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Executives

Salvatore Fazzolari - Chairman and Chief Executive Officer

Eugene Truett - Vice President of Investor Relations

Stephen Schnoor - Chief Financial Officer

Analysts

Curt Woodworth - JP Morgan

Jeff Hammond - Keybanc Capital Markets

Timothy Hayes - Davenport & Company

Bill Fisher - Raymond James

Yvonne Varano - Jefferies and Company

Harsco Corporation (HSC) Q2 2008 Earnings Call July 29, 2008 2:00 PM ET

Operator

Good afternoon. My name is [Doretha] and I’ll be your conference facilitator. At this time, I would like to welcome everyone to the Harsco Corporation second quarter release conference call. All lines have been placed on mute to avoid any background noise. After the speakers remarks there will be a question-and-answer period. (Operator Instructions). Also this teleconference presentation and accompanying webcast made on behalf of Harsco Corporation are subject to copyright by Harsco Corporation and all rights are reserved.

Harsco Corporation will be recording this teleconference. No other recordings or redistributions of this teleconference by any other party are permitted without the express written consent of Harsco Corporation. Your participation indicates your agreement.

I would now like to introduce Mr. Salvatore Fazzolari, Chairman and CEO of Harsco Corporation. Mr. Fazzolari, you may begin your conference.

Salvatore Fazzolari - Chairman and Chief Executive Officer

Thank you very much. Good afternoon ladies and gentlemen and welcome to Harsco’s second quarter 2008 conference call.

I have here with me today, Eugene Truett, our Vice President of Investor Relations and Stephen Schnoor, our Chief Financial Officer.

Before we begin this afternoon, I would ask Eugene to read the Safe Harbor statement, please.

Eugene Truett - Vice President of Investor Relations

Thank you, Sal. Good afternoon everyone. As we do at the beginning of all of our calls we just want to let you know that we will be having forward-looking statements in our discussions with you today. These statements relate to the future of our business, our operations, our results, economic expectations and other aspects relating to and affecting our business. 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 have listed in our SEC statements reasons and risk factors that affect our business and these could be the reasons for any difference that could occur. We invite you to review the SEC filings at your convenience.

Also, I would like to remind you that we replays of this call and related information are available on our website. Please take your time to access this information at your convenience at our website. Sal.

Salvatore Fazzolari - Chairman and Chief Executive Officer

Thank you Gene.

There are quite a few comments I would like to make. We believe we have a lot of good news and a lot of positive things to say and so just bear with me here as we go through some of these key points that I would like to get across.

Obviously, we have another record quarter and we continue on. Second quarter sales grew by 16% and diluted earnings per share up 18%. In fact, all three business groups posted double digit sales growth for the quarter. To me that was a very, very good quarter. For the first six months even more good news, sales were up 17%, diluted earnings per share 20%. Again, very, very strong results and we are very pleased of course with that. Particularly, given all the recent economic turbulence, we continue to be pleased with our performance and we believe we have very strong momentum as we go into the second half of the year. Despite the turbulent macroeconomic environment, we are on track to deliver for the fifth consecutive year record results.

Revenues for 2008 should be in excess of $4 billion and earnings again should grow at double digit rate. For the first six months, overall operating income of the company was $245 million. Now, why am I telling you that? Because of the balance of the company, 39% of that operating income was generated by Access Services, Minerals & Rail accounted for 34%, Mills Services for the remaining 27% that is balance that was intentionally done that way over the years to build three strong global scalable platforms.

We continue to make very good progress on the geographic expansion strategies we have been telling you about particularly over the last six months. For example, in our Access Service business we are in four new countries, during the first half. India, which we are quite pleased of course, Russia, Romania, and Panama. In addition, Harsco’s overall sales for the first half of the year reflect our increasing geographic balance. 21% of our revenues now for the first six months of the year come from emerging markets. Again, that’s an intentional strategy of the company that we have been talking to you about quite heavily. Also, 33% for North America, and the remaining 46% for Western Europe. Again, I would like to remind you that even though we are 21% now and have made really good progress in the last 12 months our goal is for the next couple of years we should get that up to 30%, in longer term our goal is to have 40% of our revenues coming from the emerging markets.

One of the highlights of our second quarter and first half performance is that Minerals and Rail Group now is clearly an eco-partner and on its capability to our other two groups. Minerals and Rail will continue to be a key focus of the company particularly as we shift more of our growth investments into this group in 2009 and beyond.

As we stated in the press release, this group expects, its solid results to continue in the second half of 2008 about more inline with those of the same period of last year. Let me take a moment here to explain why. There are principally four reasons. First and foremost higher LIFO cost of sales of approximately $4.3 million in the second half due to rising commodity prices compared with last year.

Second all businesses are essentially run in a near maximum capacity we are considering fact -- adding additional capacity to our business, for example, Air-X-Changers is currently looking at adding capacity in the Middle East and we are very encouraged by that.

Third, within the Minerals business itself, a number of high value alloys have come down recently as some other commodity prices have as well. And as I said in the last conference call the bulk of the Chinese rail orders will be delivered in 2009 and 2010. I just wanted to reemphasize that point that we only except three machines to be shipped at second half and that’s consistent with what we have been saying for a long, long time. We expect overall sales of the Minerals and Rail Group for the second half that increase by about 10% in the third quarter and a bit more than that in the fourth quarter. However, because of the increase LIFO cost income will be essentially flat with the last year’s second half and margins will of course be down because of the higher revenues.

None of this of course diminishes our conference in the future of this group. Our Access Service business also performed, we believe very well in the quarter and posted another record performance. This is despite some expected slow down in certain countries particularly the UK, Ireland and Denmark. Most of the slow down particularly in the UK is mainly isolated to multi-family type construction. Our Industrial Services and an Infrastructure Business and Access in the UK is doing well.

With its broad based geographic and services balance and the continuing long term infrastructure growth in several economies, which were currently expanding in, we expect the Access Service business to continue to perform well for the remainder of the year and in the future as well.

Our optimism on the Access Service business is underpinned by our performance for the first six months. For example revenues from emerging markets for Access Services grew from 15% to 19%.

We are executing our strategy. This gives us confidence in the future performance of the group as well. We not only have geographic balance but we also continue to have market balance between industrial, infrastructure and commercial non-residential construction.

I can’t emphasize that enough. We’re also encouraged with the improvement from the Mill Services Group. As expected second quarter margins improved by 130 basis points over the first quarter performance as we promised. We made steady progress during the quarter in addressing the significant escalation in fuel cost and the renegotiation of certain underperforming contracts. However, more need to be done and we are focused on improving the business quarter-by-quarter.

I would like to comment particularly on the contract renegotiation and fuel issue just to give you little more color on this. With respect to the renegotiation of the handful underperforming contracts, I’m pleased to report that we have made measurable progress during the second quarter.

Our current focus of fact is on nine contracts, principally in the US. All of these contracts currently produce negative returns in 2008. Of the nine we expect to exit four, additional compensation is being sought from two and the remaining three are currently in contract renegotiation with the expectation that these will be resolved favorably.

We have identified approximately an addition of ten sites across the globe where our returns although, in total are positive they are below our EVA expectations and requirements. We are targeting these sites for intense efforts to reduce cost, increase revenues and bring out returns to more acceptable levels. We believe over the next several quarters we will be successful in these efforts and continue to restore the overall no services margins to more historical levels.

Regarding the significantly escalating fuel costs, we are addressing this on several fronts. First, many of our contracts allow us to recoup a portion of these higher prices but as I mentioned previously it does take between 6 and 12 months to do so. We have also approached our customers about more immediate relief using a fuel surcharge. A number of customers have in fact responded positively to our approach and we are in active discussions on this matter. To-date we estimate that we have recovered approximately 25% of the incremental fuel costs that we have incurred. We believe that’s a very good start.

We are also approaching all new contracts and renewals with the strategy to having the customer either provide the fuel or at least have more effective and immediate escalation causes that protect us from this obviously highly inflationary event.

I would like to emphasize that we are resolute in our commitment to improving the results of the Mill Service business. The second quarter performance we believe clearly demonstrates our resolve. We are fully confident that we will ultimately regain and restore the Mill Services margins to more historical levels but, it will take time.

And finally, I would like to provide insight on some comments that were made this morning about our performance in this second quarter. First, I just want to make it absolutely clear, we have stated and you can look at the script from the first quarter that we said and guided 29% for a tax rate. We not only guided 29%, we also confirmed that it is sustainable rate.

Secondly, as I’ve just indicated we were very pleased with the 130 basis point performance of improvement in the Mill Services margin sequentially. Again, if you read the script that’s what we got was that we would show sequential improvement, we did not provide a number. In our mind, the 130 basis point improvement is considerable and we’re quite pleased with that.

Third, Access Services margins were only down 20 basis points but as Steve will tell you in a moment, Access Services margins actually improved by 40 basis points when you exclude some one time costs associated mainly with combining the three businesses. As you recall, we have Hunnebeck, SGB and Patent and our intention is we are in the process of amalgamating the three into one and we incurred some one-time costs that Steve will give you a little more color on that.

So, in our mind, there is no downward trend here. These margins are consistent. Again if you recall and you go back to the conference calls and the presentations we did on analyst, we have consistently said that we expect the margins for Access Services to be comparable year-over-year. We continue to deliver on that.

I’ll now turn the call over to Steve to give you more details on the second quarter and then I will make some further comments on our outlook and then we will be pleased to take care of your questions. Steve?

Steve Schnoor - Chief Financial Officer

Thank you, Sal and good afternoon everyone. We are very pleased with our second quarter performance, our balanced portfolio of businesses and our geographic diversity served us very well in the second quarter.

Sales, income from continuing operations and diluted earning per share were all records with these posting double digit percentage growth. The overall second quarter operating margins for the company was 13.3%, which is comparable to the last year’s 14% after you adjust for last year’s $3.2 million asset gain from a property at Minerals and Rail Group. Sales increased 16% in the second quarter reaching $1.1billion. We expect to exceed the $1 billion dollar mark in each of the remaining quarters of 2008.

Organic growth contributed about 8% while acquisitions contributed 2% and foreign currency translation accounted for the remaining 6% of the growth in sales. This performance again reflects Harsco’s International balance as well as the ability to grow organically and through acquisitions. We are pleased with the company’s solid organic growth rate as it does underpin our continued confidence in future organic growth and investment opportunities.

Our diversification strategy again paid off in the second quarter as we achieved a good balance among all three business platforms. Access Services, Minerals and Rail Group achieved increased earnings and had double digit operating margins. And Mill Services Group’s earnings equaled last year and have expected the Mill Services operating margin of 8.3% improved significantly from the first quarter operating margin of 7%. As I pointed to you during the first quarter conference call, we expect gradual, sequential quarter-by-quarter margin improvement this year in those services segment.

In the second quarter international sales for Harsco were approximately 70% of total sales. Further, 86% of the sales were from our industrial services platforms. The international scope and diversity of operations was a significant factor in our record setting second quarter results. As the effect of economy downturns in certain markets was more than offset by strength in emerging markets. Particularly encouraging was our sales growth in emerging markets in the first half of 2008. Sales grew a combined 36% in Latin America, the Middle East, Eastern Europe, and Asia Pacific. These emerging markets provide higher returns and have been less susceptible to economic downturns than more matured economies.

First of sales are geographically balanced with approximately 21% of our total sales for emerging economies as compared with 17% in the first half of 2007. This 400 basis points growth in 2008 demonstrate that we are executing our strategy of better balancing of portfolio liquidity stated objective of growing emerging markets sales faster than the developed economies.

We are also pleased with the improvement in the return on our invested capital for the first half of 2008. Return on capital from continuing operations improved to 12.1% from 11.9% in 2007. Also worth noting the company’s economic value added or EVA in the first half improved over last year.

Over 56% of this year is record capital expenditures or approximately $145 million has been invested in strategic growth initiatives. With the remaining expenditures allocate to sustaining the current revenue stream. We are importantly 39% of the unit day growth CapEx was invested in the emerging economies, which fell as well for future balance, performance and growth.

Partially 64% or $92 million dollars of growth capital in the first half was invested in our growing Access Services business with approximately $47 million invested in the Mill Services business due to recent contract signings. Remaining $6 million was invested in Minerals and Rail Group, as Sal stated earlier it’s our intention to start allocating more growth capital to the Minerals and Rail Group in the future.

Our debt to capital ratio decreased to 40.3% from 41.7% on March 31st, and 40.8% at December 31st, 2007. The June 30th, debt to capital ratio was also over 1,000 basis points lower than the second quarter of 2007 ratio of 50.4%. The second quarter 2007 debt to capital ratio reflected the effect of the Excell Minerals acquisition. Our strong cash flows and the successful divestiture of the Gas Technologies business in December 2007 have enabled us to substantially reduce the debt to capital ratio since the Excell acquisition. Cash flows from operating activities for the second quarter were record $178 million which is $24 million higher than last year’s $155 million. Year-to-date cash flows from operating activities were record $210 million, $40 million higher than cash flows for the first half of 2007. The 2008 cash flow increased despite a first quarter $20 million income tax payment, which related to the 2007 gas served divestiture. Historically, the company’s strongest cash flows are achieved in the second half of the year, therefore, we are confident that we will achieve our targeted cash flow from operations of $525 million in 2008. This will be a record and will provide support for our disciplined growth initiatives.

Let’s turn to the second quarter performance for each of the business groups. Consistent with last year, the Minerals and Rail Group and the Global Access Services Business led Harsco’s performance, setting new quarterly records for sales and operating income. The sales growth of 19% in Access Services was well balanced throughout the world. We are especially pleased with a 10% organic growth of the group. We are also pleased to see the key emerging economies such as the Middle East, Asia Pacific contributed significantly to the overall sales and income growth of the group. These global economies continue to take make significant investments in new construction and infrastructure, modernization and expansion. At the same time the Access Services group also benefited from its portfolio balance and diversification. For example, in Canada and to a lesser extent Germany operating income group from last year of second quarter, as did the Industrial Services platforms in Holland and the United States.

The Access Services operating margin in the second quarter was 13.5 % only slightly down from last year’s 13.7%. This slight decrease reflects this year’s higher business optimization costs designed to achieve long term benefits for the organization. Adjusting for these increased costs of approximately $2.3 million, the second quarter margin was approximately 14.1%, which exceeded last year by approximately 40 basis points.

The outlook across the global footprint of our Access Services business remains positive for the remainder of the year, we continued to see growth of the last year another record performance in 2008.

Operating income for the Mill Services segment in the second quarter essentially equaled last year. The operating margin of 8.3% was below the second quarter of 2007 margin but significantly above the first quarter of 2008 margin of 7%. The margin was below 2007 due mainly to higher fuel costs of approximately $9 million. However, the sequential improvement over the first quarter 2008 margin reflects continuing execution of our business optimization strategies. As stated earlier the company has aggressively pursued a strategy to recover or reduce fuel costs. In addition to what Sal says, we are also reviewing fuel cost under our lean Sigma continuous improvement process. Additionally, fuel efficiency and cost recovery are prime considerations in the purchase of new capital equipment and the signing of new contracts.

We continue to believe that we have this business on correct path to show gradual improvement as the year progresses and we are confident that we will gradually restore the margins of the business to historical levels. The estimated future value of the company in Mill Services contract has increased during 2008 and media reports indicate that global steel consumption is forecast to increase in 2008 and 2009. Therefore the key to improving this business is the execution of the optimization programs articulated by Sal. We will continue to be relentless in the execution of the strategies.

Minerals and Rail Group posted an exceptional second quarter performance with all business units posting higher sales and after you exclude the 2007 asset sale gain, all but one posting higher income.

We are particularly pleased with the results of this group considering a high bar set in 2007 due to the record performance of Minerals business, as well as the asset sale gain of $3.2 million. The operating margin for the group is down 160 basis points from last year’s record due to the performance of the Minerals business and the asset sale gain. However, we are still very, very pleased with the operating margin of 23.1% achieved in the second quarter. Excluding the asset sale gain in the second quarter of 2007 margins were the same as last year.

We are particularly pleased with the performance and year on year improvement of our Rail Services and products business, which achieved record operating margins in the second quarter and year-to-date. Our margin improvement strategy, continuous process improvement initiative and global growth strategy are having the impact that we expected. The 2008 and longer-term outlook for the Minerals and Rail Group is very favorable. We expect another record year in 2008. To sell up the quarter for the entire company, all of our major business platforms in our portfolio had improved sales and operating income. These results highlight the global portfolio diversity and strategic balance that has been achieved by the company. That balance provides a foundation for the continued improvement as we pursue our global growth strategy.

That completes my comments. I’ll turn the call back to Sal now.

Salvatore Fazzolari - Chairman and Chief Executive Officer

Thanks, Steve. Very comprehensive report. Let me just briefly summarize our current outlook for the remainder 2008, I think I already made many comments on that but just to reiterate a couple of very important points. One, again to stress the global balance, very strong end markets particularly in emerging economies coupled with many, many expansion opportunities for all of our three platforms as we continue to scale the business across the globe. Therefore, we are confident that we will continue to perform well in 2008 and beyond and of course post fifth consecutive record year results.

The outlook is for sales in the area of about $4.2 billion, that’s $4.2 billion in revenues. The outlook also reflects considerable strength in sales and emerging markets which I think we’ve already said quite a bit about. The outlook for diluted earnings per share for continuing operations for 2008 again is for another record year and as you saw in the press release, we adjusted the range up to 350 to 355. You use the mid-point of this guidance, 2008 will represent a year-over-year improvement of at least some 17%. I think by any measure that is a very, very strong year. Similarly, our outlook for the third quarter is pretty much the same. We expect another record quarter, record revenues, record income, hopefully, record cash flows as well, which again we are very confident of that. And you saw the guidance, the guidance is that using the mid point, we expect to be up somewhere close to the mid digits. So, on the balance we’re very, very pleased with our performance for the first six months, we look forward to the next six months and, then of course we look beyond that as well.

We would be happy now at this point to take any questions that you may have.

Question-and-Answer Session

Operator

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

Curt Woodworth

Hi. Good afternoon.

Salvatore Fazzolari

Hi, Curt.

Curt Woodworth

Sal, can you provide a little bit more color on your outlook for the Access Business in the second half of the year? You delineated your view for the Minerals Group for 3Q and 4Q. Could you give us a sense of what you’re expecting in terms of organic growth for Access in the back half of the year?

Salvatore Fazzolari

Sure, Sure. I’ll be happy to try to give you a similar outlook like we did for the Minerals and Rail as well. We expect, double digit revenue growth in the third quarter for Access Services and pretty high single digit to low double digit for the fourth quarter as well. So, on balance for the second half, we’re looking at, probably mid teens revenue growth. So again, consistent with what we’ve seen all along, we expect operating income to continue to grow. We probably more likely the third quarter obviously stronger than the fourth quarter, which is traditionally the case.

Margins are pretty much like we said we expect the margins for the year to end up very comparable to last year and that’s what we’ve been saying consistently and we believe that’s where we’re going end up the year. So, if you look at where we are investing the money as Steve indicated we spent considerable amount of money in the first half on growth CapEx for Access, lot of it going to the emerging markets so we just entered as I mentioned for new geographies, we started to see some activity there. The UAE, Saudi Arabia going very strong as is Singapore, Malaysia and even Australia. And so, we were seeing good balance then if you look at Europe I know there is some concern over Europe, well believe it or not we looked the way our European business is broken down, its made, the strength of Europe is for example in Holland. Holland is mostly industrial that work is pretty much consistent year-over-year, there is really very little “construction” that’s more on the industrial side.

Germany, which is more balanced, we see continued good performance there, France pretty much the same thing you just saw recent announcement where we announced a few new contracts and geographies. The UK again, if it wasn’t for a balance in the UK yeah one would be a little concerned about the recent downturn in the multi-family side but our business in the UK is extremely well balanced between industrial, infrastructure and commercial and some multi-family partners so forth. So, we think on balance it’s not going to be all that bad. If you look at the way the portfolio is evolving also as I indicated now almost 20% of that business now is in emerging markets. We’ve come a long way in the last couple years to almost nothing to 20% almost. Then we should end up probably around the 20% mark. That’s good progress, roughly another 20% for North America and the rest is scattered through Europe. But again, you got to look at Europe very closely like I indicated, it’s principally when you look at Europe the main drivers of Europe is France, Germany, UK, and Holland. Those are the primary, the big four countries if you will. So, if you look at it on balance, we are cautiously optimistic. And also, we’re investing quite a bit of money in this merger if you will the three businesses into one. As we took incurred costs incrementally about $2.3 million in the second quarter. There’ll be some additional costs in the second half that’s baked into the guidance that we gave. And so, because you can appreciate the costs of changing all the names and closing some offices and doing this and doing that. It takes quite a bit of money to affect the merger of three into one. So, that’s underway.

Curt Woodworth

How much are those costs in the back half of the year?

Salvatore Fazzolari

Probably an additional couple of million dollar but that’s baked into our numbers, though and we have already --

Curt Woodworth

Okay.

Salvatore Fazzolari

We are trying to do a lot of things here to build this business for the long term to better balance it to continue to sustain our growth and position ourselves in some of these key markets and, we were confident in what we are doing and we are we are delivering, I don’t think you can point to one thing that we have not delivered, everything we have been saying for the last 12 months I think we have delivered all.

Curt Woodworth

Well, okay, I mean, in 12 months ago, it think the target from those margins was 10.5 to 11 or that’s what you outlined at your Analyst Day in December and it looks like you are going to end up closer to mid 8s perhaps, I mean is that really fuel that’s been the major variance there and if you look at this quarter you said $9 million incremental but you are getting 25% recovery rates, does that mean the net hit was $7 million?

Salvatore Fazzolari

No, the net was not, that’s net, net, net number that’s incremental fuel cost that we absorb.

Curt Woodworth

Okay.

Salvatore Fazzolari

That’s the net number. Yeah, and if you look at it on balance when you take all the ins and outs, the fuel cost it sees underperforming contracts that were in the process of sorting out and we will have them all sorted out like I said we made considerable progress in the second quarter, there will be further progress in the third quarter and in fact some of those will already start contributing positively in starting here in August 1, so, because the ones that we have sorted out already and so you will start to seeing some benefits from that. As we continue to call back some of the incremental fuel costs, I don't know what the ultimate number is but certainly we will do better than 25%. So, we will continue to work at that for the year. That’s another reason that gives us confidence that we will slowly but surely continue to bring this business back. Then when you add in a lot of the projects that we are working on that we will be announcing over the next six months, a lot of them in the emerging economies, you know as we continue to work the portfolio and you start building all these in that will give us confidence in our outlook for 2009.

Curt Woodworth

Great, and just one last question If I may, can you run through the dynamics of the LIFO charge and Minerals and Rail for the back half of the year? How that works and although was any spill over into ’09 from that?

Salvatore Fazzolari

No, I mean the good news is if you look at LIFO basically it makes you take the cost upfront, you have to match revenues with expenses. What happens though the good news is if you have no change in prices or commodity let’s say fuel cost which is the primary driver. So, if there is no change in 2009 over the current prices of the steel there is no LIFO effect next year, okay. So, you take the bund of it upfront in a sense or we are going to incur an additional almost $4.5 million in additional expense in the second half here that goes away next year provided there is no increase in the price of those major commodities in 2009 over the level they are out currently.

Steve Schnoor

And that fills into the forecast as well, the LIFO cost.

Curt Woodworth

Okay, great thanks so much.

Salvatore Fazzolari

Okay, great thanks so much.

Operator

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

Jeff Hammond

Hi, good afternoon guys.

Salvatore Fazzolari

Hi, Jeff good afternoon.

Jeff Hammond

Certainly some concerns over just slowing the non-residential, I’m wondering in Access if you’re seeing any additional signals of softening outside of the three countries you mentioned and how would you just overall characterize rental rates in Access business?

Salvatore Fazzolari

Jeff, I think if you look at the results and what we have just said there is no change in margins, revenues are growing, we are expanding the portfolio, I don’t know what more you want. You always going to have some markets that are down and some markets up. If you look at what we’re trying to accomplish and what we accomplished is the fact that, I think, the numbers speak for themselves. You always going to have some pockets somewhere in the world, you are not going to have every cylinder flying here. And we are looking at this thing we’re saying if you look at the key countries that we’re in, other than the UK, all of the other countries are very small. Denmark is very small. Ireland is very tiny. So, it doesn’t matter one way or another. So, you got to look at the key countries in our portfolio. So, if you look at like I said, you look at Germany, you look at France, you look at the UK, you look at Holland. But then when you look at those countries, you’ve got to also look at the mix from industrial, infrastructure, commercial and so forth. And then you look at the Gulf region of the Middle East and what’s going on there. How we continue to expand. You look at India, you look at Latin America, the opportunities we are looking at there, you look at Asia, and so I don’t quite understand, you know what the concern is.

Jeff Hammond

Just as a follow on, on Access. You talked about the balance of industrial, which I think you’ve talked about as a mix. Have you gotten a better sense of, you know, the rest of the balance or maybe you can just speak to overall, what do you think the mix is between industrial infrastructure and kind of commercial construction?

Salvatore Fazzolari

Well, we’ve said consistently 25% of the total Access Service business is industrial with the major concentration of that in Holland, the US and the UK. That’s where the three, we do it many other place in the world but the bulk of it is in those three countries, okay? And that business is pretty much steady year-over-year, we continue to grow that business on a very slow but steady pace. And that’s very predictable. Then the rest, you know, the 75% roughly is broken down between infrastructure, commercial, there is some multi-family, you know, apartments, we don’t do any single family homes. But there are some particularly in Europe where you do these large multifamily large apartment complexes. There is a little bit of that as well. And, any softness you’re seeing is more enough space, Jeff, particularly, for example, in Spain. But we don’t do anything in Spain. Just it shows where the major impact in Europe is really in Spain and Ireland on the multifamily side.

Jeff Hammond

Great. And then shifting gears to Mill Services. Just with another quarter in are your belt as you get a firmer handle on the fuel cost issue and these underperforming contracts. Do you have a better sense of what kind of a goal or reasonable run rate, margins should be running at exiting the year and what is a reasonable timeframe for you to see that business kind of back to that normal, double digit margin trend?

Salvatore Fazzolari

Certainly as we said, Jeff, we expect sequential improvement quarter by quarter. We believe in that. You will see than year sequential if you were if it sounds right. You’ll see improvement in ’09 over ’08 and you shall see improvement in ’10 over ’09. Again that’s based on all things I said earlier that occurred. If you look at the contracts we’re bidding on that we’re confident we’re going to get in the emerging markets. You look at sorting out these nine very problematic contracts as well as those other roughly ten contractors that are not performing to our standard. And then, you sort out these fuel issues and so forth, we believe that clearly all those come together to get this where to go. Now, on top of that, we think the lean Sigma initiative which will take 12 to 24 months to get us even to starting to make a contribution longer term, we think that’s going to make quite an impact to the business. But that’s a much longer term thing but in shorter term, ’08, ’09, ’10, you’re looking at all the things that I just talked about. So, you will see sequentially year-over-year improvement. We’re not prepared to give you an exact number right now. As you can appreciate we have even done, our plan or strategic plan for 2009 but we have an idea where we are going to be in 2009, we are just not ready to say that but we can say that we do expect to improve ‘09 over ‘08 and continue down the path year-over-year.

Jeff Hammond

Okay and then just final question can you give us housekeeping item, what do you think growth CapEx for the year will be and total CapEx?

Salvatore Fazzolari

I would say that is will probably maintain the same ratio we have now Jeff, we have 56% growth CapEx.

Jeff Hammond

Okay. And so what’s the total CapEx for the year?

Salvatore Fazzolari

We are probably running through the first half little higher than annualized rate. So, we will be somewhat less than twice the amount that we have spent year-to-date.

Jeff Hammond

Okay. Thanks guys.

Salvatore Fazzolari

You are welcome.

Operator

Your next question comes from the line of Tim Hayes with Davenport & Company.

Timothy Hayes

Hi, good afternoon.

Salvatore Fazzolari

Good afternoon.

Timothy Hayes

Just to clarify from the first question on Access Services, you gave some figures on revenue growth for Q3 and Q4 was that for the total segment or is that just for new business/organic growth?

Salvatore Fazzolari

That was for the total Access Services segment.

Timothy Hayes

And on that in terms of organic growth for that segment any feelings on that rate for ‘09 verses ‘08, do you expect that you would see the rate of organic grow to slow next year versus this year?

Salvatore Fazzolari

We will answer again the way I answered Jeff, we have not even started our planning process for next year but again look at the dynamics. Look what we’ve been saying. Look at the amount of capital that we are investing in this business to continue to invest; we just invested another record amount of growth CapEx. That’s going to go some where and we were also looking at many other expansion opportunities and other geographies and so forth. So, we’re not going to give you a number now, but just got a look at the dynamics or what’s going on in this business and what we’re trying to do with it.

Timothy Hayes

Alright, thank you very much.

Salvatore Fazzolari

You are welcome.

Operator

(Operator Instructions). Your next question comes from the line of Bill Fisher with Raymond James.

Bill Fisher

Hi, good afternoon

Salvatore Fazzolari

Hi Bill.

Steve Schnoor

Hi, Bill

Bill Fisher

Just on the entering the new markets and access on new countries, most of that your tuck-in acquisitions or do you add some mill yards or how do you how are you going into some of these new markets?

Salvatore Fazzolari

All of the above, Bill. For example, in Romania, we purchased our distributor. We are in Russia and India and Panama we went pretty straight in organically. For example, in India we are invited in by Tata Steels because they saw the good work that we do in the UK on the Mill Side interesting enough and we’re of course talking about Mill Services as well, but they were anxious to get us started in India and help them with a lot of things including some of their infrastructure work and that’s what we are doing on the Access side there. So, there is a lot of ways we get in. We also get in by initially exporting or selling some equipment into a market and then once the market accepts that the contractors particularly and the engineers then the next phase is possibly set up a branch. So, there is a movable, movable ways of getting in. We are currently also right now looking at -- I think as of June 30, we were in 35 countries if I’m not mistaken in that business. We’re looking at possibly another two or three yet this year. So, if you look what we were eight years ago, we were in three countries. Not too long ago we were in 20 some countries, now we are up to 35. It won’t surprise me if by early next year we are close to 40 countries and so again, a lot opportunities we are looking at some key markets where we don’t participate in where we think we have an opportunity to grow.

Bill Fisher

Okay and then somewhat I guess related to -- given your growth CapEx is more on those markets, just as we go forward. Almost on a straight math basis if you keep growing there and typically, lower tax rate countries shouldn’t you rate as I said UK or so remains low, should not rate move down a bit over time?

Salvatore Fazzolari

Yeah that’s a good question that’s exactly right. If we continue to expand successfully in these emerging markets if we look at the tax rates, look at the Middle East for example most of the have a tax rate. So yes, the tax rate will continue to be driven down overtime as we continue to expand these much lower tax countries.

Bill Fisher

Okay. And then just last quick one, I know you have utilized EVA, but you have a lot of growth CapEx on there, but do you still look, I think you bought back a little bit of stock in Q1, periodically look at that at its attractiveness?

Salvatore Fazzolari

Guarantee we are going to be looking at that very closely given where the stock price is now. We think it is seed value stock rate now and we are certainly going to take a very hard look at that.

Bill Fisher

Okay, great thank you.

Salvatore Fazzolari

Thanks Bill.

Operator

Your next question comes from the line of Yvonne Varano with Jefferies and Company.

Yvonne Varano

Thanks. Just wanted to talk a little about the organic growth in Mill Service, which was pretty impressive here I think in the quarter but we haven't seen rates like this I think seven quarters now. Can you talk a little bit about where it is coming from geographically and whether you are penetrating new customers or is this more sales or services into existing customers?

Salvatore Fazzolari

Yeah, good question, Yvonne. If you look at the couple of things, couple of macro comments because it is important and we never really talk much about this. Our Mill Services business is actually the best positioned business geographically than all of the other businesses. Actually last year’s numbers, it's in the 10-K so I am commenting on that, it’s not in -- the 10-K, you will see that 27% of the revenues come from the emerging markets and that number is growing. Again, intentionally by design and we should be closer to 30 some percent this year and so it is coming from emerging markets but also in some of our key countries and key customers. The key thing with us is not only the geography here, but also the customer diversification. You know we are doing more and more work with some of the Russia’s steel makers for example, we are trying to do more work with some of the other larger steel producers, we are looking at Brazil, we are looking at Saudi Arabia, but yet we still continue to get a lot of work from Arcelor Mittal and so forth. So, we have like for example Peru, we just started up a new contract in Argentina. We started up a new contract in Nimbo Steel in China, on, and on and on. So it is a nice mix and this business like I said has the best profile of any of our businesses when it comes to geography and this will continue to improve.

Now, as we sort out and exit out some of these contracts, you got to remember you got to deduct these exits from the growth rates. So, as we get into the future, the growth rate is not going to be 7%. It can be 7% and we said that we can grow the business at a healthy rate, if you exclude out you know these types of things, exiting out these underperforming contracts.

Yvonne Varano

And where the progress in India is that an area that you are looking at?

Salvatore Fazzolari

Absolutely. Yeah, we are talking our active dialog with Tata Steel right now as we speak. Like we have an active dialog with quite a few other steel makers throughout the world particularly again in the emerging markets for looking at some key geographies to expand it.

Yvonne Varano

Just a little on Excell Mineral because I know that’s an another area where we are looking to grow still update on what you are seeing there?

Salvatore Fazzolari

It slow in there, like we said, first of we would like to look at it more as the Minerals business, read and next sell together because its really one. It’s going much slower the growth rate then we had hoped but for good reason we are in the process of integrating the business. That remembers of the family owned business they had very little or no internal controls, very poor computer systems on and on and on. We have spent a considerable amount of time and money getting them up to shocks level, controls moderate your peer system, all that step is falling now come into an end. And so, we are looking at 2009 as I mentioned earlier not only the Minerals Business but you look, we are actually going to be expanding all three business in Rail, Minerals and Products. The Rail business is going to expand just by the fact of the major Chinese order. But, we are looking at hopefully expanding that business across some other geographies as well. On the Minerals business the same thing, we are looking at China and some other key markets and on the products side as I mentioned Air-X-Changers are looking at expanding overseas in Asia and the Middle East. IKG is looking at we’re doing some work in Canada, we are looking at Latin America, possibly China. So, all the businesses are very active, very engaged and again, our intention is to start reallocating it and again, we like the balance the three segment and to grow this business hopefully a little faster than they’ve grown in total.

Yvonne Varano

Right. And just as on Excell, as the growth is slowing mainly because you’re focusing on getting operations the way you want them before moving forward for or are there market factors that help in impacting it?

Salvatore Fazzolari

No, no, it’s really us. We’re growing in a nice discipline, we like the word discipline. We’ve not slowing, we like the word discipline. We are growing at a disciplined rate. Okay? And so, that’s what we are trying to do because it’s all about people.

Yvonne Varano

Thank you very much.

Salvatore Fazzolari

You are welcome.

Operator

There are no further questions at this time. Are there any closing remarks?

Salvatore Fazzolari

No, just want to finally just say thank you. We are obviously very very pleased with our quarterly results. We are very pleased with the six months results. We are very pleased with our outlook. We stand ready and hopefully deliver the fifth consecutive record year of strong both top line and bottom line growth. Thank you for your support and your participation today.

Operator

This concludes today’s teleconference. You may now disconnect.

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Source: Harsco Corporation Q2 2008 Earnings Call Transcript
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