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Harsco Corporation (NYSE:HSC)

Q1 2012 Earnings Call

May 2, 2012 10:00 a.m. ET

Executives

Eugene Truett – Vice President, Investor Relations and Credit

Henry Knueppel – Interim Chairman, Chief Executive Officer

Stephen Schnoor – Chief Financial Officer, Treasurer

Analysts

Jim Lucas – Janney Capital Markets

Jeffrey Hammond – KeyBanc Capital

Glenn Wortman – Sidoti & Company

Rob Norfleet – BB&T Capital Markets

Scott Graham – Jefferies

Operator

Good morning. My name is Sara and I will be your conference facilitator. At this time, I would like to welcome everyone to the Harsco Corporation First Quarter Earnings Release Conference Call. [Operator Instructions] After the speaker’s 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. Eugene Truett, Vice President, Investor Relations and Credit of Harsco Corporations. Mr. Truett you may begin your call.

Eugene Truett

Thank you, Sara, good morning. I would like to welcome everyone to Harsco’s first quarter 2012 earnings release conference call. I’m here this morning with Henry Knueppel, Harsco’s Interim Chairman and CEO and Steve Schnoor, Harsco’s CFO and Treasurer.

As we do at beginning of all of our calls, we want to let you know that there maybe 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. While 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. We invite you to review the SEC filings at your convenience. I would like to remind you that replays of this call and related information are available on our website. Please take the time to access this information at your convenience.

I would like to now turn the call over to Henry Knueppel. Henry?

Henry Knueppel

Thank you, Gene, and I would also like to add my welcome to all of those participating in the call this morning. Thank you for your continuing interest in Harsco. We will follow our typical agenda. I will make a few opening remarks about the first quarter and Steve Schnoor will provide you with further details on the results. I will then finish up with some comments regarding the second quarter and we will open it up for questions.

As all of you who follow our stock for some – followed our stock for some time, know the first quarter is seasonally Harsco’s slowest quarter, principally because of the effects of weather on new construction starts and steel mill operations and rail track maintenance. We took these factors into account in the first quarter guidance that we provided you in January.

As we stated in that call, we expect a difficult in-market conditions to continue throughout the quarter, particularly in our two largest business segments, Metals & Minerals and Infrastructure. And in fact actual market conditions in both segments turned out to be even worse than we had projected.

Global mill production at the customer served by Harsco continues to be at what we and our customer see as the low end of normalized production levels. While we’re optimistic that production levels will start to pickup and return to more normal levels as the year progresses, we are still not seeing that improvement at this juncture. Obviously, one way to counter that – those market headwinds is to broaden our base and we have been successful over the past several months in expanding our footprint with additional new customers. You’ve seen the announcements regarding new customers in Italy, Bahrain, Sweden and Chile. However, we have not – we will not see the benefits of those new contract signings until later this year and into 2013.

We also continue to see year-over-year weakness in market conditions in our minerals business during the first quarter, principally due to lower stainless steel production at mills in the U.S.

In our Infrastructure segment, end market conditions continue to be challenging in the U.K., Central Europe and in the U.S. Fortunately, we are seeing some strengthening in other regions, principally the Middle East and Latin America, as well as measurable cost savings from our restructuring initiatives.

As such, we expect the first quarter 2012 loss of approximately $18 million before restructuring charges to be substantially reduced in the second quarter. In fact, if the onetime pretax gain of $4.5 million associated with restructuring actions as noted in this morning’s press release is achieved during the second quarter, overall results could be essentially a break-even for this segment for that quarter. Again, this is before restructuring charges.

On a full-year basis, before restructuring charges, we are still driving toward a goal of being at or near break-even. However, clearly the end market headwinds I have just mentioned make this goal a difficult challenge.

Regarding the restructuring, we are making good progress both in Metals & Minerals and Infrastructure businesses and we are slightly a head of the schedule we announced at the end of last year. Also partially offsetting the March softness in our two largest businesses was better than expected performance in the first quarter by our Rail and Industrial businesses.

Rail posted higher than effected contract service revenues and also benefited from the timing of equipment deliveries that we initially expected would occur in the second quarter. The industrial segment benefited from strong backlogs in two largest units, Air-X-Changers and IKG, both of which support the energy sector.

When you add all this together, we achieved overall results at the operating end of our earnings guidance. Still we would not characterize these results as particularly pleasing.

We are simply not yet where we need to be in the areas of growth, capital allocation and free cash flow. Clearly we need to make meaningful progress in each of these areas and we are focused on the disciplines and rhythms that we need to improve performance in each. It is clear to me that Harsco is a great company with dedicated employees, excellent products and services and enormous potential. That said, we have under delivered on the value promised to stakeholders and we need to rebuild confidence through meeting our commitments and through steadily improving our performance. We’ll start with once successive time and then build on that base.

I’ll now turn the call over to Steve Schnoor, Harsco’s CFO.

Steve Schnoor

Thank you, Henry. Good morning everyone. As reported in this morning’s press release, excluding previously announced pre-tax restructuring charges of $35 million, we recorded earnings per share from continuing operations of $0.05 for the first quarter. The results included approximately $0.04 per share of separation costs for the former CEO and a pre-tax pension curtailment gain of approximately $0.02 per share. Excluding those items, earnings per share was $0.07, exceeding our previous guidance of $0.01 to $0.06 for the quarter. First quarter 2011 earnings were $0.15 per share.

First quarter consolidated sales of $752 million were 3% lower than last year. Most of the reduction resulted from foreign currency translation due to the weaker Euro. On a comprehensive – on a comparative basis, first quarter results were affected by lower steel production volume in Metals & Minerals business, a continued end-market weakness in our infrastructure business. Particularly in the Europe and North America, this is offset by strong performances of our Rail and Industrial businesses. A portion of Harsco Rail’s first quarter operating income results from shipments that were originally expected to occur in the second quarter.

First quarter effective income tax rate, excluding restructuring charges, was 68%. As previously communicated, the higher first quarter tax rate resulted from reduced tax benefit in certain international jurisdictions compounded by the seasonally lower first quarter earnings. The year – the effective income tax rate excluding restructuring charges is estimated in the area of 27%.

As previously announced at our Annual Analyst Conference in December to ensure the continuous successful transformation of our Infrastructure and Metals & Minerals businesses, especially in light of headwinds from the European economy, we are executing a restructuring program which began in the fourth quarter 2011 and will continue through 2012.

Total pre-tax restructuring charges are estimated approximately $198 million to be recorded in both 2011 and 2012. We recorded a pre-tax restructuring charge of $101 million in the fourth quarter of 2011 and $35 million in the first quarter of 2012, remaining $62 million will be recorded during the balance of 2012.

As a reminder, the restructuring charge includes further streamlining of our European presence exceeding 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. As Harry has just said, we are on schedule to deliver those savings.

I will now review our cash flows and liquidity positions, then discuss performance of each business segment in more detail. First quarter cash from operations was $27 million excluding $29 million of cash paid for restructuring activities.

Cash from operations in 2012 exceeded $23 million, again before restructuring the payments recorded in the first quarter of 2011. Excluding net restructuring of payments, discretionary cash flow for the quarter was an in flow of $7 million, compared with the cash outflow of $9 million in the first quarter of 2011. Discretionary cash flow is cash from operations, plus cash of asset sales, plus the maintenance capital expenditures.

First quarter capital expenditures decreased compared with 2011 due to the timing of project capital requirements. First quarter cash of asset sales also increased in 2012 to $22 million compared with $7 million in 2011. Such asset sales which in 2012 included $7 million related to the sale of assets disposed in restructuring activities. Our routine part of our business and the cash is used to offset capital expenditures. Thus our net CapEx in the first quarter was $38 million, excluding the restructure and cash receipts.

Our debt to total capital ratio as of March 31st was 44.4% as compared with 42.7% as of December 31. The higher ratio as of March 31st results from a seasonally higher commercial pay per debt at the end of the first quarter.

Net debt to capital which considers our balance sheet cash was 40.6% as of March 31st, compared with 39.2% as of December 31.

I mentioned in our last conference call, that we’re working to renew our revolving credit facility that expire at the end of 2012, was to expire at the end of the 2012 that is. I am pleased to report that we have renewed the facility for $525 million at a five-year term. This provides us with sufficient liquidity for an extended period of time.

Let’s now review the first quarter performance of each of the business groups. First quarter sales and operating income of the Harsco Metals & Minerals segment were lower than last year due to contracts that were exited in 2011, lower steel production by certain customers and foreign currency translation. This is partially offset by higher income in the roofing granules and abrasives business.

Looking forward, second quarter results for Metals & Minerals are expected to improve from the first quarter but below the second quarter of 2011 due to continuous lower steel production volume. However, operating margins are expected to approximate second quarter of 2011 due to restructuring cost savings.

The $18 million first quarter operating loss excluding $36 million of restructuring charges for Harsco infrastructure approximated the $17.5 million operating loss in the first quarter of 2011. Results in the quarter reflect weaker than expected end-market conditions in North America due to deferred industrial maintenance projects and continued weakness in Europe particularly the UK. These are partially offset by restructuring savings.

First quarter sales were below 2011 due to lower volume in North America and Europe, foreign currency translation and $5 million for the disposition of a UK product line in 2011 as part of the 2010 restructuring program. Despite lower sales in 2012, the operating loss still approximated 2011 as a result of restructuring savings.

The rental equipment utilization rate in the first quarter was 56.3% which is comparable to the adjusted utilization rate first quarter of 2011. And as expected, due to seasonally decreased market activity, lower than the fourth quarter of 2011. Provided a valid year-on-year comparison, utilization rates for 2011 have been adjusted for the equipment rationalization that occurred as part of the restructuring.

Rental rates in the first quarter approximated those in the first quarter of last year as well as the fourth quarter of last – of 2011.

Looking forward, we expect seasonal improvement in the Harsco Infrastructure business in the second quarter as well as additional cost savings from the restructuring program. Therefore, second quarter operating income, excluding restructuring costs, to improve for both the first quarter of 2012 and a $5 million loss in the second quarter of 2011.

Harsco Rail sales and income in the first quarter exceeded the comparable period of last year. These better results reflect higher machine sales and contract services revenue. Certain first quarter machine shipments were originally expected to ship in the second quarter. Therefore, the second quarter results will be lower than originally expected.

Also, please recall that the second quarter of 2011 included an $8 million one-time gain resulting from a change in estimated costs for the China Ministry of Railways contract. As a result of that, plus the movement of certain shipments to the first quarter as well as the third quarter, second quarter operating income will be below 2011. However, bidding and contract signings are both strong which is benefited the full year results.

Harsco Industrial continued to perform well in the first quarter. Sales and operating income were higher than the first quarter of 2011 as well as the fourth quarter of 2011. Operating margins were somewhat lower than last year due to higher material costs. Looking ahead, backlog from Harsco Industrial has been increasing and the near-term outlook is strong. As of now, orders have not been affected by the volatility and natural gas prices.

However, we’re closely monitoring the markets that are ready and capable to immediately reduce costs as necessary.

That completes my comments and I’ll turn the call back to Henry.

Henry Knueppel

Thank you, Steve. Looking into the second quarter, we expect steel production by customers we serve to remain below the comparable period of 2011 and below what we expected as we entered the year. However, we should also see an increasing benefit from restructuring actions that we undertook at the end of 2011 and into the first quarter of this year.

We expect end-market conditions for our Infrastructure business to remain difficult through 2012 just as with Metals & Minerals we expect to see measurable and increasing benefits from our sizable restructuring actions as we enter the second quarter. Second quarter results in our Rail businesses are likely to be down significantly on over – year-over-year basis due principally to the timing of deliveries and that I mentioned earlier and the fact that last year second quarter included the one-time pretax benefit that Steve talked about a few minutes ago. This benefit will not repeat in 2012.

On the other hand, we expect results in our industrial group to be better than last year second quarter, again reflecting their strong backlogs in ongoing continuous improvement initiatives.

To be sure, we have a lot of work in front of us. I’m confident that we will get through the current macro economic issues with the structure that can produce solid returns. As you know, we are in search mode for a new permanent CEO for Harsco. I can tell you that the board is fully aligned and will exercise whatever patience and due diligence is needed to select the right person. Our search will look both inside and outside to find skills, demonstrate track record necessary to lead this organization and put Harsco significant assets back on track creating shareholder value.

We would now be pleased to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of Jim Lucas from Janney Capital Markets. Your line is open.

Jim Lucas – Janney Capital Markets

Hi, good morning gents.

Henry Knueppel

Good morning.

Stephen Schnoor

Good morning, Jim.

Jim Lucas – Janney Capital Markets

A couple of questions here, first I want to follow-up on a comment in the earlier part of your prepared remarks when talking about the underperformance on growth capital allocation and free cash flow that you’re focusing on the disciplines to improve in those areas and I was wondering if you could expand upon the – that comment in terms of what do you see as the opportunities there, the biggest areas of improvement?

Henry Knueppel

Well, yeah the quick hitter, frankly as working capital, I think there is a lot of opportunity for us to improve working capital both in days sales outstanding and days payable outstanding so to speak. We need to be far closer with those two measures than they are today, there is too wide of spread. So I think that’s a quick hitter.

Longer term clearly we need to get our margins up and we need to be able to spend less capital to do that. So capital efficiency becomes a key issue for our future. There are number of things we need to do with ongoing preventive maintenance, et cetera and a equipment to help our equipment last longer, but I think the bigger issue over the next few years is to continue to work on technologies where we bring a better value add to our customers with less capital intensity.

Jim Lucas – Janney Capital Markets

Okay, that’s very helpful. And as you and the board are looking at the search for a new CEO, what are some of the key criteria that you are looking for?

Henry Knueppel

Well, I think that pretty straightforward we want an operating background. I mean this is an industrial operations company and so I think someone who has operating background can come into play in that, in this scenario is extremely helpful. Certainly someone who has had significant global experience, because as you can see we are continuing to make great progress on the globalization of the business and the future really depends on being far more diversified in markets and what we do in those markets. And it would be obviously very helpful if we get someone who has had public company experience to bring into play.

Jim Lucas – Janney Capital Markets

Okay. And with regards to the infrastructure business, obviously there is still a lot of headwinds there. Could you just bring us a little bit more up-to-date in terms of where the restructuring is today, you eluded to the benefits playing out as expected, but in terms of some of the end market has been a little weaker than expected, is the current restructuring enough to offset the continued headwinds?

Henry Knueppel

Yeah, we talked about it a little bit. I mean, I think everyone knows what’s going within Europe for us to get out. I think you have seen some announcements from us recently. So despite that market, there is still opportunity there. We just – we have to make sure that we are getting more than our fair share.

In terms of North America, where we got a little bit headwind then we would like particularly in industrial maintenance, a lot of it has to do with what would this time a year would be, pretty nice amount of work that goes into the maintenance of power generation facilities. And what we are seeing is because of the natural gas prices, a number of the coal generating facilities are frankly not doing the maintenance that we would normally see. And I think they are kind of in the hold mode, trying to figure out whether or not it makes sense to run coal generating facilities with natural gas prices being where they are.

So the good news is that we – it is a very nice area of business for us in power generation in North America, the bad news is at the moment there is a lot volatility there.

Jim Lucas – Janney Capital Markets

Okay, thank you very much.

Henry Knueppel

Thank you.

Operator

And your next question comes from the line of Jeffrey Hammond from KeyBanc Capital. Your line is open.

Jeffrey Hammond – KeyBanc Capital

Hi, good morning guys.

Henry Knueppel

Good morning, Jeff.

Jeffrey Hammond – KeyBanc Capital

Okay, so just on the guidance I mean you gave us some great color on 2Q, but I’m wondering are we pointing away from kind of the full year, how should we think about that?

Henry Knueppel

Well, Jeff you know me for a long time and I don’t believe in yearly guidance. Yeah, I just think – I think right now we need to be concentrating on the – I call it say do if you will and the quarter immediately had, make sure that we are continually hitting what we say we are going to do and just regaining confidence there first.

In terms of the year, if somebody can tell me exactly what’s going to happen in Asia with steel demand and here with energy demand, et cetera, I could probably give you a lot more color, but I’m certainly not the person to make that call at this point. So I think I just try to stick to what I know best and that’s what’s in front of us and what we can do with the business that’s in front of us.

Jeffrey Hammond – KeyBanc Capital

Okay. And then – but it sounds like in the release you mentioned being profitable in the back half and infrastructure and I’m just wondering what level of demand recovery you need to see there for that to happen. And then I think it was in Metals you mentioned kind of improvement form here and I don’t know if that was a year-on-year comment as much as sequentially, but maybe a little more color on what you really need to see from a macro perspective that hit those bogies?

Henry Knueppel

Yeah, I think it’s fair. I mean I think in the infrastructure we would expect to make the improvement if we have a normal seasonal kind of trends. We are not expecting some great new windfall and hopefully we don’t see that the situation we’re seeing with this North American industrial maintenance situation continue on for much longer. But I think if we see the normal kinds of trends in our business then we feel pretty good about where we’re headed.

In terms of Metals & Minerals, we’re hearing more positive tone if you will for our customers in the second half. But I mean I always have to give the caveat, I mean we had a more – a little bit more positive tone than what we seen in the first half. So I think a lot of that just depends on how the global recovery continues particularly as you know China and India have a lot of influence on that and I think as we’ve all learned recently, we don’t always know exactly what’s going on there. So hopefully that’s warming up and we’ll see that demand improve as we go through the year.

Jeffrey Hammond – KeyBanc Capital

Okay. Can you give us a sense, maybe there’s a [indiscernible], a sense of how this $36 million of savings falls out second half, first half or kind of the cadence in terms of how it builds for the year?

Stephen Schnoor

Yes Jeff, its Steve. We – the savings will be waded towards second half of the year. We had some savings in quarter one as we said, little bit more in quarter two than the bulk of it starts in quarter three, quarter four and we’re on track to achieve the full $36 million if not a little bit more.

Jeffrey Hammond – KeyBanc Capital

Is there a way to frame first half versus second half, is it 80/20, 60/40?

Stephen Schnoor

No – yeah, I could tell you what we did in the first quarter for example, we did $6 million of savings out of the $36 million we expected for the year. It will be little bit more in the second quarter than as the third and fourth quarter is the bulk of it.

Jeffrey Hammond – KeyBanc Capital

Okay, that’s helpful. And then just can you give us an update, Henry you talked a lot about capital efficiency. Can you give us an update of how are we thinking about free cash flow for the year? How are we thinking the same or differently around total CapEx and within that maintenance versus growth CapEx for the year?

Henry Knueppel

I give you some color Jeff, but I just tell you that it’s a work in progress I mean we are working on this pretty heavily internally right now to look at alternatives and what we can do. This year is not going to be an exciting free cash flow year one because of the spending we’re doing on restructuring. I mean as much as that I’d like to say just ignore restructuring costs their real costs. So that is what we’ve already announced.

In terms of the CapEx for ongoing operations, there is a fair amount of carry over from last year that I think will cloud what the numbers look like this year. So I think I mean, we’ll be positive but it’s not going to be an exciting number. For the future, I think we all recognize here is that free cash flow as a percentage of net income needs to be north of 80% and ideally north of 100%. And we’re working on how do we get there. I’m pretty comfortable that we’ll find those paths, if you will, but we have some work to do to make sure that we’ve got to firmly in place and we have to deal with the carry over from last year. Now some of the carry over…

Jeffrey Hammond – KeyBanc Capital

Okay.

Henry Knueppel

Just, some of those carry over is good news not bad news is just that it is what it is, I mean the TISCO contract has a lot of carry over costs, some of the other new lines of business that we’ve added with that carry over costs and unfortunately we get the cost side of that heading us this year and its late in the year before we start to see a lot benefit. So it’s not necessarily bad news, but for a snapshot if you will of this year, I don’t – our cash flow will be positive but not very good.

Jeffrey Hammond – KeyBanc Capital

Okay. Thanks guys.

Henry Knueppel

Thank you.

Operator

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

Glenn Wortman – Sidoti & Company

Good morning everyone.

Henry Knueppel

Good morning.

Stephen Schnoor

Good morning Glenn.

Glenn Wortman – Sidoti & Company

Just separating out any typical seasonal pickup in infrastructure and then Metals & Minerals, can you kind of maybe just qualify how the business is going from 1Q to 2Q or are you seeing further degradation in your markets. Could you just give us a little color there?

Henry Knueppel

Now, actually it’s improving. It’s improving with the normal kind of seasonal mix. What we’re not seeing is improvement that would be over what you would expect seasonally. In the first quarter, we were probably in the area of 4% or 5% low what we expected to see in Metals & Minerals and I think that’s going to continue through the second quarter. As I mentioned earlier, anecdotally, if you will, through comments from our customers and so on, we’re hearing better things about the second half. But we’ll be up over the first quarter and the same thing is pretty much true and that pretty much it is true in infrastructure as well.

Glenn Wortman – Sidoti & Company

Okay. And then just focusing on Metals & Minerals the margins there. It sounds like you expect 2Q to be comparable to 2Q a year ago. Can you just maybe talk about a margin goal for that business for the full year and then perhaps your longer term margin goals?

Henry Knueppel

I had a little trouble understanding the last question you asked but just – I’ll start and then you can back at me if you will.

Glenn Wortman – Sidoti & Company

Sure.

Henry Knueppel

Yeah, when we look at the second quarter, we will be down on a year-over-year basis in terms of the base business. We’ll be better than the first quarter but down on a year-over-year basis from last year. And despite that, I think our earnings are going to be pretty even with last year. So that’s kind of testament, if you will, to the restructuring things that we’ve done in the continuous improvement efforts that are going on within the business. And I think when you’re operating at the low end of the cycle and your business goes down further and you’re able to hold profitability that’s a pretty good sign for the future. I apologize but I didn’t catch the second part of your question.

Glenn Wortman – Sidoti & Company

No, no problem. Actually I just kind of let in to my second question, so in a more normalized operating environment, where do you think does margins [inaudible]?

Henry Knueppel

Yeah, I mean, the magic question of course is, what’s the more normalized op for all of us. But I think if certainly not back to the 2007-2008 level but if we are back in – I’m going to say back in the 2005 and 2006 kind of level, we certainly think that we can return to the kind of margins we had then perhaps a little better.

Glenn Wortman – Sidoti & Company

Okay. Thank you.

Henry Knueppel

Thank you.

Operator

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

Rob Norfleet – BB&T Capital Markets

Good morning everybody.

Henry Knueppel

Hi, Rob.

Stephen Schnoor

Hi, Rob.

Rob Norfleet – BB&T Capital Markets

Just a quick question, Henry, that to you I wanted to ask, I understand you’re getting away from annual guidance, I think that’s actually a smart move focusing on the quarters clearly at this point. But you will obviously spend a lot of time kind of putting together what ideas kind of your framework for, how Harsco can get back to, let’s say, $3 to $4 earnings number by 2015 which included restructuring, savings and other initiatives. Is that framework still in place? Is there anything that structurally changed since then for us not continue to look at that type of earnings power for Harsco over the next few years?

Henry Knueppel

Well first of all, I want to say that the first compliment I’ve had since I’ve been in this job, so appreciate. But I mean the framework that was laid out, I think pretty straight forward in terms of what component parts are. There are some parts of that that I think are little more challenged than other parts. So I’m not going to sit here and try to give you three or four year out guidance. I will say it is clear that we can – we have a lot of runway for improvement and at the cost out things that we talked about in that guidance are very real.

Rob Norfleet – BB&T Capital Markets

Okay that’s helpful, thank you. And then just a quick question on the capital allocation, I think you talked about that a little initially, but I guess could Steve maybe update us on what we should expect in terms of asset sales for the remainder of the year and even though I know you won’t take it a specific number, but maybe a ballpark number? And obviously you do have an authorization to buyback stock, where did that – where did buybacks kind of rate on your – in terms of importance from a capital allocation standpoint in 2012?

Henry Knueppel

Well, I’ll answer that one and let Steve answer the first one. But I don’t foresee at this point seriously considering a stock buyback. I mean I think right now given that the spending that we’re doing on restructuring and spending that we’re doing on follow through CapEx for growth projects, et cetera from previously announced opportunities, we need to get that accomplished and make sure that we are on the right path before we start contemplating other uses of cash.

Stephen Schnoor

As far as the asset sales, we’re a head of where we expected to be in the first quarter we had $22 million in the first quarter, for the year we originally expected $25 million. So I would estimate conservatively, probably another $10 million or so or $10 million or more for the rest of the year.

Rob Norfleet – BB&T Capital Markets

Okay, that’s great. And the last question I had, Henry you mentioned one thing that I – when I was listening to your comments about looking at ways to reduce the capital intensity to business and obviously predominantly I think you are talking about in the Metals & Minerals business. I was just wondering the way that you structured contracts in that business in the large upfront payment that’s made in that business. I mean what are some initiatives you are looking at to potentially reduce the amount of capital that we need to front to order equipment and get it in to the customer, can maybe make it a more capital efficient model?

Henry Knueppel

Yeah. I mean I think there are several things involved there. I mean one is making sure that as we go down a nice path that we’re doing the things that we can do to make capital last longer and I think that there are opportunities there. But probably more important as I mentioned before is that as we move that business to a higher value add where we’re doing more resource recovery and less just logistics if you will on a mill site, the capital intensity of that business is actually less than the straight logistics business and the value add to the customer is frankly higher. So it’s – it is the model that we think has got a lot of runway for growth for us and where we frankly delight customers more. So it’s not that we’re going to get away from logistics business but I think mix needs to change and we will – and we just changing it will continue to change.

Rob Norfleet – BB&T Capital Markets

Great. That was helpful. Thank you for your comments.

Henry Knueppel

Thank you.

Operator

[Operator Instructions] And your next question comes from the line of Scott Graham from Jefferies. Your line is open.

Scott Graham – Jefferies

Hi, good morning Henry. So in your press release that announced your arrival here, you seem to endorse a three to four hours. And now it seems like you’re not. I just want to understand what you’re saying?

Henry Knueppel

Well okay I apologize if that sounds like I’m not. What I would just say to you is that there had challenges to everything we do and there were pieces of that that came from various initiatives that I have not personally fully vetted I can tell you that. But I think that there are going to be pieces that to come out stronger than what we thought and pieces of it that don’t. I’m certainly not saying we can’t get there. I’m very hesitant when you start talking about something that’s three and four years out when I think it’s difficult to understand what the economy is going to do six months from now to start endorsing much of anything no matter whether it’s in this business or any other part of my life.

Scott Graham – Jefferies

So even though that’s kind of what the wording said in the press release maybe second thought that’s not your style. Is it more stylistic thing than anything?

Henry Knueppel

Yes.

Scott Graham – Jefferies

Okay. The other question I had is maybe a little bit more holistic and it was a previous question asked about capital allocation to businesses, but let me maybe ask that question in a just a different way. You are largely a service company and the significant amount of capital that has been allocated both to working and fixed has really hurt the free cash flow over the last couple of years.

And I know that’s what you’re talking about with capital allocation, free cash flow but doesn’t that also suggest that your two largest businesses are just spending a lot of money on resources that are kind of low margin which to me it’s kind of tells me that those businesses office footprints need to be shrunk and we need to increase the sales per employee from them. And I think the only way to do that is to focus on your best markets and let the other ones go. Some of that is already being enacted in the restructuring, but I guess I am a little bit surprised that you haven’t expanded the restructurings in each business if capital allocation is a priority?

Henry Knueppel

Well, I mean it is what – really what the restructuring is all about. We’re accessing a number of areas in infrastructure that are – it is exactly what you just got through talking about and it will provide a much better operating picture for us.

In terms of Metals & Minerals, I mean we work off of a lot of long-term contracts and we have walked away from some contracts that just no longer make sense for our business and we’ve been converting to more of the higher value add resource recovery kinds of agreements with customers whereas clear as the value proposition works for both of us. So we are making those changes, but you – but in that business in particular you can’t just walk away. We do have long-term commitments and we do live up to our commitments.

Scott Graham – Jefferies

Fair enough. Let me just ask you this final question on the Metals & Minerals business. You indicated that your customer outlook for second half is your customer shall maybe a little bit more positive tone. We’ve got the largest contract in the history of a company about to be executed this year and I’m just wondering if that combined with the customer comments that maybe this business should be – should have a pretty good second half. How are you planning for that on the capital side?

Henry Knueppel

Yeah I assume you are talking about the fiscal contract and I think that that actually comes into play towards the very end of the year. So we won’t see a lot of benefit. Unfortunately, we get to – we see the specs inside, but we won’t see the benefit until the end of the year. But I think going forward it’s certainly going to be a very positive development for the company.

In terms of the steel demand, there are a lot of questions still to be answered globally in this economy. I mean we see them everyday and read about them everyday and that’s going to be the bigger picture, that’s the macro of what’s going to drive it. We are – we believe we’re seeing a reduction in inventory at our customers, we hear them talking about better Metal utilization rates in the second half and so we’re cautiously as well optimistic about seeing improvement in second half.

Scott Graham – Jefferies

Okay. I thank you for those answers. The first question was more along the lines of the capital allocation in front of TISCO. You said that they are spending in front of it, that’s exactly what I’m talking about. So I was wondering how you were mapping that spending out. Last year we had a number of contracts that helped sales at the operating margin line, very little if not and sometimes even dilutive benefit, cash flow even worse than that. How do we get away from that dynamic with this TISCO contract by allocating capital better? How do we do that?

Henry Knueppel

I don’t think that there is any magic that’s going to automatically that we know of right now that’s going to change that for the TISCO contract. I mean I think this one is pretty straight forward, it’s going to be good business, good returns et cetera as it gets rolling but it’s kind of tantamount investing in new product development with where you do have investment upfront and – but the new product has to work. This one is just assure new product if you will and that we already know what the income stream is and we know what the cost structure is going to be. So it’s kind of, I guess in some respects to be a high grade new product development R&D expenditure thought process.

Scott Graham – Jefferies

Very good. Thanks a lot for your time.

Henry Knueppel

But there isn’t anything specifically that we can do to change that structure at this point.

Scott Graham – Jefferies

All right thank you.

Henry Knueppel

Thank you. Okay I think that’s all the questions that we show. I again want to thank everyone for joining in the call and for your interest in Harsco. The takeaways from this call hopefully are that the first quarter was on the high end of our expectations despite some continued headwinds. The second quarter sequentially will show a significant improvement but the headwind still persists. Restructuring is ahead of schedule and we have work to do but we have great people to do it in businesses that have and we’ll again produce solid returns.

So we thank you. Have a great day.

Operator

And this concludes today’s conference call. You may now disconnect.

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