Q2 2020 Harsco Corp Earnings Call
Good morning, My name is Carmen and I will be or conference facilitator.
At this time I would like to welcome everyone to the Harsco Corporation second quarter earnings 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 Carmen welcome to everyone. Joining us this morning, and I hope, you're doing well I'm, Dave Martin VP of Investor Relations for Harsco.
With me today, as Nick Grasberger, our chairman and Chief Executive Officer, and Pete mine in our senior Vice President and Chief Financial Officer.
This morning, we'll discuss our results for the second quarter up 2020.
And various initiatives that the company, including the integration of each school.
We'll then take your questions.
Before I presentation. However, let me mention a few items.
First our quarterly earnings release as well as a slide presentation for the 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 from those forward looking statements for a discussion of such risks and uncertainties see the risk factors section in our most right.
<unk> 10-K in 10-Q, the company undertakes no obligation to revise or update any forward looking statement.
Lastly on this call we refer to adjusted financial results that are considered non-GAAP foresi see reporting purposes. A reconciliation to GAAP results is included in game in the earnings release as well to slide presentation now I'll turn the call over the next to begin his prepared remarks.
So good morning, everybody and thanks for joining us today.
Well, we are seeing some evidence of improvement on our end markets. The second quarter was characterized by extreme volatility and uncertainty.
Both for Harsco and for our customers.
The volume of waste material that we processed declined about 20% year over year in the quarter.
A bit more in our steel markets and somewhat less and most of the clean Earth markets.
Sure I mentioned Harsco rail held up well for most of the quarter began to decline later in the quarter.
North American customers pushed out delivery dates due to covert related pressures.
[noise] within harsco, the pandemic and the current operating environment have brought out the best in our workforce.
We've moved quickly to adapt and remain flexible and our ability to navigate the challenge is a testament to the strength of our leadership team.
And the strong culture that we've built at harsco.
I truly appreciate the ongoing support that we've received from our customers investors relationship banks and other stakeholders.
And I'd like to thank all of our employees for their resilience and dedication to our business into our customers.
The fact that harsco remains on track with our portfolio transformation into a pure play environmental solutions company.
On the ads to my confidence in our team and our future.
[noise] throughout the quarter, we were focused on four key priorities.
First the keeping our people save during the pandemic.
Also preserving liquidity.
And then capturing the value of these sort of acquisition and fourth executing the score program in rail.
From a financial perspective, our primary focus in Q2 was to ensure a strong liquidity position.
And enhance our financial flexibility following the acquisition of that you saw business early in the quarter.
We made good progress with these efforts during the quarter, which encompass to cost reduction cut some capital spending deferrals or certain payments and importantly, an amendment to our credit facilities.
[noise], although we expect our end markets to improve somewhat in the second half of this year the recovery will likely be slow.
We are prepared to take further actions to strengthen our financial condition if warranted.
From a strategic perspective, we've taken several meaningful steps over the past year to transform our portfolio as you know.
At this point it is unlikely we'll be taking any such additional steps for at least the next year.
Given the operating environment and our focus on the internal value creation opportunities in each of our three segments.
[noise] well take just a few minutes a comment in each of our businesses.
[noise] Harsco environmental has been the most impacted by cobot of our segments.
Overall, though I was pleased that we maintain strong margins.
Our ability to flex to the conditions allow the business to generate positive free cash flow during the quarter.
The vast majority of steel mills that we support or no operating in contrast to the situation in early Q2.
So our production levels have improved they remain well below year ago levels and in fact, some sites or even at historical low points.
We expect only modest improvement throughout the remainder of the year.
Our focus an h. she continues to be on cash flow generation and further shifting our mix and products of products and services towards environmental solutions to our steel and aluminum customers.
Roughly 70% over 80 business today is aligned with this ambition.
In recent success is derived from applied products mobile equipment and increased collaboration with clean Earth.
Support this theme and the continued shift.
Over the next few years, we certainly expect a lower degree of capital intensity and HCCI.
As we focus more on growing the EBITDA minus capital expenditure metric.
Then on growing revenue.
Turning to clean Earth, we made significant progress in the quarter on the integration of diesel.
As part of that effort, our combined clean Earth and you saw team is working hard to improve core processes and boost customer service.
As expected this focus is yielding cost and working capital opportunities, but also better pricing discipline and execution of all the business critical functions.
We continue to identify levers to improve margins even beyond what we expected when we acquired the business.
So therefore, despite the negative impact of coated on this year's results or EBITDA target and your three remains unchanged.
Perhaps the most pleasant surprise has been the enthusiasm and energy of our new colleagues at he saw.
They clearly possess the passion for winning attitude, which is one of harsco as core values.
Strong leadership active engagement and a supportive parent company has been the recipe for success in the east all integration to this point.
In terms of business performance, we've seen some recovery in industrial retail and medical waste volumes.
The dredge business is fairly robust, whereas the project work that feeds our contaminated soil business remains uneven and difficult to forecast in the short term.
Finally in Harsco rail the execution has been remarkable given the challenges the team has faced.
The core elements of our score program remain on track and the outsourcing a diversification of key supply chain components.
Significantly reduced the risk of delivering against our strong order backlog.
On the commercial side, North American order rates are declining as expected due.
Due to capital spending cuts at the class one railroads.
[noise] Fortunately our business mix is much broader than it was a few years ago and or international projects are moving forward largely unaffected by cobot.
I also want to highlight the most promising new product introduction, we've had an harsco rail in decades.
Our next generation tamper targeted at least initially at the North American market.
The prototype is been operating for the past few months and has delivered a 50% improvement in productivity versus the industry benchmark.
We look forward to completing the field testing and implementing the lessons learned at the cereal version.
Our core customer base has expressed keen interest in this machine, which is the heart of the range and our product portfolio.
Before I turn the call over to Pete I'd like to focus just a minute on our environmental social and governance initiatives.
Since E.S.G. is tightly linked to our corporate strategy, we're placing a great deal of focus on developing a best in class program.
In July we released our 2019 2020. He asked you report, which highlights our sustainability accomplishments over the past 18 months.
One of our objectives with this year's report was to provide more metrics and data points on or he asked you progress and to better align with leading sustainability reporting standards.
So in addition to providing a detailed look at our vision and the transformation journey that we've been on for the past 12 months.
Finally at how we are creating value for our business and positive outcomes for stakeholders.
Across our four SG focus areas.
[noise], we've had a very positive response from a number of our investors industry ratings groups and since January of 2019.
We've seen a 40% improvement in our iasci risk rating from sustained analytics.
And 60% improvement in our environmental and social quality score from ISS.
[noise] well now turn the call over to Pete.
Thanks, Nick and good morning, everyone.
So please turn to slide six and our consolidated financial summary for the second quarter.
But before walking through the detailed let me Echo Nick's comments I'm also pleased with our Q2 results in the context of economic pressures, we've experienced and continue to be impressed by the effort and coordination of our operational and finance teams managing through this difficult period.
Our collaborative and proactive approach allowed us to react quickly to the changing market conditions.
And these actions coupled with our continued focus on safety and operational excellence enabled us to generate strong results and positive free cash flow during the quarter.
In the second quarter horse goes revenues totaled $447 million and adjusted EBITDA totaled $59 million.
This EBITDA figure is higher than our Q1 adjusted figure a $57 million and compares with our adjusted EBITDA of $63 million in the prior year quarter on a continuing business basis.
While we didn't provide guidance for the quarter. This result was better than we'd expected earlier in the quarter.
Each of our businesses and various key drivers contributed to the strong quarter.
We believe our efforts to control costs and the fact that underlying market conditions appear to have troughed in April and May certainly helped.
We also benefited from the accounting for or timing of some expenditures including employee costs.
In addition, Q2 included a reduction to a compensation accrual, which will not likely recur.
A good portion of these expenses are anticipated to be incurred in the second half of the year and I'll discuss this impact further when I comment on the outlook for the third quarter.
You know rail business. We also benefited by some aftermarket orders moving into Q2, which we had initially expected to occur in the second half of 2020.
As a result, our EBITDA margin in the quarter was just over 13%.
With margins at each of our legacy businesses holding up very well given the market conditions.
As expected the inclusion of he saw diluted our consolidated margins a bit for the second quarter.
The change in EBIT da compared with the prior year quarter is principally driven by lower results in harsco environmental due to the pandemic.
With this impact partially offset by the inclusion of clean Earth and lower corporate spending.
I will discuss these impacts further in a few minutes.
Horse goes adjusted earnings per share from continuing operations for the second quarter was 13 cents compared to 23 cents in the second quarter of last year.
And please note. This figure is adjusted for integration and debt Amendment costs.
Lastly, and importantly, our free cash flow totaled $18 million in Q2, which is traditionally not a strong cash flow quarter for the company.
By comparison Harsco is free cash flow was negative $45 million in the second quarter of 2019.
The significant improvement year on year is driven by lower capital expenditures and working capital.
This improvement also reflects our deferral of payroll tax payments in certain pension contributions as allowed by various legislation.
Which totaled nearly $8 million in the quarter.
At the beginning of the year, we committed to a meaningful improvement in free cash flow compared to 2019 as well as positive free cash flow for the full year.
That pandemic hasn't affected our commitment to this goal and we expect to see more progress later in the year.
Now please turn to slide seven and our environmental segment.
Revenues totaled $204 million and EBITDA was $40 million.
These figures translate to a margin of roughly 20%.
We view this result positively given a severe economic headwinds and we believe it reflects our ability to flex our variable in semi fixed costs in recent months.
Compared to the same period last year revenues and profitability were as expected impacted mainly by lower services and products demand as a result of the pandemic and foreign exchange translation.
Revenues decreased 24% year on year were 19%, excluding the impact of foreign exchange.
Steel output at our customer sites declined approximately 23% on a continuing site basis compared with the prior year quarter.
Importantly, the utilization rate at our customer sites for the quarter drops below 62%, making this the lowest operating rate for our customers since 2009.
As I mentioned earlier these negative factors were partially offset by lower operating and administrative expenses.
Harsco Environmentals free cash flow totaled $22 million in the quarter and now totals $32 million for the year.
This year to date figure compares with negative free cash flow of $16 million in the prior year.
Overall I believe these results are positive and illustrate the process and structural changes we've made in this business in recent years.
Next please turn to slide eight to disclose to discuss our cleaner segment, which now includes the Psol business that we acquired in early April.
For the quarter revenues were $162 million and EBITDA totaled $11 million.
Well not apparent on to slide revenues were down approximately 20% for the second quarter compared with the prior year quarter on an apples to apples basis with similar comparisons for both the legacy cleaner business and diesel.
The financial impacts if you saw are included in the hazardous waste details on the slide.
Among our business lines, the hazardous and dredge materials volumes held up better than contaminated materials, where the stoppage of construction projects in states like New York in Pennsylvania impacted results.
Lastly, clean Earths free cash flow totaled $6 million in the quarter and now stands at $21 million year to date.
Let me also comment on the east all integration, which as Nick mentioned is going well despite the coated headwinds.
We are well on our way to executing the actions necessary to double the EBITDA in three years meaningfully increased cash flow generation inefficiencies and improve the overall customer experience.
In addition to an intense focus on the inquiry to order in order to cash processes, which will provide EBITDA generation and significant Cashel improvement.
We're also looking at key operational improvement initiatives, inbound and outbound logistics optimization procurement and commercial improvements as well.
We expect to realize more than $5 million of benefits. This calendar year with annual run rate benefits of $30 million to $35 million by the end of year too.
Now please turn to slide nine in a real business.
Rail revenues were $82 million were similar to Q2 2019 levels, while the segment's adjusted EBIT da declined to $10 million from $12 million in the previous year quarter.
The changes can be attributed to a less favorable mix across all product lines and lower short cycle volumes.
The impacts within our equipment and technology businesses can be attributed to lower sales to our class one and metro customers within North America.
Some of this change was anticipated given the timing of shipments, but some is likely driven by discretionary spending cuts by our customers, which are continuing to face economic pressures from the pandemic as well.
These negative factors were partially offset by additional contracting work in the us in the UK.
As well as manufacturing efficiencies and lower SDMA costs.
Reals backlog continue to show positive trends in the quarter totaling $456 million at the end of the quarter.
This figure is up 57% year on year, and 5% quarter on quarter.
Despite the pandemic our bookings were strong in the quarter.
Order activity was also broad based while we likely benefited from the timing of some of these orders are key wins included additional equipment orders from India and Hungary.
Aftermarket sales into China, and standard equipment sales in the U.S.
Lastly on the score program in rail as Nick mentioned, we continue to make very good progress in our tracking on target with key initiatives, including capacity competency and quality.
We've achieved roughly 75% of our year end objectives, and given a record backlog backlog achieving these milestones will allow us to continue growing this business.
So before I conclude let me comment on our balance sheet and the outlook.
Starting with our financial position, we ended the quarter with net debt of $1.2 billion in a leverage ratio of 3.9 times.
Also our liquidity was approximately $390 million at quarter end.
Maintaining financial flexibility is very important to us and we took actions this quarter in that regard.
As previously announced we took advantage of favorable market conditions in excellent relationships with our key banks to amend our covenants and provide us even more liquidity.
This was a proactive decision not driven by business performance or a change in our market outlook.
Rather I view. This move is more of an insurance policy a prudent action given that economic conditions remain fragile and our visibility is limited.
Under the revised covenants, our debt to adjusted EBITDA Covenant steps up to 5.75 times starting in Q3.
And our liquidity position will strengthen as a result.
Looking further forward as we stated in the past, reducing our debt is a top priority for harsco and our goal is to see our leverage ratio below 2.5 times within a couple of years.
And while we are well above this target currently I'm very comfortable with our current financial position and our ability to manage through the current economic conditions.
Lastly, let me turn to the outlook.
Future economic trends continue to be uncertain and likely to remain volatile given the effects of the pandemic.
Accordingly, we will again refrain from providing detailed guidance.
With that said, however, I can provide some directional guidance for Q3, given where we stand in the quarter and certain other factors, including the timing of expenditures in Q2 in Q3.
First it seems that business activity appears to have touched bottom in Q2.
Specifically this likely occurred for harsco environmental in April and clean Earth in May.
We've seen stability in some improvement since then in these businesses. However, this improvement is uneven and slow and in some cases slower than we previously hoped.
For clean Earth demand from the retail market, which had some spots of strength throughout the pandemic appears to have come back, particularly the large retailers.
Our daily activity, which had dropped off in Q2 is now only modestly below pre covert levels and this volume is being helped by a backlog of material as the economy reopened.
Elsewhere within clean Earth, including within the industrial and Nonhazardous markets activity is less robust and more mixed.
Additionally, as you know some states are now slowing reopenings, while others are putting restrictions back in place and this dynamic likely impacts us most within the cleaner segment.
In Harsco environmental roughly 40 of our customer sites were shut down at one point in April.
Today Thankfully that number is only a few.
However, operating rates or production levels that customer locations remain subdued as you would imagine given trends in the relevant end markets.
In rail the pandemic impact is less visible from the outside.
However, as we start to see in June our freight and metro customers in North America begin to curtail capital and operating spend.
Some orders that we had anticipated which are not in backlog have now been deferred.
We are hopeful, but we will offset this pressure with incremental offshore sales and cost actions, but this domestic trend further reduces our visibility.
So all this means for harsco is that we anticipate a modest increase in revenues in the third quarter relative to the just completed second quarter.
Although this increase is anticipated to be more pronounced for clean Earth and for rail.
Despite this revenue trend, we anticipate that our adjusted EBITDA will be consistent with door declined slightly versus Q2.
The timing of certain expenditures, which includes some insurance costs professional fees and variable compensation expenses.
Whether with the accrual adjustment mentioned earlier is expected to offset the benefit of higher revenues.
And relative to the second quarter. These expense items will likely impact the comparison by as much as $10 million to $12 million in the third quarter.
Let me close that.
In saying that all things considered I'm pleased with our Q2 results.
And I'm confident in our balance sheet in our ability to withstand the current economic pressure. Thanks to our ongoing efforts to control costs limit capital spending and maximize free cash flow.
Our cost reduction objective is now $20 million for the year and we continue to target positive cash flow for the full year.
So that concludes our prepared remarks, and I'll turn the call back to the operator to open line up for questions.
Thank you at this time, if he would like to ask a question simply press star one on your telephone keypad again that is star one.
We'll go ahead with your first question that will come from Michael Hoffman with Stifel. Please go ahead with your question.
Thank you very much.
So I appreciate not giving guidance in light of Theres, just moving pieces.
How do you feel about a backstop around free cash flows since you alluded it will be positive.
We've managed to get leverage below four times can you help us a little bit about what the backstop might be on pretty casually nothing less than kind of number as opposed to a strange.
Hi, Michael It's Pete how you doing.
Right now I think right now I think its but we feel very comfortable saying is can be positive free cash flow I think given the volatility in the uncertainty in the markets as well as that the timing of some of the payments they come from our customers as a period of time I think its best that we just leave it at that rather than put any sort of.
Backstop as you said.
Okay can I ask a different way when you do you think you'll be free cash flow positive in the second half since you were in the first huh.
Yes, I think so that's that's the plan.
Okay. So I can assume that I will be better than the first half is at least a minimum.
Yes, that's a good good way look at it Michael Okay, Alright that helps a lot and then.
The.
Within the context.
Clean Earth business.
When you say industrials lumpy is it.
As a big generator small generators or is there an end market that you are saying that's a clean harbors is just reported in their alluding to that there's some softness in chemical for instance, but they've.
No reinstated and revised guidance. So I'm, just curious what you're thinking and seeing on your industrial business.
Well first of all Michael Hi, it's Nick.
The Lumpiness and clean Earth is really predominantly in the soil business I think the industrial business.
As a stabilized and is moving north of a bit.
[music].
So I.
I would characterize it is.
As a bit more stable and predictable.
It's probably then these large construction projects that.
That feed our soil.
Business that are lumpy.
Yes, and that's consistent with what you're hearing from Avi I in some of that.
Indexing around future Nonres construction.
The last question for me.
Yes.
Terrific job proving that you can in fact flex costs around.
Steel business, yes, if activity stays right, where it is right now at one point you thought steel would be down about 15% overall worldwide production Where's your view about steel.
In context of those comments back in June.
Yes, it's virtually the same aren't right now our expectation is that.
Overall steel production leases relates to our customers will be down about.
We are from 13% to 15% for the full year.
That's terrific nice job on the cost cutting gentlemen, thanks very much for taking the question. Thanks, Michael Thanks.
Your next question will be from the line of Jeff Hammond with Keybanc capital markets. Please go ahead.
Hey, good morning, guys.
Hey, Jeff.
So just on rail can you just talk about the cadence into the second half given the kind of balance of a very strong backlog versus some of these.
Deferrals that you're seeing and how does that.
Kind of inform that 12% to 14% EBITDA margin you talked about last quarter.
Yes, but first of all we certainly expect the that the second half and rail to be a good bit better than than the first half were also still looking at good double digit EBITDA growth year over year and the rail business from a margin standpoint, the margin should lift as well.
So Q3 margins.
We will likely be similar to that in Q2, but Q4 should be better.
Okay. So the deferrals are more impacting.
New orders coming in than the second half.
Getting materially better.
Yes, I think the the North American business will be softer in the second half than what we had thought three months ago.
Some of the push outs are within the year some of them are into 21.
Okay and then.
Certainly some noise with the Sol acquisition coming in it looks like you know that the soil business is kind of the big headwind in the bridge, but can you just talk about how.
The hazardous business performed versus your expectation in the quarter.
Both in terms of top and bottom line.
Yeah.
Yes, I would say generally speaking that the the volume trends that we saw in hazardous.
While consistent with the market.
We're nonetheless, a bit weaker than than than we thought they would be.
A good bit of that was was retail as I mentioned, that's coming back some of that was medical that's coming back as well.
Of course.
The industrial volumes with production picking up or also improving but I would say in general.
They were softer than than we anticipated, but again as we look at.
The performance of kind of peer companies in the hazardous sector. We believe our trends have been consistent with theirs.
Okay, and then construction materials a lot of my companies that sell in the non res are seeing work stoppages abate and things improve and.
You know if.
Are you starting to see some of that loosen up and some of these work stoppages abate where that business would get better.
We have.
But I think the other hand, we've still been surprised particularly in the northeast.
That.
The other projects.
That we expected to.
To to restart have not not yet restarted so it's.
It has been a bit of a surprise for us but.
That business changes week to week day by day and this environment.
So it's difficult to to project as I mentioned.
Okay, and then the higher cost what was the number you said PV 10 to 12 million sequentially is that mostly in corporate orders that you know kind of blended across.
Segments.
Yeah, that's across the segments. There is that there's an element in the corporate costs, Jeff, but it's pretty much almost proportionate across the business unit.
Okay and then just final question on the MSG.
Good to see your sustainability report and improvements can you just talk about you know as you get feedback from some of these industry funds and and <unk>.
The people that look at it in your self assessment like where the biggest opportunities for you guys to continue to kind of improve on that curve.
Yeah.
Well I think.
A lot of it honestly.
It is driven by better disclosure of the things that we are doing and we have done a lot of the metrics that.
That others look at we historically had not not provided not disclose we're beginning to do that so that that's helpful.
Clearly on the on the social and the governance side.
I think we've we had been and we continue to to get stronger.
I think the focus is really more on the environmental and again it a lot of it comes down to better tracking and focus on certain metrics and we've made good good progress there there's an awful lot of focus on it now.
And of course with the shifts in our portfolio.
We will have.
Even even better better metrics and and results. So that's really the focus.
Okay. Thanks, guys.
Yes.
Your next question is from a line of Rob Brown with Lake Street Capital. Please go ahead.
Good morning.
Good morning, Sarah.
Just following up again on the on the rail.
Push outs in terms of potential new orders, how do I know the visibility isn't great but how.
How quickly can that come back what's sort of the dependency there and maybe historically you know what have you seen.
In terms that order activity kind of resuming.
I think generally what we've seen is that the class ones tend to be a little bit slow to reduce their capital spending budgets and we certainly saw that.
Over the last quarter.
But at the same time, there then reluctant to.
Boosted back up.
So they it tends to lag of this.
And so I think.
It unlikely that the recently announced capital spending.
Reductions by the class ones will be reinstated this year.
Hey, Rob as Pete This is Pete let me just had just one other point when we're talking about these push outs. These are all relative to our previous expectations for the second half I think the main point is that we do anticipate theres still to be meaningful growth in this business, even even in consideration of those push outs compared to prior.
Yes.
Yes, okay, great, but that's great color.
And then the clean Earth activity.
Mentioned, a number of things you were doing it's starting to work on.
But because this.
Cobot slowdown.
Change anything in terms of what you're doing in terms of getting close.
So integrated.
Or is that is that really progressing on plan and do you.
Seeing any new opportunities kind of developing you get into it.
Yes, yes, yes. Good question no I don't really see any impact of coded on our ability to integrate.
The business and to capture the the benefits that we identified as I highlighted earlier.
We've been very happy is we've dug into the business and reached out to our new colleagues that you saw unsolicited their thoughts.
I'm very pleased with the.
The additional opportunities that we've identified so.
I think.
Despite the that pandemic situation.
The the upside in the business is even greater than we thought.
Okay. Okay, great. Thank you I'll turn it over.
Q.
And again, if you have any questions or comments. Please press star one on your telephone keypad again Thats star one.
Your next question will come from the line of Larry Solow CJS Securities. Please go ahead.
Great Good morning.
Just on the.
On the rail segment going to judge Smith the beginning.
On the Pushouts et.
More North America related or is out across the board and obviously most of your growth has been coming internationally sold shop.
No it's really all in North America.
Okay of course, our customer base in North America is largely privates.
Our customer base outside the U.S. is largely funded by governments right infrastructure projects and so forth and so.
The international business has been largely unaffected.
Bye Bye Covidien and those projects are.
Continuing on the timeline that we.
We had expected months ago, and most of your growth in backlog and your expectations.
Moving out have been more on the international side and as I corrector.
Absolutely some of the big wins that we've had with Deutsche of on Pete mentioned in this past quarter, India and hungry.
Yes.
And you still expect I know, you're not giving guidance, but you still expect sequential improvement.
In both margin and sales as we go into the back half Unreal correct.
Yes, Okay, and then in terms of.
You mentioned international really haven't seen any push outs, but.
But just on the on a longer term basis or a bit to long term basis.
Any any fear or anecdotally that you know obviously you have a great backlog and you can probably leave off that for some time, but I know you had expectations of notably maybe three four years out reaching a 500 million dollar segment sales number and $100 million EBITDA number is that still within your sort of longer term targets.
Yes.
Yes, very much so I think the international opportunities continue to expand again as I've mentioned before I think the.
The the success technologically and our SBB contract.
Really boosted our brand many doors had been opened.
We will have a good look at.
Many similar opportunities.
In the EU and also in Southeast Asia, So I think.
I've never been more optimistic about the international portion of the rail business got and then just switching gears real fast on the environmental obviously.
[music].
On precedent period, you're reducing growth Capex, which clearly makes sense, how about as the markets start to recover or do you guys. You know I'm sure you will return to some growth capital expectation, but do you know is that somewhat tempered longer term you know.
Sort of greater focus on cash flow.
Yes. Good question absolutely. It is tempered were focused more on shifting the mix within the business than unnecessarily growing the top line. So so I think you'll see EBITDA minus capital spending.
Continuing to grow whereas revenue will be a bit more muted.
And it's all focused on no shifting that mix to less capital intensive more environmentally oriented services and products.
Got it great. Thank you very much.
Thank you.
Next question comes from a line of Chris how with Barrington Research. Please go ahead.
Good morning, everyone.
Morning, Chris.
Just wanted to follow up on some of those questions are that we've had on rail segment.
You commented about the backlog, having a higher mix in the international business.
But perhaps you could dig in a little bit further as to how the aftermarket piece is doing I know you said the short cycle business.
There was some pull forward and this quarter what are your expectations for that piece of the business as we look forward.
And I know that backlog.
In terms of the backlog, perhaps you can comment on the adjusted EBITDA and free cash flow conversion in the segment in kind of what your expectations are.
For cash flow generation here.
Now I'll take the first part of that Chris.
Yes, I think the aftermarket business outside the U.S., let's say primarily in China should remain strong in the second half of the year.
One thing we need to consider is that as this backlog internationally is delivered and most of that of course as equipment, Okay would which will.
Have.
You know a bit of a dampening effect over all on margins as we as that installed base.
Overtime requires aftermarket components, that's where we'll see the real margin lift so.
Aftermarket outside North America today is in terms of margin predominantly in China.
But thats going to shift over time, we'll still have good margin in China.
We'll start to see more aftermarket.
Following our new installed base and in Europe.
Yes, let me just have de couple that point, so with respect to aftermarket so as for the reasons. Nick just mentioned the percentage of aftermarket as a total of the the whole business units revenues for example will be smaller than it had been in the prior year, just because of the increase in new equipment orders.
And deliveries in terms of free cash flow as we're growing you appreciate that the cash flow for this business is modest as we grow and that's because we start making investments as we build the inventory for these long term contracts and don't deliver the cash flow until we actually get the units delivered so the expectations of cash flow generation.
For this business unit are very very modest this year and they will increase in subsequent years as we start delivering the units and started to take advantage of the aftermarket on that installed base.
Okay.
And my last question is in regard to you. So you mentioned the reaffirmation of your goal to get to that 70 million and the cost savings and synergies are still there and we will be realized as time moves forward.
But from a.
As we kind of look over the integration can you maybe talk about whats moving slightly ahead of expectations.
What's been discovered that previously was undiscovered and kind of how things are moving along from in innings perspective.
Yes.
Yeah.
Yes, I guess I would say as we understand the business better in the industry better.
We've realized.
In terms of let's say the value proposition that we believe the cleaner segment can provide to the market.
There's an opportunity there to differentiate somewhat.
From the existing.
Market participants so it's something we're very focused on now it's not just about the integration although of course, all an awful lot of work is being done. There were also very focused on on that value proposition and we think that theres a lot of upside in the business overtime as we.
We.
Carve out a somewhat unique position in the and the market around around customer service.
So that's been of I think longer term.
One of the more appealing aspects of.
Of the acquisitions that we've made in the cleaner segment.
That's very helpful. Thank you for taking my questions.
Okay. We have no other questions at this time I will now turn the call back over to Dave Martin for any closing remark.
Thank you Carmen and thank you everyone for joining us. This morning. Please contact me with any follow up questions and again, we appreciate your interest in Harsco and look forward to speaking with you in the future take care.
Thank you. Thank you again for joining today's conference. This concludes the call you may now disconnect.
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Yes.
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