performance of that business with our own proprietary branded product as opposed to selling these valuable raw material at low prices and low margins to a what was a rather voracious client base in the Mill Services business, in the Reed Minerals business.

So, it simply is anticipation of a phenomenon, dealing with it, coming up with solutions, and being rewarded for the foresight to do it. And I'm sure that that principle that Sal has just enunciated regarding Mill Services, you recognize the phenomenon and do with it accordingly. That's why I've got every confidence in this management teams to deal with the issues. Same principle, really.

Sal Fazzolari

The other thing I may add too, is their cost. We've done -- the management there has done a very good job of optimizing the sites. They have spent a lot of time over the last year or so going through every single site, re-engineering it and reducing the operating costs, so it's an efficiency issue and, certainly like Derek said, it's a business model change in the markets that we go after.

Timothy Hayes - Davenport & Company

I guess you guys did a better job foreseeing it than some of the mortgage brokers.

Sal Fazzolari

Well-- .

Derek Hathaway

That's your company.

Timothy Hayes - Davenport & Company

Thank you.

Derek Hathaway

You're welcome.

Operator

At this time there are no further questions.

Derek Hathaway

Well, thank you very much. We, as I said, are very encouraged. You have heard the future Chief Executive Officer of the Company talk about his confidence in this next quarter and given you a hint of 2008. I'm looking forward to being with you in New York, as is Sal and our colleagues, if you'll be pleased to join us there in early December.

And I'm asking them all to produce a very, very good final quarter for me as the present CEO, and I look forward to discussing that with you in January when we produce the results. But they are going to give me one for the gipper, I guess. That's what I'm asking for and I'm sure that we'll deliver.

So thank you for your time and your attention and as always, there's an invitation on follow-up questions or clarifications that you might wish to review with us at the end of this call. Thank you again and we look forward to seeing you in December or talking to you in January, whichever is convenient for you. Thanks a lot.

Operator

Thank you. This concludes today's Harsco Corporation third quarter earnings release conference call. You may now disconnect.

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Source: Harsco Corp. Q3 2007 Earnings Call Transcript
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