2008 Scrap Metals Supplement - A Diversified Annuity

An often-mentioned bromide by many scrap recyclers is that they need to become partners with the companies that they supply with raw material. For the mill services firm MultiServ, this is more than just a saying.

The company, a division of Harsco, has blossomed over the past several years into one of the world’s largest steel mill services firms. MultiServ is looking to use the contracts it has established in the steelmaking sector to foster additional growth.

MultiServ has been able to grow its business through a combination of adding long-term contracts as well as extending existing contracts. The

Most recently, the company has signed a 12-year, $50 million contract with Ningbo Iron & Steel to support a new integrated steel mill the company is building in China. When operating at full capacity within the next three years, the mill is expected to have 6 million tons of production capacity. As part of its services with the steel mill, MultiServ will operate and manage the company’s scrap yards, loading material and transporting it to the mill.

MultiServ is one of three operating units of Harsco. The other operations are Access Services and Minerals & Rail Services. As diverse as each of the segments is, Harsco seeks to integrate the different divisions where it can.

As a mill services company, MultiServ has found that as many of the global steel customers seek growth opportunities, companies providing mill services are more in demand. Presently, the company has operations at more than 160 sites in 32 different countries, including various mill services performed at some of the largest steel companies in the world.

The contracts that the company has lined up are significant. The backlog value for MultiServ’s portfolio has a project net value of $4.75 billion for both new, renewed and start-up contracts. For 2008, the company forecasts contract values reaching $5 billion, while by 2010 the company hopes to reach the $5.5 billion level.

Many new projects have buoyed this growth, says Geoffrey Butler, president of Harsco’s MultiServ mill services division. There are tremendous opportunities and, during a presentation he gave at the company’s annual analysts meeting in early December, he noted that there are a host of reasons why a steel mill will outsource these tasks to a company such as MultiServ. These may include providing environmental solutions, offering cost and efficiency savings through global best practices, strengthening customers’ core business focus; adopting new technologies; promoting safety best practices and providing capital relief.

"Many of these top steel companies want large service providers to help accelerate their rationalization programs, reduce operating costs, improve efficiencies and improve the total cost of ownership.

"We accomplish this by deploying our capital on their property. We create co-products as well," Butler notes.

Some of the environmental and technology developments include the briquetting of waste dusts; development of dust suppression techniques, including both chemical and physical; maximizing the internal use of scrap; and improving the tracking of both semi-finished and finished product.

Since MultiServ has operations in more than 30 countries, the global development of the steel industry is an area of keen interest for the company. And, as steel production grows at far greater levels outside North America, MultiServ is looking to mirror this track by expanding its operations in faster-growing geographic regions of the steel industry.

Presently, the company has 66 locations in Europe, 34 operations in Latin America, 39 in North America and 22 throughout the rest of the world.

While this may, on the surface, reflect a fully diversified company, the reality is that MultiServ still generates an overwhelming percentage of its revenue from North American and Western European business. Roughly 80 percent of its business comes from North American and Western European steel mills. Going forward, the company is looking to lower its reliance on these more mature markets to around 70 percent of its business by 2010.

Meanwhile, MultiServ is looking to sharply increase its business in regions such as Eastern Europe, Latin America and the Pacific Rim.

Even with its current stake in the global mill services business, MultiServ sees additional opportunities to further develop this segment of the business.

The company is targeting its growth prospects in four ways: growing organically through adding additional services at its existing sites; growing organically through expanding to un-served sites; acquiring niche companies offering specialty services; and extending outside the steel side by targeting other materials, such as copper, nickel, ferro alloys, aluminum, mining and cement.

At its annual analysts meeting, Salvatore Fazzolari, Harsco president and

Growing organically is one way to extend MultiServ’s business beyond its core current portfolio. Acquisitions provide another means through which the company can scale its business across many geographical regions.

Fazzolari notes that the company recently acquired a privately owned mill services company called Alexander Mill Services International, which has contracts in Poland, Romania, Greece and Portugal. The acquisition of Alexander gives the company a greater opportunity to expand its business in the resurgent steel industry in Eastern Europe, a region of the world that MultiServ has targeted for growth.

Previous to that acquisition MultiServ completed the acquisition of Excell Materials Inc., a multinational company that is engaged in the reclaiming and recycling of steelmaking slag.

For MultiServ, there is significant room to grow. While the company forecasts that the worldwide market potential for mill services is around $25 billion annually, the company’s share of that market is only around 5 percent, giving the company a significant opportunity to expand that business.

In his discussion, Butler notes that the volume of steel at the plants that MultiServ has contracts with is around 200 million tons, equating to less than 18 percent market penetration. In emerging countries, this market penetration is far lower.

"The steel industry outsources, because strong, competent specialists can undertake support services better than the steel companies themselves, and provide environmental benefits."

Along with the traditional services the company has offered, MultiServ is aggressively expanding the portfolio of services it offers. Depending on the customer, MultiServ can provide a full menu of services, including handling and processing of raw material; maintenance of all equipment; slag management; metal recovery; semi-finished products; finished products; by-product recycling; slag utilization; and handling and processing of nonferrous metals.

MultiServ also is getting more involved in emerging technologies, including providing GPS and RFID tracking; by-product recycling; slag applications; and flame technology. The company has introduced more than 200 patents covering close to 20 different technologies.

MultiServ also has excelled at working the base materials well. The company claims it handles and sells more slag and coke than anyone in the industry.

The steel industry may be the sector where MultiServ has had its greatest success, but the company also is further developing its business working with other metal commodities. MultiServ notes non-steel businesses is where it sees good growth potential, including aluminum, with an estimated market potential of $160 million; nickel, with an estimated market potential of $240 million and 1.5 million tons in production; copper, with an estimated market potential of nearly $135 million; ferro alloys, with an estimated market potential of $130 million; mining and quarrying, with a market potential of more than $200 million; and the cement and concrete business, with a market potential of more than $200 million.

While MultiServ provides a diverse menu of services, the company is quick to point out that it also is a significant scrap recycler in its own right. Butler says MultiServ processes more scrap than many large scrap companies. "We handle over 325 million tons of scrap for our customers. We operate four car shredding units delivering more than 1 million tons a year of shredded car scrap. We also deliver just-in-time over 15 million tons of scrap in scrap baskets right to the customers doors," he says.

Going forward, MultiServ expects to grow while the steel and metals industries undergo significant consolidation. The changes in the landscape for the metals business mean there will be significant geographic opportunities for new customers and further outsourcing opportunities with existing customers.

"Our goal is simple," Fazzolari notes. "We want to become a highly respected leader in mill service and industrial services, as we believe the new peer group reflects some of our characteristics: a less cyclical business model [and] a higher PE (price to earning) ratio."

With strong opportunities to grow its business, the company also is seeking to improve its operating margins to its targeted 10.5 to 11 percent level.

As the steel industry continues to grow on a worldwide basis, MultiServ is well positioned to grow with it.