Q3 2019 Earnings Call
Good morning, My name is a tiny out and I will be your conference facilitator.
At this time I would like to welcome everyone to be Harsco Corporation third quarter release conference call.
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I would now like to introduce Dave Martin of Harsco Corporation Mr. Martin you may begin your call.
Thank you as a Tanya welcome to everyone. Joining us this morning, I'm, Dave Martin Vice President of Investor Relations for Harsco with me today as Nick Grasberger, Our chairman and Chief Executive Officer, and Piedmont in Harsco, Senior Vice President and CFO .
Good morning, we will discuss our results for the third quarter of 2019 and our outlook for Q4 will then take your question.
Before I presentation. However, let me mention a few items.
First our quarterly earnings release as well as a slide presentation for this call are available on our website.
Second this call is being recorded and webcast a replay will be available on our website later today.
Third we will make statements that are considered forward looking within the meaning of the federal Securities laws. These statements are based on our current knowledge and expectations and are subject to certain risks and uncertainties that may cause <unk> actual results to differ materially from these forward looking statements.
For a discussion of such risk factors and uncertainties see the risk factor section in our most recent 10-K the company undertakes no obligation to revise or update any forward looking statements. Lastly on this call. We may refer to adjusted financial results that are considered non-GAAP foresi see reporting purposes, a reconciliation to GAAP results is unclear.
Did in our earnings release as well as a slide presentation today.
That being said I'll turn the call over to Nick.
Thank you, Dave and good morning, everyone. Thanks for joining us.
This past quarter was yet another quarter, the demonstrated our ability to execute across the organization.
Taking meaningful steps to reshape our strategic focus and navigate difficult market conditions.
Together these actions allowed us to deliver growth across our business, even with the challenging market conditions in our environmental segment.
Earlier this year, we communicated our vision to be a global leader of environmental solutions, which we believe will create meaningful value for harsco.
All of our stakeholders.
This is an important shift for us for a number of reasons Harsco has always been environmental solutions company.
And it became clear the further investments in focus in this area would allow us to drive higher growth with enhanced margins and reduce cyclicality.
Practically speaking this also provide some insulation from some of the market dynamics. We saw for example, this quarter.
And our environmental segment as its customers manage through some of their own challenges, which I'll touch on in a moment.
As we continue to advance our portfolio transformation. We are excited about growing harsco in a way to reflects our core values.
Meets the innovation needs of our customers increase meaningful value for our shareholders.
Turning to the quarter I could not be more pleased with our first quarter of clean Earth as part of the Harsco family.
Revenues grew 20% and profit doubled compared to the same quarter last year.
Our integration of the business is on track to achieve its objectives and prepare us to scale the business to a much larger segment of our portfolio.
Over the next few years.
I'm also encouraged by the collaboration between clean Earth and Harsco environmental.
What gets me excited about this transaction has the ability to realize commercial and operational benefits from this new partnership over time.
Particularly as we sharpened our focus and grow both platforms.
Speaking of Harsco environmental business witnessed the most difficult market conditions for its customers since 2016.
Especially in North America.
Mill utilization rates in Q3 declined to 76%.
Compared to an average figure of 82% over the past four quarters.
Nevertheless, when excluding the impact of foreign currency movements, a cheese revenues were unchanged and profit was up 10%.
In Q3 compared to the same quarter of last year.
And profit margins were at the highest point in some time, reflecting add on services improved contract mix.
And ongoing cost reduction initiatives.
Overall, we expect HG to deliver its fourth consecutive year profit growth in 2019, despite dramatic steel industry volatility over the period.
As we look ahead to 2020, we expect continued growth in HCC as result of or increasingly are increasing backlog and visibility to new contract opportunities environmentally driven add on services.
Turning to Harsco rail I'm confident in saying that the strength of our brand and the outlook for the business have never been stronger.
And the evidence is clear.
The order backlog is that a record high or innovations in real surfacing and treatment lead the industry.
And the preeminent state owned railroads in the world such as Deutsche abandon our increasingly looking into harsco real to provide environmental and safety solutions across their networks.
Our ambitious but realistic goal is to achieve 100 million EBITDA in harsco rail in the next three years.
I'd like to make just a few comments and our outlook for next year.
Although we will look much more closely and our expectations for 2020 over the next few months.
I have a preliminary view based on our recent long range planning process.
First of all we remain optimistic that each of our three segments will produce revenue and earnings growth in 2020.
With the rate of growth in rail and clean Earth.
Outpacing that of environmental.
Importantly, our recent portfolio rotation actions, including the acquisition of clean Earth and the divestiture of the exchanger business.
A key factor supporting our positive outlook.
Overall on a consolidated basis, we expect topline growth on a comparable basis.
To be in the mid to high single digit range next year with earnings grew with the earnings growth rate outpacing that of revenue growth.
With respect to financial leverage we should end this year at around two times and anticipate further improvement in this figure in 2020.
Our leverage should also benefit from the divestitures of the remaining businesses in our industrial segment over the next few months.
Before turning the call over to Pete I'd like to focus for just a minute on our environmental social and governance initiatives.
Earlier this month, we released our 2018 2019 SG report.
For most comprehensive sustainability report to date.
Last 18 months had been exciting period of change for our business and this expanded report tells a more comprehensive story about our strategy.
Mmm solutions, we are delivering to our customers.
Our corporate governance approach and the investments, we are making and our people and in our communities.
As you can see on slide four harsco businesses are already delivering environmental products and services to our global customers.
We're pleased to see to have seen a very strong positive response from a number of our investors.
Which reaffirms our recognition of the importance of sustainability.
Increasingly critical role it will play in Harsco school forward strategy.
I'll now turn the call over to Pete.
Thanks, Nick and good morning, everybody.
So let's start with slide five in our consolidated financial summary for the quarter.
First goes adjusted operating income in the third quarter was $57 million, excluding acquisition amortization expense.
Translates to a margin of 13.5% on revenues of $423 million.
This income figure compares favorably with adjusted operating earnings of $45 million in the 2018 quarter.
Which excludes our prior industrial segment now accounted for as discontinued operations.
Also our Q3 operating results were within the guidance range, we previously provided a $56 million to $61 million.
We are pleased with this performance given the external market pressures on our customers and harsco, environmental which intensified throughout the quarter.
Lower services demand or steel output commodity prices and foreign exchange negatively impacted our results by a few million dollars in the third quarter versus our expectations at the beginning of the court.
However, despite these challenges our business grew.
Environmental results improved year on year in the segment's adjusted operating income margin exceeded 13% for the quarter.
This outcome illustrates the fundamental improvements we've made within this business in recent years in our ability to manage through difficult conditions.
It also reflects positively on the growth investments, we started to make an environmental.
Meanwhile, our clean Earth and rail segments, both had very strong quarters that were consistent with our expectations.
Rails adjusted earnings were lower year on year.
This comparison as we've discussed before is against a record quarter for the segment in Q3 of 2018 and this comparison challenge will reverse in the current quarter.
Our optimism for Harsco rail remains very high.
Clean Earth showed significant year on year growth in Q3.
Gross revenues grew more than 20%.
And as adjusted operating income increased more than 100% compared with its 2018 quarter.
On a consolidated basis, our schools adjusted earnings per share from continuing operations was 36 cents compared with 32 cents in the prior year quarter.
And this outcome also puts us within our guidance range of 35 to 41 cents per share.
Unusual items in the quarter totaled nine cents per share and primarily included clean Earth integration and acquisition related costs in additional expenses to complete our productivity improvement initiatives and harsco rail.
Other unusual items, including site exit costs and other adjustments netted to a very small amount in the quarter.
Next our free cash flow was $5 million in Q3, which was consistent with our expectations.
In the current quarter Q4, our free cash flow is expected to be materially better as is traditionally the case in our fourth quarter.
Lastly, before moving on to our segment slides, let me comment on our capital structure and share buyback activity.
Given that we sold our air exchangers business on July Onest. The day after the second quarter close is understandable that there was some confusion about our capital structure. Following our Q2 results.
Our Q3 balance sheet clarifies that situation.
At the end of Q3 and in fact at the beginning of Q3, our net debt approximated $700 million and our net leverage ratio was 2.2 times.
Liquidity at September Thirtyth was over $600 million.
As you can see our capital structure as well as our financial flexibility remains very strong.
The balance sheet position also reflects that we repurchased 1.4 million shares of harsco stock in Q3 for $26 million.
At an average cost of approximately $8 $18 per share.
At the end of Q3 $19 million was remaining under our current buyback authorization and we've continued to repurchase our shares since the end of the quarter.
Now please turn to slide six in our environmental segment.
Segment revenues in the third quarter were essentially unchanged compared with Q3 2018 after foreign exchange translation impacts.
Meanwhile, adjusted operating income totaled $34 million, representing an increase of 8% versus $32 million in the prior year period.
And our adjusted operating income margin was just over 13%.
There were a number of moving parts in the quarter as you can imagine.
The high level summary from our bridge is that lower SGN, a expenses new sites higher applied product contributions in improved services mix offset the impacts of lower steel output in commodity prices as well as foreign exchange rate changes in site exits.
Given the challenging macroeconomic factors, we've been actively and rigorously managing our cost structure.
These actions helped stabilize our results in the quarter and as we move forward. We will continue to focus on these actions given the ongoing market conditions.
Steel output at our continuing customer sites declined approximately 6% compared with the third quarter of 2018.
As a result, as Nick mentioned facility utilization rates at our customer mills were the lowest we've experienced since early 2016.
Also commodity prices were lower year on year.
Despite these trends our profitability in environmental improved versus 2018, and our adjusted operating margin exceeded 13%.
Clearly we view our Q3 results in environmental as a positive achievement given the challenges facing our major customers.
Next please turn to slide seven and clean Earth.
As you know this is our first quarter with clean Earth, and it's off to a great start.
Revenues grew 23% and profitability doubled as I mentioned earlier.
Processing volumes increased strongly for both contaminated and hazardous materials and pricing trends were favorable in these business lines as well.
Acquisitions completed in late 2018 also boosted these comparisons.
The segment's adjusted operating margin in the quarter was nearly 19% where the best of our three segments.
Our clean Earth management team executed well in the quarter our business in functional integration is largely complete and has been successful.
And we're on pace to achieve the targeted run rate of synergies by the end of 2020.
Now please turn to slide eight regarding our rail business.
The segment had another strong quarter.
Revenues reached $75 million and rails adjusted operating margin exceeded 17%.
As I mentioned Q3, 2018 was an unusually strong quarter and therefore, a tough comp.
Year on year change in profitability was driven by lower shipments in the less favorable product mix of equipment in parts.
And these factors were partially offset by lower manufacturing costs.
Beyond the financial results there were a number of other positive developments in rail during Q3.
Our initiative to consolidate our north American manufacturing footprint into our South Carolina facility is largely complete.
We launched our next generation tamper technology, which has been under development for some time.
And we experienced a nice growth in our backlog.
In particular, we won a large order in Germany, which we recently announced.
And there are other significant wins in the quarter as well.
As a result, real backlog increased 40% quarter on quarter to nearly $380 million.
Year on year, our real backlog is up 45%.
And importantly, this backlog provides us with tremendous visibility as we begin to think about 2020.
Next let me discuss our outlook for the year on slide nine.
Our latest expectation is that our full year 2019 revenues will increase mid single digits.
And our adjusted operating earnings will grow nearly 10% at the midpoint of our guidance range.
As a reminder, this outlook includes the results of our prior industrial segment for the first half of 2019.
For the year adjusted operating income is now anticipated to be within a range of $209 million to $214 million.
The midpoint of this guidance is modestly lower than our prior midpoint.
But in the context of the current steel markets in a sluggish global industrial economy, We view our outlook is positive for all three of our businesses.
The remaining guidance figures on the slide or updated to reflect the change in operating income in indicates a free cash flow, our new range incorporate slightly higher growth related capital spending.
Our expectations for each of our segments is included in the appendix of the slide deck.
Let me conclude on slide 10, with our fourth quarter guidance, which points to strong year on year growth in each of our three businesses.
Q4, adjusted operating income before acquisition related amortization is expected to range from $53 million to $58 million.
Harsco Environmentals growth will be driven mainly by new site benefits and lower administrative spending partially offset by lower services demand foreign exchange and site exits.
Improved year on year performance for clean Earth is anticipated as a result of strong volume growth and better results within its contaminated and dredged materials lines of business.
Prior year acquisitions will also help comparisons.
In rail is expected to benefit from higher volumes and more favorable product mix for equipment parts and protracted technology products.
So that concludes our prepared remarks ill now turn the call back to the operator to open the lines for questions.
Yes.
Any are you with us.
Yes. Your first question comes from the line of Jeff Hammond of Keybanc capital markets.
Hey, good morning, guys Hi, Joe.
Just wanted to understand I'm struggling getting to the to the Fourq you guide a little bit. So just on on environmental I think you said it'd be flat to up on op income ex FX can you just quantify.
What the effect or what you think the FX op profit headwinds going to be.
Yeah, Hey, Jeff its fee so on the on the revenue side for Q4, the FX headwind using the end of quarter rates is going to be about anywhere from $6 million to $9 million.
And the Hawaii impact to be about 1 million.
For Q4, so that puts it wed like 4 million for the year.
For the full year FX will be about 5 billion in tone at the at the operating income level 45 million at the top line. Okay. So just to be clear your.
Your op profit is going to be flat to improve ex that 5 million.
We should be up mid single digits in environmental and Q4 from the prior year and that's really a combination of despite the the FX headwind and the commodity hadn't which is little bit. We've got some good service mix, we're anticipating some growth in applied products.
I think we have some some cost improvements that that we have undertaken that will offset that and generate mid single digit growth for Q4.
Okay, and then and then on rail it looks like Youre going to.
Your fourq is going to be up 100% to get to the 30% to 35%. So can you just.
I mean, it sounds like mix is going to be favorable what do you think the.
EBITDA margin ranges to think about for on that on that big growth number.
Yeah, so personal you're absolutely right. That's the kind of growth, we're expecting is going to be darn near close 100% year on year EBITDA margin for rail is going to be.
Similar to the neighborhood of.
16, 17%.
Which is about what we've experienced.
The first half.
Actually will be a little higher than that.
Okay.
Okay great.
And then.
Just kind of.
Nick I appreciate the 2020 color.
Can you just within that comment that you think you can grow in and environmental how should we how are you thinking about or how should we think about.
Plus t. volumes within the context of that and maybe you can just break out what you say you know all tech and the net new contracts can add and.
And maybe what you can grow in kind of a flat.
Steel production environment. Thanks.
Yes, Jeff. This is Pete we don't really have all the details on that yet obviously, we're still early days in kind of finalizing our 2020 outlook, but clearly we remain optimistic.
Even with some expectations that there won't be a lot of production growth from our customers in terms of steel production. The applied products is going to contribute a good portion of the growth for us.
I think we'll continue the cost reductions that was expected and those factors together I think will provide us a good a good bit of tailwind that certainly the new contract wins, we won 35 new contracts over the last couple of years.
And a lot of those if not a significant portion of those will be fully ramped up by the end. Their 2020. So we will definitely start to see the impact of that the contract win rate in 2020, all those factors together kind of support the growth that the Knicks alluded to.
Okay, and if I could speak one more in just rail you some pretty positive on the outlook certainly over the next three years, maybe just give us a little bit better picture of how you think about the growth into into 2020. Thanks.
Yes, so Jeff we given the their record backlog that we have.
Expected the end of 19, we're looking at pretty strong double digit topline growth in rail next year and it's really.
Across the different segments of the business both products and geographies. So it's a it's really a very strong outlook.
And rail.
Okay. Thanks, guys.
Thank you.
Your next question comes from the line of Rob Brown with Lake Street capital.
Good morning.
Just sticking with rail a little bit.
What kind of gives you the optimism there is it is an overall environment improvement it or is it is it is it some product gains or what's what's sort of the driver of the optimism there.
I would say, it's two things Rob certainly the the innovations see the launch of new tamper that Pete referenced.
As a.
Is it getting an awful lot of interest from the that the class ones.
We also.
Outside the us.
Utility vehicles and another.
Vehicles had built a very strong backlog at both in Europe and Asia.
And there's some optimism in South America as well, so even though the kind of the macro factors within the rail industry freight industry in the us are somewhat mixed.
Can we can look to our backlog and the innovations and also in our pro trend segment some of the to safety and technology products that we.
We are increasingly selling to a.
Municipalities.
As a as quite positive.
Okay, great. Thank you and then the cleaners business could you remind us again, where you're at in terms of getting synergies and that was on track, but to put how's that going and then and then second how do you how do you see that business growing over the next couple of years it sort of where you are in thinking through M&A.
Well.
Yeah, Rob as Pete I'll answer the first part of question certainly Nick in any additional color commentary I think.
With respect to synergies. We are we had targeted looking for kind of a run rate of $10 million of synergies and we're on pace to get those by the end of 2020. So I think the integration efforts that we've done to date with respect to the funnel. The functional integrations are kind of well on target maybe even slightly ahead of target list, we feel pretty good about.
In terms of the growth factors here, it's the organic growth rate. We saw this year when you carve out the acquisitions just in Q3 was about 14%.
Certainly not out of the realm of possibility going for we don't expect quite that degree of core organic growth, but it should be kind of high single digits, maybe even low double digits.
So I think that'll be coming from all three of their lines of business contaminated hazardous and probably even to a larger degree the dredged materials business. So I think those look pretty good as far as M&A goes maybe a nickel it you will comment on.
You may recall, Rob that some of the commentary around the announcement of the acquisition was the industry itself.
The clean Earth participates in remains a kind of highly fragmented.
And clean Earth has been somewhat successful.
Making largely smaller acquisitions over the past five or so years, we certainly see that.
Opportunity, continuing but even larger opportunities, we believe may well be available so.
I think relative to HCCI for CECO, environmental you'll see us allocating more M&A capital to clean Earth.
Okay. Good.
No I think you touched on the remaining and environmental or sorry, the remaining industrial businesses.
Divesting those how do you see the timing on that in increments. What those are doing in terms of revenue and EBITDA.
So so full year those businesses the remaining businesses as you know the the Patterson Kelley industrial and anybody I kg business, there are kind of foreign or discontinued operations to full year EBITDA impact of those businesses is low $20 million. They are both actively being marketed for sale, Rob and we fully expect that we will have these.
Transactions done by the India.
Okay great.
That's all have thank you.
I cannot give I'd like to ask your question. Please press Star then one I know a telephone keypad.
And you have a question from the line of Jeff Hammond of Keybanc capital markets.
Hey, just a couple and cleaner so.
I think you talked about that as being kind of a 7% core growth you know kind of business. How are you thinking as you start to look at 2020, how are you thinking of gross shaping up relative to you know that kind of long term growth rate.
I think the 14% as much as we'd like to say that sustainable I think the more likely or organic growth rate for clean Earth is probably a mid to high single digits, probably high single digits.
And so that would be expectation for 2020.
Okay and then.
You know how soon would you expect you know whether it be bolt on or something bigger to feel comfortable doing some M&A and the cleaner space.
Yeah, I think we feel a prepared to to continue on the M&A in that segment at this point, we as I said, we we we largely have executed the integration of the business.
And I feel quite good about the underlying processes and the team that we have so I think a I think we feel prepared to take that next step.
And then there can you mentioned in the prepared remarks about kind of collaborating with the AG and clean Earth can you just talk about maybe some early observations and where you're seeing offer opportunities for synergies are collaboration. Thanks.
I think the opportunities are more with clean Earth supporting.
Applied product initiatives within Harsco environmental.
So whether it's a other byproducts or waste streams at our customer sites or even with our Reed minerals business.
I think we've been quite pleased with the some of those solutions that clean Earth.
As suggesting on some issues that we've had a difficult time tackling ourselves. So it's mostly on the applied products side.
Okay perfect. Thanks.
There are no further questions at this time Mr. Martin you May proceed with any closing remarks. Thank.
Thank you for joining this call a replay of the call will be available later today through November Twelveth and the replay details are included in the release earnings release also please contact me with any follow up questions and again, we appreciate your interest in harsco and have a great day.
This concludes today's conference call you may now disconnect.
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