Q4 2019 Earnings Call
Good morning, My name is set and he and I will be your conference facilitator at this time I would like to welcome everyone to the Harsco Corporation fourth quarter release conference call. All lines have been placed on mute to avoid any background noise. After the speaker's remarks, there will be a question and answer period, if he would like to ask a question.
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I would now like introduce Dave Martin of the Harsco Corporation Mr. Martin you May begin your conference.
Thank you Stephanie and good morning, everyone joining us some Dave Martin Vice President of IR for Harsco with me today as Nick Grasberger, Our chairman and Chief Executive Officer, and Pete Mine in our school senior Vice President and CFO.
Morning will discuss our results for the fourth quarter and the full year as well as our outlook for 2020 will then take your questions.
For a 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 we will make statements today 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 actual results to differ materially from those forward looking statements.
For a discussion of such risk factors and uncertainties see their risk factor section in our 10-K. The company undertakes no obligation to revise or update any forward looking statements.
Lastly on this call will we refer to adjusted financial results that are considered non-GAAP foresi see reporting purposes. A reconciliation to GAAP results is included in our earnings release today as well as a slide presentation now I'll turn the call over to Nick to begin his remarks.
Thank you, Dave and good morning, everyone.
Our results for the fourth quarter were consistent with our previous guidance.
Pete will provide additional color and a few minutes.
My comments will focus primarily on our outlook for this year.
Also reinforce a few of the key messages related to our planned acquisition of the environmental solutions business or east so from store cycle.
For 2020 on a consolidated basis, we expect revenue and EBITDA to grow by mid to high single digits with the strongest growth in a rail followed by clean Earth and Harsco environmental.
For H.E.
Our guidance does reflect a cautious stance on the potential effect of the Corona virus outbreak on her eightci in real businesses.
Even though we've yet to experience any meaningful direct impact.
Well make a few comments on each segment first harsco environmental.
Our Q4 results reflected the weakest conditions across our steel industry customers in the last four years.
Volume was down nearly 10% year over year and capacity utilization declined to 72.5%.
The lowest figure since Q4 of 2015.
Nevertheless, on a full year basis, the impact of new contracts and cost reduction measures.
Well, they cheetah holder revenues and profits about equal to 2018.
And once again delivered double digit profit margins.
We anticipate the weak market conditions to persist through at least the first half of this year.
Perhaps modest LSG growth in the second half.
Our growth drivers this year will again be new contracts further cost reduction as well as gains from innovation and applied products.
Well, new contract growth opportunities and Agee remain at a high level or allocation of capital will become more balanced between agee or clean earth segments and debt reduction.
So we will become even more selective on growth investments in nature.
Finally, we have recently made several organizational changes in a ci I'm very excited to see what the team can accomplish this year.
Turning to clean Earth.
Expect a business to perform in line with our assumptions when we acquired the business last summer.
If anything internal growth opportunities are greater than we expected across all business lines, those being hazardous waste contaminated soil and dredge material.
The integration of clean Earth is also on track and should be completed later this year when the final I T systems are migrated to the harsco systems.
Perhaps most importantly, the cleaner team is highly enthusiastic about both the strategic and financial merits of the pending combination with you. So.
Concerning harsco rail, we anticipate a 30 plus percent increase in revenue.
Based heavily on our existing backlog and you expected boost in manufacturing capacity and productivity by the middle of the year.
Since the revenue growth is weighted more towards the second half for the year. It's critical that we achieved these mid year milestones.
Let me provide a few more specifics.
We've developed a robust plan, we call score or supply chain operational recovery.
That incorporates the key elements required to fix our problems.
These elements include top grading our operational leadership.
Which has been completed.
Reconfiguring the plan to expand the equipment slots from 18 to 34.
Oh sourcing additional lower value work to existing partners.
And implementing a manufacturing system to optimize material flow and reduce lead times.
All of these elements and others are currently being measured and track against the score program not simply to achieve at the mid year milestones.
But also to ensure the fixes our sustained.
The entire real leadership team together with Pete and myself are heavily engaged in this program and at this point I'm very confident in a successful execution.
Moving on to the East all acquisition as you might imagine there's a significant amount of work underway by both our internal team and our external partners.
To advance our planning to integrate the business and improve its financial performance.
We have about 20 functional operational teams in place and reporting into our integration management office.
As stated our goal is to double you. So EBITDA to 70 million a in three years and moved the margins closer to those of clean Earth overtime.
Recall that that you saw margins today around 6%, whereas the comparable clean Earth margins are about 20%.
The primary value drivers the near term will be returning visibility and accountability to the sites.
Quicker responses to bid requests improved billing processes.
Optimize logistics and better vendor management.
Well the cleaner team and are outside partners have tremendous expertise in these areas.
And are eager to get started in partnership with their new easily colleagues.
Well I'll turn the call over to Pete.
Thanks, Nick and good morning, everyone.
So let's start with slide four and our consolidated financial summary for the fourth quarter.
Wescos revenues totaled $400 million, an adjusted operating income in the fourth quarter was $31 million.
All these figures are the same as the preliminary financial results we provided in January.
This adjusted operating income figure compares with adjusted operating income of $27 million in the prior year quarter.
After excluding the industrial businesses that we've now so.
The majority of the variance against the original guidance in the quarter was attributable to our rail segment, where we encountered shipment delays and higher operating costs as a result of manufacturing and capacity challenges.
I mean, the consolidation of our manufacturing facilities in North America.
The remainder of the variance was due to the environmental segment were softer than expected services and product demand from our customers impacted the results.
Steel output and our customer sites was roughly 6% lower than anticipated and declined approximately 9% compared with the fourth quarter 2018.
Furthermore, steel market pressures intensified late in the quarter essentially a continuation of what was overall a challenging year for the industry.
Against this challenging backdrop, we are encouraged that the business was able to maintain a 10% adjusted operating margin in the quarter, which is comparable with the prior year quarter.
Overall, we again believed that our performance, particularly later in 2019 illustrates the improvements we've made within this business in recent years.
And it reflects positively on the growth investments we've made in environmental.
Meanwhile, clean Earth had another strong quarter consistent with our expectations.
Revenues grew 20 plus percent year on year, or 17% organically and we delivered a 70 cents adjusted operating margin in Q4.
Our schools adjusted earnings per share from continuing operations for the fourth quarter was 12 cents.
This figure is adjusted for strategic cost related to our pending you saw acquisition and a few other unusual items in the quarter.
Lastly, we generated $28 million or free cash flow in Q4, and we spent nearly $6 million to repurchase 349000 shares of our stock in the quarter.
Now please turn to slide five and our environmental segment.
Revenues totaled $243 million and adjusted operating income was $25 million translating to a margin of just over 10%.
Revenues and profitability were largely impacted by lower services demand, including the impact of exited sites.
Customer steel output was down meaningfully year on year as I indicated earlier with capacity utilization at our customer sites at roughly 72%.
As Nick mentioned this represents the lowest utilization level at our customer sites in four years.
And reflects that there was likely a meaningful amount of inventory de stocking going on throughout the steel supply chain well underlying demand was far more stable.
Steel producers decided to trim production as a result.
These actions appear to have stabilized the markets and we're hopeful will lead to a recovery in the coming quarters.
The impact of exits is principally related to two sites in the southern hemisphere.
One was a joint venture with a customer who exercised its option to exit the contracting purchase our equipment.
The other exit.
It was a slight where the renewal metrics didn't meet our standards.
You applied products impact was principally driven by a few businesses in North America were lower volumes in commodity prices weighed on our performance.
These factors were offset by lower administrative expenses and other spending as we recognize the need to control costs, given the external market conditions in the quarter.
Next please turn to slide six for clean Earth.
As noted clean Earth delivered another strong quarter with revenues up 22% and profitability nearly tripled.
Clean Earth organic growth rate in the quarter was 17% year on year.
Volume growth, most pronounced for contaminated and dredged materials.
Business mix also favorably impacted cleaner if you for.
The segment's adjusted operating margin in the quarter was 17% as mentioned earlier the highest among our three segments.
Lastly, cleaner, it's free cash flow totaled $29 million in the second half of the year.
With a free cash flow conversion at approximately 80% of EBIT da.
We believe this ratio illustrates an important and attractive financial characteristic of this business and the industry.
Now please turn to slide seven regarding our rail business.
Rail revenues were $75 million up 8% over the prior year period due to higher equipment sales in North America in additional revenue on long term contracts.
Lower aftermarket in pro trend volumes in a less favorable mix weighed heavily on earnings in the quarter.
These impacts also reflect a manufacturing issues, we experienced which delayed shipments and led to higher operating costs and lower cash flow in the quarter.
The manufacturing or cost impact is included in the other category in the bridge on the slide.
Also contributions from our rail contracting business, which can be lumpy at times were modestly lower.
Very importantly on rail, let me comment on backlog, which illustrates the positive strategic in commercial momentum were seeing in this business.
Real backlog totaled $447 million at the end of the year, which is another record for us.
This total is up approximately 20% quarter on quarter, and 50% year on year with a sequential increase attributable to equipment orders in Europe, India, Brazil in Japan.
Our rail backlog is now more than doubled since the beginning of 2018 in a steadily climbed over time as a result of product innovation and penetration in new markets and new customers.
This backlog provides us with significant visibility for 2020, and 2021 and provides confidence in our growth plans for this business.
Now as Nick mentioned, we are very disappointed with the recent operational developments within rail so against the background of strong and growing demand or manufacturing footprint that expanded workforce in South Carolina did not execute up to our standards after the facility facilities consolidation.
Well, we moved quickly and are taking decisive action to improve the situation.
Our biggest challenge as physical space or capacity.
And real is focused on reorganizing its manufacturing work flow strengthening its shop for leadership in incentives and improving processes with the goal of optimizing production later in the year.
As Nick mentioned, we are confident the plans, we haven't place will drive improvement in the coming quarters.
Turning to slide eight which is a high level summary of our full year 2019 results.
The data on this slide is presented on a continuing business basis that is it excludes our now divested industrial businesses.
If you were to include industrial for the first half of the year, our adjusted earnings were down only modestly.
Strong results for clean Earth, offset a large portion of the steel market in foreign exchange rate pressures on environmental <unk> and the real operating challenges.
As a result, our operating adjusted operating margin was stable at approximately 11% for the year.
So now let me discuss our segment outlook for 2020 on slide nine.
First the high level point is that each business is expected to show improvement compared with 2019.
Please note that will now be guiding <unk> EBIT da as opposed to operating income consistent with many of our peers.
Starting with Harsco environmental revenue and EBITDA is projected to increase low single digits as a result of new contracts in products growth.
We also expect to benefit from some improvement restructuring savings during the year.
We're not anticipating much tailwind from the steel industry, although market fundamentals likely touched bottom a couple of months ago and one of our major customers is pointing to a more normalized growth rate the industry in 2020.
Next for clean Earth, we're guiding to EBITDA of $50 million to $55 million for the year. However, we were actually planning to do better than the midpoint of this range.
Hi ended this range is up low teens year on year versus pro forma 2019.
The underlying organic volume growth in permit modifications to process more medical and consumer waste being the primary drivers.
Note that our clean Earth outlook does incorporate a corporate cost allocation of $5 million for 2020.
But this growth rate I mentioned is on a like for like basis.
Rail, we're expecting 30% topline and 30% earnings growth, reflecting our strong backlog and some shipment delays from Q4.
For the year higher equipment and technology sales will offset the impact is weaker parts mix and investments in research and development.
We expect to resolve our operating or capacity challenges in Columbia, South Carolina by the end of the first half.
Lastly, corporate costs are anticipated to be within a range of $26 million to $29 million.
So turning to our consolidated 2020 outlook on slide 10.
Our adjusted EBITDA is expected to be within a range of $280 million to $310 million.
This compares with pro forma EBITDA in 2019 of $283 million, which includes the effects of clean Earth for the full year. It excludes industrial for the four year.
This range also reflects some consideration for recent external developments such as the Corona virus and foreign exchange fluctuations primarily against the euro.
This EBITDA guidance translates to earnings per share of 84 cents to $1.12 per share.
EPS range contemplates non operating pension income of $7 million.
Interest expense of $49 million to $51 million, an effective tax rate of 20, 830%.
Lastly, free cash flow is projected to be between 10, and $40 million, including growth capital spending of roughly $70 million and total capex within a range of $170 million to $180 million.
I should point out here that we're continuing to exercise strict discipline over capital spend this year.
Despite our pipeline of opportunities growing significantly, particularly in environmental we're keeping gross capex spending to the same level is last year selecting those projects, which best meet our strategic and financial standards.
The improvement in free cash flow during the year, we'll principally driven by working capital in environmental and rail where some of the pressures on Q4 free cash flow are expected to ease into a reverse as well as higher cash earnings.
So let me conclude on slide 11, with our first quarter guidance.
Q1, adjusted EBITDA is expected to range from $43 million to $48 million.
The range contemplates that environmental results will be lower year on year as a result, lower services demand foreign exchange translation and site exits.
Rail results are also expected to be lower year on year, given the lumpy nature of this business in a less favorable mix compared to the prior year quarter.
So the results should improve on a sequential basis compared with Q4.
And clean Earth is projected to show strong double digit growth in revenues and EBITDA as a result of underlying volume growth in a more favorable mix.
Cleaner its results will be lower on a sequential basis compared with Q4, given the normal seasonality of this business.
Lastly, let me comment on phasing as.
As you likely conclude we expect our results to strengthen as the year progresses.
The factors to consider regarding the phasing include the seasonality of both clean Earth and environmental.
The impact of growth investments in the maturing of new sites in environmental and that rails manufacturing efficiency will continue to be constrained until the second half.
So that concludes our prepared remarks, and I'll now turn the call back to the operator to open the lines for questions.
At this time, if he would like to ask a question. Please press Star then the number one on your telephone keypad again, that's star then the number one on your telephone keypad to ask a question well pause for just a moment.
Your first question comes from the line of Chris how with Barrington Research.
Good morning.
Morning.
Moving through some of my questions here.
If we look at the time period 60, released preliminary Q4 results until now you had mentioned the different buckets and the different operational improvements that are happening at the facility in South Carolina.
Is the conservative assumption to assume that that facility is back up and running and running to your expectations or by mid year in other words could this be back up and running sooner or is it right to think about mid year homeland.
Hi, Chris I I believed that the the mid year assumption is appropriate there's an awful lot to do.
Oh again indicate express my confidence that we will in fact get it done.
But I think to assume anything earlier than mid year is inappropriate.
Okay. So you had given given the improvements being made there in combination with your expectations for rail.
It seems like that couldn't line up for a good 2021 not to be to forward looking.
But going more on rail. My next question can you talk more about what you're seeing in regard to the aftermarket mix.
You had mentioned that the aftermarket mix.
Was part of some of the weakness, but I assume aftermarket is still expected to grow.
Positively in fiscal year 20 and beyond.
Can you talk more about that now that that's that's right or do you need the backlog commentary that he provided the growth in the backlog is primarily driven by equipment.
Well, we still do expect the aftermarket.
Business to grow about 10% topline this year, so still very good growth.
Whereas the other growth and equipment is 40, 50%. So that's that's driving the mix.
Okay.
Okay and then.
And then as far as pro trend, that's still going to continue to be a substantial growth driver moving forward what are your expectations for pro trend as far as how it winds up as a portion of the mix in 2020.
Okay, I think the there for a trend topline growth should be well over 10% as well a few of the large orders that were expected in Q4 that have been pushed out are indeed the guidance for this year.
So Chris this is P.D. the pressure in revenues in 19 are about 12 or so million dollars, we're probably going to do twice that in 2020 at the top line. It's obviously very small base, but it will grow substantially.
Your next question comes from the line of Jeff Hammond with Keybanc capital markets.
Hey, good morning, guys, Hey, good morning that you just.
Just don't cleaners can you just talk about the mix dynamic that's that's holding back the margin drop through and then.
Just wondering why core products corporate expenses and overall is going up if you're shifting 5 million to the cleaner.
Yeah, Let me take the second question first Jeff is speed. So in terms of corporate it's really a combination a couple of things. There's there's some growth investment that we're making a in incorporated there's also some additional compensation in the comp comparison to last year, that's driving most of it there's a very little amount of of of other stuff, but it's a combination of Newport.
And some comp increases compared to last year and and growth investments in the pace of clean Earth. The the mix really is a combination of the.
The three business line. So we got cut contaminated dredge and hazardous in 19 to mix in hazardous had a couple of operations with respect to mobile units that were very very good margins, they're going to be online and this year as well, but they're gonna be at a slightly lower margin. So the composition between the were among the three business lines is really what's driving it gradually increasing.
You bet and as you know dredges lower margin, then that has and the contaminated business will grow as well, it's just combination of those.
Okay.
Then a free cash flow can you just talk about what you think working capital is gonna be because there was a pretty big Dragon and 19 and.
It looks like you're keeping your growth Capex flat.
Is there any expectation that that you know ends up being you know a high number and you pull back some of the growth Capex.
Yeah. So the working capital I, we had some challenges in working capital really in Q4 and really the last month. The Q4 really in two areas. One the biggest by far was related to the operational challenges we had in rail which affected our inventory levels. There were ended up being higher than we wanted them to be it kind of delayed some of the sales into later in the months. So we didn't.
Get some of the billings out that we wanted to so the combination of that had a ferry six significant effect on our working capital, which we think we've got under control and intended to see that the reverse itself in 2020.
In the case of H.C.. We also have struggled with working capital, but in that case. It was largely related to your receivables that our customers held back on the last couple of days of the year and we ended up receiving a good portion of the these deferred collections. If you will in early January that's likely to continue for the year, but we've got strategies in place to kind of manage that as well.
He has managed the.
The vendor payments to help in terms of Capex d. the expectations just as you laid it out right now we're targeting to keep gross capex spend flat, including Oh, well, that's not just stay T.H. is the the bulk of it but there's a little bit in and in rail as well, but by and large there's really no intention to Ah to move that even though the pipe.
Plenty of opportunities is greater we're gonna be selective to identify those that does to achieve our our desired metrics.
Okay and then just one on you saw like it was kind of going through some of the you know a conference calls et cetera, and it seems like there are industrial business, which I think flows through hazardous still you know I've been pretty cyclical and there were some large projects and I think you characterize your hazardous business is less cyclical so I'm just trying to understand.
Maybe what's different there and then they also talk about direct disposal costs.
And I think clean Earth doesn't really do any direct disposals <unk> can you just kind of address those two dynamics on that you saw business.
<unk>.
Yeah, So I'll take the second question first.
I actually saw and and clean Earth or have a very similar dynamic with respect to disposal.
Right. They neither business owners to smooth final disposal assets, so they both need to contract with them.
For the ultimate disposable what's process through their TST ups. So there's not much of a difference there between the business model on the too.
With respect to the so called Eminase or industrial component of hazardous waste.
It is true that that and clean Earth, it's really not a lumpy as we did our diligence on on a you saw there was a little bit more lumpiness, but again I think that's something that we would.
Hope to address a in our operational improvement initiatives.
Okay. Thanks, guys.
Your next question comes from a line of Rob Brown with Lake Street capital.
Good morning.
Morning.
I think diesel or maybe just give a sense cleaners had very strong growth or in the in the quarter, but I think he sells growing much more slowly I could you kind of reconcile why that why the difference there and can you can you get yourself growth, improving and what sort of the plants there.
Sorry, Rob.
You repeat that like I didn't catch all that for some.
All right just wanted to kind of get a sense of what you think the growth rate in you saw it can be and cleaner seemed pretty strong growth rate can you give yourself growth rate, improving and what sort of your plans for growth and the clean Earth business overall.
Yeah, So as Nick mentioned the diesel business is very similar to the cleaners business that we own it as you know in terms of the business dynamics, they've got some elements that are different and some expanding market spend in markets that we don't have a cleaner.
But I think the expectation is that we should achieve similar organic growth rates in you saw maybe even slightly better than we were currently experiencing and clean Earth, which is mostly high single digits cleaner theres been consistently achieving those that that type of organic growth rate over the last few years and and we think that there's clearly the opportunities that deliver that same degree of growth in the quarter.
He saw business no once we get it done on board.
Okay great.
That's switching to rail.
Thank you do the backlog growth there, what's what's sort of your expectation and 2020 should you see continued strong order flow there and maybe a comment on the capacity that you'll have once you get the operations fix it.
That backlog growth sort of fits into that capacity.
Yeah, we certainly do anticipate D or the backlog to continue to grow in fact, I mentioned, some key milestones from a capacity standpoint by mid year, we have Oh, we have other targets for the end of this year to accommodate.
The backlog going into 2021, which was pointed out earlier should be another quite strong year for the real business. So we need to continue to expand capacity really throughout the year.
To to accommodate that that backlog for 21.
Okay, and can you kind of <unk>, what would your capacity be exiting a 20.
[noise] sort of number well, we look at it primarily from the equipment perspective, and the number of slots available and the plant for.
Oh for machines, and I think worried about.
18, now we need to try to get to around 30.
By mid year, and something closer to 40 by the end of calendar 2020.
So let me add Rusty just in terms of kind of the financial equivalent basically what we were successful in addressing the matters that we described under project score we feel confident that the capacity will be a adequate with adequate to deliver the long term revenue targets that we put up.
Great. That's helpful and then they don't China, and I guess, the acquired a virus what kind of mentioned that as some of it bit of a headwind what what do you sort of expecting there what's the risk point that exposure.
Well of course is very difficult to say, we or revenue when China is really derived from two primary steelmaking facilities.
At this point they've not reduce their production.
Oh, but my understanding is that we're seeing inventory levels steel inventory levels in China increase.
And so it wouldn't surprise as if at some point. This year. There are some production cutbacks, but if not then discuss with us by our customers and we're certainly not seeing any impact now.
We just see the potential for that being the case.
Got it okay. Thank you I'll turn it over.
Thank you. This concludes today's conference you may now disconnect.
Thank you have a good day.