Harsco Corporation (HSC): Harsco Management Discusses Q3 2013 Results - Earnings C...

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Harsco Management Discusses Q3 2013 Results Earnings Call Transcript

Executives James Jacobson - Director of Investor Relations Patrick K. Decker - Chief Executive Officer, President and Director F. Nicholas Grasberger - Chief Financial Officer and Senior Vice President Analysts Ashby W. Price - BB&T Capital Markets, Research Division R. Scott Graham - Jefferies LLC, Research Division James Picariello - KeyBanc Capital Markets Inc., Research Division Glenn Wortman - Sidoti & Company, LLC Brian Jacoby - Goldman Sachs Group Inc., Research Division Harsco (HSC) Q3 2013 Earnings Call November 7, 2013 10:00 AM ET Operator Good morning, ladies and gentlemen. My name is Ryan, and I will be your conference operator today. At this time, I would like to welcome everyone to the Harsco Corporation Third Quarter Results Call. [Operator Instructions] I would now like to turn the call over to Director of Investor Relations, Jim Jacobson. You may begin. James Jacobson Thank you, Ryan, and welcome to everyone joining us today. I'm Jim Jacobson, Director of Investor Relations for Harsco. With me are Patrick Decker, our President and Chief Executive Officer; and Nick Grasberger, our Chief Financial Officer. This morning, we will discuss our results for the third quarter of 2013 and provide our outlook for the fourth quarter, then we will take your questions. Before our presentation, let me take care of a few administrative items. First, our earnings news release was issued this morning before the market opened. A PDF file of the news release, as well as a slide presentation that accompanies our formal remarks for this call, have been posted to the Investor Relations section of our website. We encourage you to access these files. Second, this call is being recorded and webcast, and a replay will be available on our website later today. Next, we will make statements considered forward-looking within the meaning of federal securities laws. These statements are based on our current knowledge and expectations, and are subject to certain risks and uncertainties that may cause actual results to differ materially from the forward-looking statements. For a discussion of such risks and uncertainties, see the Risk Factors section in our most recent 10-K and 10-Q, as well as in certain of our other SEC filings. The company undertakes no obligation to revise or update any forward-looking statement. And last, both the third quarter of 2013 and 2012 included special items. In this call, we will refer to adjusted results that exclude those special items. A description of the items and a reconciliation to U.S. GAAP results are included in our press release issued today, as well as in our slide presentation.

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And now I'll turn the call to Patrick Decker, our President and CEO. Patrick K. Decker Thanks, Jim, and good morning, everyone. This morning, we reported our third quarter earnings per share, which was $0.20 and within our guidance range, as well as strong free cash flow, driven by working capital improvements. Nick will provide additional detail on our third quarter performance momentarily. I'll keep my comments today concise as we will be providing detailed commentary regarding the company's future strategy at our Investor Day next month. With that said, we have made important initial progress to transform Harsco since our last earnings call. In mid-September, we announced the transaction to sell the Infrastructure division into a joint venture with Clayton, Dubilier & Rice. This significant action is the first step in Harsco's transformation to optimize the company's portfolio by simplifying our operations, creating efficiencies and capitalizing on higher return growth opportunities, with the ultimate goal of increasing our earnings power and return on invested capital. This transaction provides numerous benefits to Harsco and its shareholders. First, it immediately strengthens our financial profile as we will receive $300 million in cash upon closing. We will use those proceeds to reduce debt and strengthen our balance sheet. Second, it allows us the flexibility to pursue both organic growth and bolt-on acquisition opportunities over time, which will create differential value and generate improved returns and growth. Third, the transaction reduces the earnings volatility of our portfolio. Finally, by retaining a 29% equity stake in the new, stronger company, our shareholders have the potential to capture significant additional value as the end markets recover and as the new venture grows and realizes cost and revenue synergies from combining 2 marketleading businesses. We're on track to close the transaction in the fourth quarter, likely in late November or early December. With the joint venture transaction nearing its consummation, we are turning our attention to improving the operational performance of Metals & Minerals and accelerating growth in Rail and Industrial. In particular, Nick and I are actively engaged in overseeing Metals & Minerals with a near-term goal of improving results, particularly return on invested capital and driving greater operating efficiency. The recent leadership transition affords us the opportunity to work more directly with the core leadership team and to sharpen our focus on a few areas that we believe can have a sizable and meaningful impact on the business. In Rail, we are focused on rebuilding our project backlog following the completion of our large multiyear China project early this year. Consistent with our prior statements, overall bidding activity remains healthy. We were pleased to announce that we won a significant new contract in Europe. This new contract with SBB, the federal railway system in Switzerland, is valued at $100 million and demonstrates Harsco Rail's strong leadership position in the maintenance of weight [ph] market. For this project, we will design and manufacture 31 utility track vehicles or UTVs. These machines will be used to maintain 2 integral tunnels in the Swiss AlpTransit project. We will deliver the first of these machines in 2015, and the remainder of the project will extend into 2016. Beyond its scale, this win is an important strategic entry for us into Europe, the world's largest rail market. Our win validates our ability to compete successfully in this market and it creates a strong foundation from which we can build. Within Industrial, I am very encouraged by the strong operating platform we built and the attractive end markets we serve, in particular, natural gas. We believe this will serve us well to accelerate growth, both organically and through bolt-on acquisitions. Now Nick will go over the quarter's results and our near-term outlook. F. Nicholas Grasberger Okay. Thank you, Patrick. Good morning. My comments will refer to the slides beginning on Page 3. So the adjusted EPS for Q3 of $0.20 per share was in the middle of our guidance range. Relative to what we expected, the Rail business did a bit better; the Industrial business is about what we expected; and Metals & Minerals and the Infrastructure business, a little worse. In terms of cash flow, it was a very strong quarter. We delivered cash flow of about $50 million, which was more than 2x the cash flow in the third quarter of last year. As expected, the second half of the year will be stronger than the first. You may recall that through 6 months, our free cash flow was minus $40 million. So we're now about plus $10 million through the first 3 quarters.

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We also reported a sizable loss in the quarter due to the write-down of Infrastructure assets that will be sold into the joint venture with CD&R. We had expected the loss to be larger. We guided the loss to be between $350 million and $450 million. It came in at $240 million because of the value of our retained stake in the business was higher than we anticipated a few months ago. Turning to Page 4, the key performance indicators for the quarter. You can see revenues were down 2% versus the same quarter last year, operating income down 23%. That's relatively high operating leverage, a $13 million decline on a $17 million -- in earnings on a $17 million decline in revenues. That's due mostly to the Infrastructure business, and we'll talk about that in a minute. EPS down about 49%. The tax rate was higher in the quarter versus the same quarter last year, about 39% excluding special items versus 29% last year. And interest expense was up about $2 million year-over-year. So the free cash flow of $49 million was really driven by the Metals & Minerals business. They generated about $50 million for the quarter, Rail about $15 million and Industrial about $15 million, and then corporate was a deficit of about $20 million and Infrastructure's cash flows were basically breakeven for the quarter. On Page 5, we reconcile the reported GAAP operating income and EPS to the adjusted results. You can see on the first line there -- the second line, the impairment charge of $240 million. Again, this was -- this reflects the sum of the $300 million that we expect to receive in cash plus the book value of the minority stake relative to the book value of the assets net of liabilities, that were on the Infrastructure balance sheet. We also recorded about $12 million of transaction-related costs in the quarter. On a noncash basis, the tax impact of the transaction was about $0.24, and that's largely the reversal of some NOLs or deferred tax assets that we had on the balance sheet at Infrastructure that have been removed. As part of the accounting for the transaction prior to closure, we also stopped depreciating the assets of the Infrastructure business. So we make that adjustment as well. So the adjusted operating income is $42 million or $0.20 a share. On Page 6, the revenue bridge for the quarter versus the same quarter of last year. Again, revenues down about 2%. You can see that the Metals & Minerals and Rail businesses were down. The Infrastructure and Industrial businesses were up, and we'll talk about this in more detail in a minute, but there are really no surprises here relative to what we expected for the quarter. The next chart, Chart 7, the operating income bridge on the same basis versus last year. Again, you can see that each business is down year-over-year. I'll talk more in a minute about Infrastructure, showing a $13 million increase in revenue and a $2 million decline in earnings. The Metals & Minerals and Industrial businesses would have performed better from an operating income standpoint, if not for a handful of unusual items in the quarter relative to the same period last year. And the Rail business, actually, because it had some part sales in the quarter at very high margin that helped to offset the impact of the end of the large project in China. Turning to cash flow on Chart 8. This is a reconciliation of the $49 million of cash flow that we delivered in the quarter relative to the same quarter last year. The second line shows the change in working capital year-over-year, $59 million favorable variance, is due in large part to very strong receivables performance in Metals & Minerals, as well as strong performance in Rail relative to a weak quarter last year. CapEx for the quarter was about 10% above the same quarter last year. We expect CapEx on a full year basis to be between $250 million and $260 million, which would be down modestly versus the full year of 2012. Chart 9 shows a few of the key balance sheet metrics. As we discussed previously, we have changed our principal covenant in the bank facility from debt to capital to debt to EBITDA. That debt-to-EBITDA ratio in the quarter is 2.6x versus the threshold of 3.5x. On a pro forma basis, following the sale of the Infrastructure business into the joint venture, we would expect debt to EBITDA to be 2.2x to 2.3x against the covenant of 3.5x. And we expect the debt at year end, which is about $1.07 billion at the end of the quarter to be around $800 million at the end of the year; on a net basis net of cash, about $700 million at year end. Turning to a brief review of each of the divisions, beginning with M&M, revenues were down 3%. Operating profit down 15% in the quarter versus the same quarter last year. If you look at the operating income impact of lost or exited contracts relative to new contracts, the impact was roughly 0 on operating income. So even though we lost about $15 million of revenue on a net basis, we -- because of the higher margin on the newer contracts, the net impact on operating profit was 0. So I mentioned we also had a few million dollars of onetime items in the quarter. And as Patrick mentioned, we're also spending some money in Metals & Minerals for consulting support to improve with the performance of the business.

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And finally, the nickel pricing and the scrap demand was weak. And due to the high margin of those products, that affected the profit from a mix standpoint. Okay, in terms of Rail. Rail revenues were down 27% in the quarter. Profit down 42% in the quarter. Again, the big change here was the ending of the large contract in China. About $30 million of revenue year-over-year in the third quarter was taken out because of the China order. The core business, if you exclude China, was up about $5 million or up in the high single digits. And as I mentioned earlier, the sale of spare parts in the quarter at a very high margin certainly helped mitigate the operating leverage effect of the large decline on the China revenue. Okay, Industrial. Not much of a story here in the third quarter. Revenues were basically flat. Profit was basically flat. We had some growth in the IKG grating business, as well as in the Patterson-Kelley Boiler business, offset by a weak mix in the Air-X-Changer business. We also had higher commodity prices in the IKG business, which had a negative accounting effect due to LIFO. Okay. Infrastructure had a weak quarter. Even though revenues were up 6%, profit declined about $1 million. And this is really an issue with a handful of geographies that are much weaker than others. In North America, for example, and parts of Europe were quite strong. But Benelux, Australia and the parts of the Middle East were quite weak. That's what really led to the negative leverage. In particular, in Benelux, we had begun to invest in some new contracts that have ramped up slower than we expected, and so that had a sizable negative effect on the quarter. Okay. So turn to the outlook for the quarter by segment on Page 14. In Metals & Minerals, we expect to see yearover-year, both revenue and profit growth -- profit growth probably in the high single digits that's held back somewhat by some of the consulting cost that we've mentioned earlier. So we do see on a year-over-year basis, on a like contract basis, 2% to 3% revenue growth in LST. In terms of Rail, a similar situation to the third quarter, we have a very difficult comp to the fourth quarter of last year due to the China contract. So we again expect revenues to decline in that 30% range, but the operating margin to remain in low double digits. In terms of Industrial, again, a similar quarter to the third. Revenues essentially flat, but the OI margins remaining high in the mid to upper teens. And in Infrastructure, again, similar to the fourth quarter, high single-digit growth in revenues, but the operating loss year-over-year will be roughly the same, again due in part -- in large part to new contracts in the Benelux and the costs associated with ramping up those contracts. Chart 15 is the consolidated outlook for the year -- for the quarter. What we decided to do here is provide guidance on operating income only and only for the ongoing businesses, Metals & Minerals, Rail and Industrial, largely because of the uncertain timing of the Infrastructure sale into the joint venture and the recording of a stub period of equity incomes from the joint venture. There's simply too much uncertainty around the timing of that to really provide a meaningful EPS number for the quarter. So in terms of operating income for the remaining businesses, the ongoing businesses, we expect the range to be $37 million to $42 million, which is down 18% to 27% versus last year, and it's really all the Rail business. As I mentioned, we expect earnings to improve both in Metals & Minerals, as well as Industrial. If you were to exclude some of the consulting costs that we're planning on incurring in the quarter, that we did not incur in the fourth quarter last year, the operating income decline would be more in the 10% to 20% range. In terms of free cash flow for these remaining businesses and corporate, we expect that to be plus or minus 0. Let me reconcile that for you back to the guidance that we have provided on a full year basis for cash flow to be $50 million to $75 million. We provided that guidance back in early August. So year-to-date, the company is at about plus $10 million of free cash flow. We now expect the deal costs on a cash basis to be about $15 million, which were not anticipated in the guidance, at least not provided in the guidance. So that gets us to about $25 million for the year. Since we're selling Infrastructure very late in the quarter and December tends to be a very strong month in terms of working capital reductions in Infrastructure, we expect that after the deal closes, we will receive a post-closing adjustment based on the working capital test. That should yield something around $20 million of cash. So that takes the full year free cash flow up to the $40 million to $45 million range. And then the last piece was the poor performance in Infrastructure for the quarter, on the operating income basis, also translates into cash flow. So the Infrastructure cash flow is $15 million to $20 million lower in the quarter than we would expect.

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So those items, if you adjust for each of those items, gets us back into that range of kind of $50 million to $75 million for the full year on free cash flow. So I've also highlighted here what we've not included in guidance. As I mentioned, we're not guiding on the Infrastructure performance for the period over which we own the business in the quarter. We're also not providing guidance on the equity earnings from the joint venture. There will be an adjustment in Q4 to the impairment charge that we've recorded in Q3 for the Infrastructure assets based on changes in the balance sheet accounts since the end of the third quarter. We also talked previously about a restructuring charge in Q4 related to the reduction of corporate overhead. We mentioned on the last call that corporate overhead of about $30 million annually is allocated to the Infrastructure business that will be stranded or remain behind. And the plan is to take a $3 million to $4 million charge in Q4 that will result in reducing $15 million -at least $15 million of that $30 million of corporate costs. And if you look at the $70 million of corporate costs that we have in total and look at what's addressable in the shorter term, we are reducing about 1/3 of the addressable corporate costs in the fourth quarter on an annualized kind of ongoing basis. We may also, although it's not yet clear, take a charge in the fourth quarter for the simplification initiative in the Metals & Minerals business. We are working very actively through that program now. If it's not recorded in the fourth quarter, it will likely be recorded in the first quarter of 2014. We also have not included in the guidance the transaction-related costs and the impact on earnings. Through the end of the third quarter, we've spent about or expensed about $15 million of costs associated with the transaction. And by the time the transaction closes, we'll likely have incurred $20 million to $25 million of total costs on the Infrastructure transaction. On the tax rate, you'll also see, it will be unusually high in the quarter, in the fourth quarter, due to the transaction. I think going forward, looking at the remaining businesses and their profile, we would expect an ongoing tax rate in the 30% to 35% range. Okay. Those are the comments on the third quarter and the outlook for Q4. I will turn the call back to Patrick. Patrick K. Decker Thanks, Nick. We are committed to creating long-term value for our shareholders, improving financial returns, and we'll continue to take the necessary steps to do so. The Infrastructure transaction was the first major step in the transformation of the company. Embarking upon a transaction of this size obviously puts into motion various necessary actions such as restructuring and associated charges and clearly leads to various transaction-related accounting adjustments. These are all necessary transition effects, as we take the actions required to reposition the company for long-term success. I very much look forward to our Investor Day next month. During which, we will share much more on our strategic objectives, the road map and our plans for the future. So operator, we'd be happy to take questions at this time. Question-and-Answer Session Operator [Operator Instructions] Your first question comes from the line of Robert Norfleet from BB&T Capital Markets. Ashby W. Price - BB&T Capital Markets, Research Division This is Ashby Price on for Rob. In terms of Metals & Minerals, can you discuss how underperforming contracts impacted margins in Q3 and so far in Q4, and how should we think of the impact in 2014? Will additional contracts roll off? And what is the average duration of the contracts? Patrick K. Decker Sure, I'll give a -- try to give a few answers to that question. First of all, the average tenure of our contracts really varies by site and customer. I think historically, we've said that in somewhere typically in that kind of 5- to 7-, sometimes 10-year time frame, we have some that go longer and some that go shorter. But it is in that kind of high single digits from a year perspective. Secondly, in terms of what we saw in the third quarter and the guidance we gave for fourth quarter does reflect the fact that we are seeing the turn now in terms of having gotten more revenue from the contracts that we have won recently, which are higher return versus those that we had either walked away from or exited over the course of the past year. In terms of impact for '14, premature for us to give any guidance in that regard just yet. Obviously, it's heavily sensitive to volume as well. But we look at each one of these contracts that come up for renewal individually, and we'll continue to take a bright line on making sure that they are generating

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attractive returns on capital in order for us to continue to pursue them. So there's still very well be some churning contracts as we continue to shine that bright light, but we'll give more -- we'll give much more color on that in the Investor Day next month. Ashby W. Price - BB&T Capital Markets, Research Division Okay, great. And can you discuss the timing of overhead reduction in M&M and what specific actions are being undertaken to achieve the -- this outside of productivity enhancements? Will these actions provide meaningful improvement in 2014? Patrick K. Decker Yes. So as Nick alluded in his comments, we are very actively engaged and have been over the past few months here with the Metals leadership team on looking at what are the opportunities, not only to drive a level of cost reduction, that's certainly part of simplification, but it also is largely about making sure that we drive efficiency, speed, decision-making and get better at site execution and contract negotiations. So there's a number of factors that go into what we're addressing in simplification, with cost reduction certainly being one of those. We aim to be in a position, as Nick pointed out, to hopefully take a charge either in Q4 or no later than Q1 of next year. And so obviously, we would expect to then begin seeing benefits realized over the course of 2014 and beyond. Again, we'll -- we expect to be in a position to share more in that regard as we get to Investor Day. Ashby W. Price - BB&T Capital Markets, Research Division Okay, great. And lastly, in terms of work you're currently bidding on right now in M&M. What is the breakout between legacy-based logistics work versus less capital-intensive recourse recovery in environmental services work? And what is the difference in margins between these? Patrick K. Decker Yes. I mean, the -- generally speaking, the margins and return profile on those contracts that have a higher portion of resource recovery and byproduct sales, if we're in an environment where nickel prices and scrap metal prices are normalized, then those are higher-margin, higher-return projects typically than the base logistics work that we do. But again, those contracts, as I said, are sensitive to nickel prices and scrap metal prices, other things that affect demand and pricing on the resource recovery and byproduct side. In terms of mix, it's hard for us to point right now to a specific number as to what percentage of revenue we'd be looking at in the contracts that are up for renewal over the course of 2014. So I'd probably stay shy of giving you any marker in that area. Operator Your next question comes from the line of Scott Graham from Jefferies. R. Scott Graham - Jefferies LLC, Research Division So I wanted to ask several questions, and one of them is the guidance for the fourth quarter in M&M. That would imply a fairly meaningful turn in what we -- from what we saw in the third quarter. And I'm just kind of hoping that you can give us a little bit more breadcrumbs to kind of get there. Patrick K. Decker Sure. If we look at the fourth quarter and we compare it to Q3, we're effectively looking at LST volumes being up about 2% sequentially. And certainly, we would expect there to be a fair amount of operating leverage on that lift, given the size of our fixed cost base. As Nick pointed out, the things that are holding that back a bit in Q4 from a natural leverage standpoint are these one-off consulting costs that we've got to -- that are working with us on the simplification effort. We also are seeing -- we are at least expecting a slight decrease in nickel prices from Q3 to Q4. So that hits us from a margin and mix standpoint as well. It's -- when you look at the year-over-year, Scott, that comparison looks a bit richer, largely because of the fact that Q4 of last year was the lowest volume quarter that we had seen in about 3 years. And so I don't find the year-over-year to be entirely meaningful. It really is more of a quarter sequential discussion, as you pointed out. R. Scott Graham - Jefferies LLC, Research Division Okay. That's helpful. If we take a step back, and this is more of a corporate question, you've really accelerated on activities, let's just call them, Patrick, as -- particularly, when Nick joined on, it seemed like that triggered a lot of things. And when you talk about all these different things that we're doing, it's an Infrastructure deal, it's lowering corporate overhead, it's ramping new contracts, it's a focus on cash flow. How is the organization taking that? And I'm asking that because it was a little bit sleepy before you guys got there. And so -- and I know that they were eager,

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but I mean, how is that happening? And then maybe sort of an ancillary question to that is that as you restructure M&M to lower the corporate overhead, how does that work exactly? Is it just that your assessment of M&M, is that there's may be one too many people in all of the locations? So how does that work? Patrick K. Decker Let me take your first question. Obviously, the company and the organization is experiencing a fair amount of change. And I think to your point, you kind of insinuated that people were probably hoping for a level of change, given, certainly my arrival and I would say not only Nick's arrival but others that we've hired on the team that are helping in this effort. Change is always difficult, but change is necessary here. And I think that people are appreciating the focus. They're appreciating the catalysts that we're actually doing some things to address the portfolio. I think it's been well received across the business units, that we are taking a sharp look at what the role of the corporate center is and how this group interfaces with the businesses to really create value. Obviously, we've continued to bring people onto the team and upgrade talent. We've highlighted a number of people, obviously, that were on the team already, that are very talented individuals that have really carried the bucket here in terms of whether it be the transaction and whether it be a restructuring work at corporate, a lot of those activities are going on. And we're building strength and capability through this process. I mean, this is the best training people can have is on the job in terms of moving things forward here. So I think it's been well received. Obviously, we measure the temperature of the organization and make sure we pace it accordingly. In terms of the Metals & Minerals simplification, there are multiple aspects of this. I think we are -- first of all, we're taking a very inclusive approach with people both at the site level, as well as people that are kind of above the site in various kind of administrative and leadership roles because I do not believe in a purely top-down, from the corner office kind of mandate in terms of what a restructuring or redesign looks like. That adds time to the process, but I think it gets us to a much better outcome and is part of the change management. In terms of what the nature of the savings will be over time, I think first of all, some of the savings will need to be reinvested back into building capabilities and adding some resources in different areas. But net-net, I see the opportunity to reduce costs because I do believe that there are some efficiency opportunities at site levels in terms of headcount levels. But also, I think it's even more so above the site. And as we have refocused and repurposed what we're going to be going after from a strategy perspective, I think there is an opportunity for us to relook at what those headcount levels are and adjust accordingly. Operator Your next question comes from the line of Jeff Hammond from KeyBanc Capital Markets. James Picariello - KeyBanc Capital Markets Inc., Research Division This is James Picariello filling in for Jeff. Just can you flush out the comment on the $240 million in restructuring and how that fell short of or was below your guidance of $300 million to $350 million restructuring charge? F. Nicholas Grasberger Yes. To be clear, it was not a restructuring charge, right? It was the impairment of assets under the Infrastructure business that was sold into -- will be sold into the joint venture. When we provided the guidance on that expected loss a few months ago, we were looking at some precedent transactions of the same type and what their book values were on the balance sheet relative to kind of the headline value of the deal. And there was a pretty sizable discount applied in that process. So we used that precedent to kind of estimate what the impact would be on a Harsco deal. In reality, as we began to value, from an accounting standpoint, that stub and looking at the cash flows of the Infrastructure business in that joint venture, they quite frankly supported a much higher valuation than we thought. So that led to the loss being about $100 million less than we thought it would. James Picariello - KeyBanc Capital Markets Inc., Research Division Got it. And could you just provide a general feel on the Metals & Minerals segment and how -- should we be feeling better about the steel industry still weak capacity utilization? And any early read into 2014 would definitely be hopeful. Patrick K. Decker Sure. Well, I think that we are seeing some slight improvement here quarter sequential, although I wouldn't suggest that a quarter or 2 makes a trend line. And I think there still is a fair amount of uncertainty in the marketplace. Obviously, as you've seen, there had been some upgrades recently by the analysts on some of our major customers, better outlooks in North America, et cetera. I would balance that with the fact that we're -- you're also seeing reports of some softening in steel production and demand in places like China and India. So I think we are still very much in a touch and go here in terms of when we would see sustainable improvement in volume. We're still obviously seeing softness in terms of nickel prices and scrap prices. So as that -- that's been fully vetted into our guidance. So

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obviously, as that would turn over time, which we believe it will over time, that obviously begins to drive some lift from a margin and earnings standpoint for us. But we're certainly not declaring that yet for 2014. As part of our planning process, we get good reads from our customers as we develop what our own outlooks and plans are. We probably won't be in a position, even on the Investor Day in December, to give definitive guidance at that point for '14 because we won't be in the planning process yet, but we'll continue to keep you guys posted in terms of what we're hearing and seeing. Operator Your next question comes from the line of Glenn Wortman from Sidoti & Company. Glenn Wortman - Sidoti & Company, LLC Just back to the -- looking at the Metals & Minerals business from 3Q to 4Q, does some of the implied operating income decline in your guidance also include the allocation of some of those stranded corporate costs from Infrastructure? F. Nicholas Grasberger Yes. No, it does not. We -- those are remaining at corporate in the fourth quarter -- or in that stub period after the deal closes, let's say, for that, perhaps, 1 month period. Glenn Wortman - Sidoti & Company, LLC Okay. And then just looking at the Rail business, if you could just comment on the pipeline heading into 2014. I know it's early. I guess, we'll get more color at your Investor Day. And then also if you could just maybe add any comments on what you see as the significance of this recent contract win in Switzerland. Patrick K. Decker Sure. I'll take the latter part first. I mean, we think it's a very big win for us. This is the first win for us in Europe, certainly this size and scale. And I think it's probably helpful for those listening in to realize how influential the European railway authorities are from a specification standpoint around the world. Many of the developing markets around the world take their lead from the European rail specs. And so this is also a big referential win for us as we're bidding on projects elsewhere around the globe. Two, it's a very good foothold into that particular customer in Europe. And we certainly expect to use this relationship to get close with them and hopefully take other work over time. In terms of the impact for '14, this project itself won't begin to ship out until '15 and then into 2016. So I think as we said before, as you guys can all appreciate, these are very long lead times in terms of the design work and the actual spec and production work, so that's why the long time to deliver. In terms of the outlook for the business, I mean, we do have a hole that we've been trying to fill here in terms of '13 going into '14 by way of the revenue that we've had this year for the China administrative rail order that has now been shipped out. And we've been trying to fill that gap by aggressively going after aftermarket parts and service work. And I'm pleased by what we're seeing there, but we still have some of that hole to fill as we go into '14. And again, I take a longer-term look here at rail. The bidding activity is very healthy, it's robust. We've got line of sight to a pretty healthy, lengthy list of projects that we are pursuing. And certainly we plan next month in the Investor Day to give you guys more clarity as to what that pipeline looks like and when we think those things come to fruition and the impact they'll have on our financial performance over time. Operator Your next question comes from Robert Norfleet from BB&T Capital Markets. Ashby W. Price - BB&T Capital Markets, Research Division This is Ashby on for Rob again. Post-close of the Brand Energy JV, can you discuss what you consider an optimal capital structure, especially on the debt side? Patrick K. Decker Yes. I think we'll certainly be sharing much more in that regard in next month's Investor Day as we walk you through kind of what our overall financial policies and biases are going to be. But I think the initial use of proceeds will be to pay down debt. I think Nick alluded to what those kind of net debt levels would be as we exit the year. And certainly, we also understand the importance in terms of the dividend to our investors. And so again, in the Investor Day, we'll walk through a clear construct as to how we think about capital allocation. But in the immediate term, that very much would be to pay down debt and sustain the dividend.

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Operator Your last question comes from the line of Brian Jacoby from Goldman Sachs. Brian Jacoby - Goldman Sachs Group Inc., Research Division When you're looking at your capital structure and you talked about some debt reduction and so forth, can you just tell us how you're thinking about your capital structure going forward in terms of whether you want to have a capital structure that looks like an investment-grade company or more of a high-yield company? And maybe if you could share with us your -- on the review for downgrade by S&P, if maybe you had any updates on that in terms of how that might impact your funding if you do get downgraded to high-yield or whether you think maybe you can stay IG there, that would be helpful. Patrick K. Decker Sure. Well, let me take the latter part first. Obviously, it's difficult for us to predict what is in the heads or minds of people at the rating agencies in terms of how they're going to think about that. But clearly, we stay close to them and we do have ongoing reviews and dialogues with them. In terms of if there was any downgrade there, would it have any impact on our ability from a financing standpoint, our view, either financing capacity or cost. We don't believe it has a meaningful impact. Obviously, we aspire to be investment grade rating over time. But in the meantime, we're going to do what we need to do appropriately in a [ph] fashion to transition the company and to do things we need to do there. But again, certainly, over time, we aspire to have a very healthy investment grade credit rating. Again, we'll share more in Investor Day as to time frame and how we look to navigate that over the course of the coming time. Operator And we have no further questions in queue. I would now like to turn the call back over to the presenters. Patrick K. Decker Great. Well, thank you, operator. Let me conclude the call by simply repeating that we do understand it's imperative to improve our operational processes and execution, to enhance the financial return profile of the company and to generate stronger results. In the third quarter, we announced the first major step in this transformation with the Infrastructure sell into the JV. I am highly confident in our actions and look forward to communicating more with you at our Investor Day next month. So with that, good day to everyone, and we'll see you soon. Operator This concludes today's conference call. You may now disconnect. Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited. THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS. If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

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