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Executives

Stephen Schnoor - SVP, CFO and Treasurer

Jim Jacobson - Director of Investor Relations

Eugene Truett - VP, IR

Analysts

Scott Graham Jefferies & Company

Harsco Corporation (HSC) Jefferies 2012 Global Industrial and A&D Conference August 8, 2012 11:30 AM ET

Scott Graham Jefferies & Company

Good morning. Welcome to Jefferies Global Industrial and Aerospace & Defense Conference. I am Scott Graham, diversified industrials analyst with Jefferies. Our next presentation is from Harsco. Before we get there, just to tell you that when we run down to zero on that clock, if Steve Schnoor still has, we still have little time left after his presentation, we will take some Q&A but after that, we will go to the breakout room which is a floor below us in the Cormack Hall room.

With that, it’s my pleasure to introduce Steve Schnoor, CFO of the company. Thanks.

Stephen Schnoor

Thank you, Scott. Appreciate it. Welcome to the Harsco Corporation presentation. I am glad you can make it. I have with me today Jim Jacobson who has about 10 days with the company at this point in time. So he’s learned a lot during those 10 days. And also have with me our VP of Investor Relations and Credit Gene Truett. I’d like to publicly acknowledge Gene, I'm not sure how many of you aware of it but he is retiring as of September 7, this year, that’s coming up.

Gene has 45 years in the business and 18 years of loyal and exemplary service with Harsco Corporation. So I just like to publicly thank Gene for his service. He has been a great help to us. Thank you, Gene very much.

On this page you will see our safe harbor statement. I just want to make sure some special important information regarding forward looking statements and estimates that we will be presenting today. Little bit of our overview of Harsco Corporation. We are a $3.3 billion industrial services business, serving over 50 countries globally. We operate through four business groups, four business segments, the largest of which is the metals and minerals segment.

The metals and minerals segment is the largest outsourced supplier service provider to the global metals industries. And we do that in over 30 countries. We’d like to say our services are focused on reducing the environmental impact of the waste streams produced by the metals industries. We do that in several ways. Waste streams such as slag produced by the steel making process contain metallics which we recover, so it’s a resource recovery. The remaining slag components we convert into beneficial use products such as fertilizer, aggregates for road building, as well as concrete.

We also – we are in the environmental solutions and we also provide other services such as logistics and material handling such as scrap management as well. We operate in about 160 mill sites throughout the globe. There are a total of about 600 mill sites in the globe. About 400 of those 600 are considered our target market. Within the 160 mill sites that we operate we are about 40% penetration with our services. So as you can see, between the number of mill sites in our targeted market, as well as service penetration within our current mill sites, we have substantial market opportunity for growth.

This business, metals and minerals business also includes the minerals side of the business which in addition to resource recovery from stainless steel mills, also produces other beneficial products from waste streams such as roofing granules and aggregates, not aggregates, but abrasives for use in the infrastructure refurbishment industry.

Second largest group the Harsco infrastructure group, this service is the global civil infrastructure industry as well as the industrial maintenance industry, and non-residential construction. Once again global, throughout the globe, we provide highly engineered hybrid forming. We provide scaffolding, shoring, which is a form of concrete forming as well but also services such as erection and dismantling services, project management and most importantly, upfront engineering for the major complex civil infrastructure projects.

The third group is our rail group. Rail group, we provide comprehensive line of rail equipment, rail track and maintenance equipment throughout the globe. And we also provide repair parts for that equipment as well as services throughout the globe.

Industrial group is energy focused group providing air-cooled heat exchangers to the natural gas industry as an example. Grating, industrial grating provided for such applications as offshore drilling platforms, and lastly, we provide industrial boilers and heaters to the non-residential construction industry and to commercial and educational institutions.

All these products as you can see are related to the global infrastructure. So you can see as we maintain the global infrastructure and help grow the global infrastructure, so as population grows for example, our services and products will be in greater demand.

Little bit more about the metals and minerals business, as most of you probably know right now the end market conditions are somewhat challenging. But we are doing a lot to improve this business. Some evidence of the improvements can be seen in the operating margins which we achieved in second quarter which were 8.7%, higher than they were last year, and the highest actually since the third quarter of 2010. So we are getting some leverage from lot of the actions we have taken over the last two or three years. But some of those ongoing strategies that helped us with the improved margins include exiting lower return contracts whereby we are not making what we consider as satisfactory returns, and focusing more on environmental solution type projects which should give us the higher returns.

We also have cost reductions. We had a restructuring, we’re getting the benefits of that restructuring this year. Sustainable cost reductions are being achieved as a result of that. We’re going to a more global asset management system as opposed to individual plan management system, give us the benefit of efficiency of capital as well as reduced maintenance costs overall by using best practices in our maintenance programs.

During 2011 and into 2012 we exited several underperforming contracts as I mentioned earlier. That reduced our revenue but that revenues being replaced by higher return projects which are meeting our more higher standards when it comes to hurdle rates, higher demand when it comes to hurdles rate if they are environmental solution type projects which have a higher value proposition. Those projects take a little time to get off the ground. We have announced several of them in China and India for example. But they are replacing the revenue from these lower performing contracts that we exited. They are also helping reduce capital expenditures. As I said the environmental solution projects tend to require longer term lower capital expenditures.

We’ve had significant contracts signings over the last year or so to the point where our backlog – the way we look at backlog is the future value of our revenues for contracts that we currently have signed, those contracts may last anywhere from five to seven years. But as far as the backlog goes increase from both the end of this past year but also from June 30 of last year as well. So the backlog is increasing. We are getting contracts – new contracts with higher replacing contracts that we exited upon renewal which had lower returns.

As far as, I talked about the restructuring that we took in 2011 to reduce the cost base of this business. $25 million of the costs, we took about half of the costs in 2011, in the fourth quarter the other half will be taken this year because of the accounting rules. Benefits in 2012 are expected to be about $10 million from this program mostly due to headcount reduction, we are on schedule with that, those benefits, achieving those benefits. On an annualized basis once you hit 2013 $25 million will be the benefits, that’s an incremental $50 million from 2012.

Little bit more about the Harsco infrastructure business, this business – although the markets have swapped on a historical basis over the last two and a half years, we have been in the trough, we built a lot – a solid foundation to this business for the future, for future profitability. We have a global unified vision now with the home business. We also have a much more – greater focus globally on our strategies that we haven’t done before.

Some of our strategies include, for example, now that the restructuring we’re talking about a little bit more, is almost behind us, we are executing on that, we are getting the savings we required. Now what happens – now because we spend so much time restructuring and the focus on our restructuring lot of management time I have spent on that. Now focus on a global sales and marketing, really the top line so to speak, we need to focus on improving that top line and especially in markets which have higher growth rates, such as the Middle East and North America. This is a focus that has started last year, it continues on.

Differentiating ourselves, our value proposition in this business is really the engineering resources that we have, especially the resources that we have out of Germany. So we could up focus those engineering resources on the upfront engineering required to complex forming projects throughout the globe. These are projects, (indiscernible) more complex, they bring us a higher rental rate, and the rental periods last longer. So that, that’s going to be a focus of ours and along with that, that goes above the business diversification more towards civil infrastructure work which does required that more complex engineering and a global reach which we have more or so many of the companies.

As far as other diversification, we also beyond civil infrastructure projects to more complex products. We are diversifying the last cyclical industrial maintenance aspect of the business and getting a more towards away from the promotion instructions to more commoditize.

Our continue with our cost reduction as said in the wit the infrastructure restructuring program, was cost reduction all being achievement but at the same we were focusing on customer services. That being a with a global inventory management system now which we did not have previously, as well as the global asset manager. So we can manage our inventory globally as well as our logistics but at the same time service to customer on a local basis. So we’re not losing our local touch even though we are reducing the number of physical locations. The software resources we have and the personnel we have provide us with better information than we ever had before. And we utilize that un-information that will help us maintain the lower level of capital expenditures that we have historically.

We are already seeing – a matter of fact, the last thing which this business is full section on our auto projects flawless, by that I mean one time, and the acceptance delivery of our mix drawings, upfront engineering products for the complex projects, that will learn through social projects, as well as the online delivery of our equipment, the performance of our erection and dismantling and installation services, to project management doing everything to meet or exceed customer expectations. These things may seem like obvious – then they are obvious but the restructuring in the markets downturn we have faced with the execution of the restructuring actions over the last couple of years, that’s been the main focus of the business. Now we are focusing on the other key strategies which will take us forward and build while the operating leverage that we have already established with a re dues cost basis.

In the restructuring in 2010, and we did a restructuring of down 2010, the markets continue to be soft as a result of improving our markets in 2011 and 2012. We determine that it was not necessarily to do with another restructuring as well. That restructuring resulted in a – in exit of several countries in Europe, small market countries about the seven all together, one of which is in the South Africa, and also resulted in a product rationalization, we will take more about when I get to the next slide.

The cost of volunteer $173 million total but 100 million of that was taken last year 2011, the rest is being taken this year, because of the accounting rules, and the savings from the two restructuring program should be 28 – are expected to be, are being achieved $26 million this year 2011 and the $40 million in 2013 on an annualized or outlook basis. So that’s an addition $15 million or so.

Now once again why do we take another one in 2011, the restructuring charge, I think the one in 2010. Well, in 2010 we focused more on actually exiting markets and people. The leadership structure was changed but we didn’t really focus on product realization and there were certain markets which are smalls markets as I mentioned earlier, we didn’t exit. So the production rationalization is the key part of this restructuring. By that what I mean is over the years we had built up inventory of our rental equipment pre- acquisitions, different product lines which had – most of had the same purpose but there were different product lines but interchangeable caused a lot of extra costs from the standpoint of storage cost, maintenance costs – basically with additional labor, and have more physical locations and capital expenditures to keep supporting those product lines which are not interchangeable.

So we decided, hey, we need core products, with the core products which are the best products we have in our system which can be used globally, that’s what we are going to focus on. So we rationalized the non-core products by scrapping them and now we are focussing on our core products we are using throughout the globe.

To manage those core products, as I mentioned earlier, we have now established a global inventory management system and have a global asset manager to ensure to use efficiently and effectively and that we minimize our capital expenditures. We are achieving that.

In summary of the charts, I don’t need to go a lot into this already, I already mentioned a lot of this already. But there it is, once again in 2012, $26 million benefit and $40 million in 2013. This will give us more operating leverage and we hope provide the foundation for improved profits.

Harsco rail, this business is running, doing very, very well. As the China ministry of railways order and shipments continuing in 2012 and into 2013, they are being replaced by other orders from throughout the globe and as a result of our marketing efforts and physical presence throughout the globe we had not had previously. Previously we were strictly, historically U.S. company, we still serve the five major rail roads in the U.S. It’s a very good market for their affair as well as municipal systems in the U.S. as well.

But we have expanded our presence into a number of locations throughout the globe, physical presence where we have onsite marketing, sales and engineering resources beyond the U.S. We’re already in Europe, we are in Brazil, Middle East, China, Australia and India as well. This provides us the onsite ability to deal directly with these local rail roads, national rail roads in those countries and they provide our equipment, the order activity, the bidding activity is excellent and we are winning orders as well.

As far as China goes, as I said the original grinder order we had is a large contract is being delivered in 2012 and into 2013. However in China we still are doing very well. We’ve had a lot of success in China beyond the ministry of railways contract. We have had several orders we’ve announced with local metro lines in China. We still have a nice and with all the grinders that we have sold over the years, dozens of grinders actually in China, there is a good backlog of repair parts that will be required over the long term to replace parts that they wear on those grinders. And China is a place we’re going to be for a long time. This is something that with the established presence that we have there and our success, this is not something that’s going to end once the railway MOR contract has been delivered.

Also Harsco industrials are doing well, significant growth year over year, we have a piece of margins there in mid-teens or so, the high teens, we focus on the energy industry here as I said. Also we have established joint venture in Australia which has given us a more global presence. One of the big reasons for the higher margin in this business is the lean continuous improvement activities we have undertaken in engineering and manufacturing which has been very successful.

Operating sensitivities, this is an important thing to point out. Our end markets have been at the low end of historical range for some time. We reduced our cost base significantly as I mentioned due to restructuring. As far as sensitivities go going forward, with the low end – low level of production in steel mills and low level of utilization – relatively low level in infrastructure, opportunities for leverage are substantial. Metals and minerals which is driven by steel production for every $1 million of liquid steel tons produced by our customers that results in additional operating income of $1 million.

In infrastructure, an example rental rates, and the rental rates which are based basically – if you look at how much we’re getting in revenue for the replacement volume of equipment on jobs, say it’s 5%, that 5% goes to 5.1%, that’s 10 basis points, that’s worth $8 million on annualized basis to our operating income. Significant leverage.

So let’s take away message, I can’t once again underestimate – under-emphasize that operating leverage that we have established through a lot of the initiatives especially the cost reductions in our rental markets. So significant opportunities there as I mentioned earlier. I think the cost reductions and the strategies that we have implemented give us the good opportunity for consistent double-digit earnings growth, and once the markets start to improve, we had the lowest cost structure as I mentioned, and that provides the solid foundation for improved operating margin and return on capital which is extremely important and a major focus of ours.

So that concludes the presentation. I will take anyone’s questions at this point in time.

Question-and-Answer Session

Unidentified Analyst

You talked about the steel industry, what about the non-ferrous industries in particular, let’s say in Chile or some of the other geographies where copper and the likes are pretty big?

Stephen Schnoor

I believe the question is that talk about the other metals industries outside of steel in place of other countries such as South America. Yes, we have – we are not just steel service provider. We also basically service all metals, stainless steel, copper places like that and we have some very successful contracts such as in Peru and in Chile for non-steel type of producers.

Scott Graham Jefferies & Company

Steve, one question from me before we depart for the breakout session. I was just wondering on the metals and minerals business, that’s a business that’s kind of been stuck in the rut margin wise for a little bit here. And I was wondering is there – the things that you are doing with the restructuring should give that margin a little bit of liberty. But what type of level of steel production because that is your primary market for that business, what type of level, is there any number you can throw out, that really starts to maybe move the needle on the margin side when you get that operating leverage?

Stephen Schnoor

I will tell you, historically, right now I think the utilization, that’s actually production that drives away -- utilization is definitely related to that but capacity utilization now I think for most of our customers in the bid 70s, when they start to get to 80% and above, that would drive – that’s when you see – start to see the improvement. I think historically the mills likely to see between 80% and 90% for maximum returns to the mills, above 90%, I know Gene likes to say that’s about 90%. So we start to see the benefits – with the operating leverage we’ve built, in the low 80s and above.

Scott Graham Jefferies & Company

And sort of similar question for the infrastructure business which has been pretty consistent where you are generating quarterly losses, the restructuring is starting to really eat into those losses and get you pretty close to breakeven in the first quarter. But are we looking at a business that with our end market improvement is kind of a modest operating loss. I know you kind of haven’t seen these conditions in a while but if I recall from the history, the infrastructure even in difficult times did not operate a loss for as long as it has been recently. I am just wondering what has maybe changed in that business and perhaps what is it going to take, is it just akin to commercial construction project – what do you see as kind of getting yourself out of the loss position in that business beyond the restructuring?

Stephen Schnoor

Well, the restructuring is the key thing but I believe with the operating leverage we have, we still are getting some end market improvement. For example, I mentioned rental rates start to open, they have been stable for the last year and a half. That’s a huge benefit to us and they start to go up when the utilization improves. So you get some of the end market improvement, decent amount of end market improvement and it starts to hit the bottom line pretty fast. So the key thing here I think is the end markets.

Scott Graham Jefferies & Company

Would you believe that we are probably not going to get that out of your for a little while that it’s just really going to come out of the U.S. even though that’s not the biggest portion of the business?

Eugene Truett

If I may, keep in mind where we are in Europe, our largest country in Europe is Holland, and we’re actually doing pretty well because that’s in the industrial maintenance area, that’s very stable, it’s kind of an annuity stream. Then we are in the UK, which in Middle East is typical, but we've taken significant cost reduction actions there, which should show some improvement. And in Germany which is doing okay and France which is hold the line. So you’ve got to get down to the fifth country, you’ve got to come down to revenue size and then you have Italy. So we’re not in the poor countries, the UK is the most problematic, the others are holding their own. So I think that we just get a little lift in the UK, have little better in the other, we will do pretty well, Scott. Steve, if you want to add anything to that.

Stephen Schnoor

Fine, Gene, that’s it. Thanks.

Scott Graham Jefferies & Company

Thanks Steve, thanks Gene. Breakout session now. Thanks.

Eugene Truett

And if anyone has any questions, please feel free to give us a call.

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