Q4 2020 Harsco Corp Earnings Call
Good morning, My name is Shelby and I'll be your conference facilitator at this time I would like to welcome everyone to the Harsco Corporation fourth quarter release conference call on.
All lines have been placed on mute to avoid any background noise.
After the Speakers' remarks, there will be a question and answer period.
If you would like to ask a question. During this time simply press Star then the number one on your telephone keypad. If he would like to withdraw your question press the pound key.
Also this telephone conference presentation and accompanying the webcast made on behalf of Harsco Corporation are subject to copyright by Harsco Corporation and all rights are reserved.
No recording or redistribution of this telephone conference by any other party are permitted without the expressed written consent of Harsco Corporation.
For participation indicates your agreement.
I would now like to introduce Dave Martin of Harsco Corporation. Mr. Martin You may begin your call.
Thank you Shelby welcome to everyone. Joining us this morning, I'm, Dave Martin of Harsco with me today is Nick Grasberg of our chairman and Chief Executive Officer, as well as Pete mining Harsco, as senior Vice President and Chief Financial Officer.
This morning, we will discuss our results for the fourth quarter of 2020 and our outlook for 2021, we will then take your questions.
Before our 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 risks and uncertainties see the risk factors section in our.
Most recent 10-K and 10-Q 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 for SEC reporting purposes. A reconciliation to GAAP results is included in our earnings release as well as the slide presentation now I will turn the call to Nick to begin his prepared remarks.
Good morning, everyone and thanks for joining us today.
Our fourth quarter results reflected the continued positive trends in our largest businesses harsco environmental and the hazardous waste portion of our clean Earth segment.
Overall harsco delivered both sequential and year over year growth in Q4, and EBITDA was consistent with our expectations.
With that said, we're very happy to have 2020 in our wake.
Harsco like many other companies face challenges in 2020 that required us to shift our focus essentially overnight to keeping our employees safe our businesses of resilience and our liquidity position strong.
At the same time, we closed the largest acquisition in harsco as history in terms of revenue you.
He saw.
Beyond the scale he saw required of complicated carve out from its parent company.
Was the need of basic process discipline and was underperforming its market.
Additionally, in 2020, we made a step change in our ESG journey as evidenced by significant ratings upgrades external recognition and improved metrics in nearly all areas.
It is clear that ESG is closely aligned with our strategy and central to the shifting identity of harsco.
Looking back on what the Harsco team accomplished I.
I could not be more proud of both of the effort and the results.
Turning to 'twenty 'twenty, one there are many reasons to be optimistic about the direction of our company.
Notably the continued improvement on our end markets and the value creation potential of our environmental services businesses represent about 80% of our revenue.
We also are about double those realized in 2020.
We still expect total benefits of $40 million to $50 million by the end of 'twenty two on a run rate basis.
Although external integration costs are behind us, we will incur about $10 million of cost this year for branding of it initiatives that will not repeat in 2022.
Overall, while the negative impact of the pandemic on the business could not have been predicted.
I am pleased with our execution and the foundation, we are building in this new platform.
And of Harsco environmental it's terrific to have following seas. After 18 months of menacing head seas.
I'm excited to see the development of the business this year, particularly in the areas of all tech applied product sales and innovation.
As previously discussed a significant amount of maintenance capital was deferred from 2020 to this year.
On capital spending on new contracts will also be higher than in the future years.
Nonetheless, the growth in cash flow trends in the business are favorable and we are targeting free cash flow generation of 8% to 9% of revenue of 22 on.
On a path the 10 plus percent in future years.
Yeah.
Our rail business was set up to have a very strong year in 2020 based on operational improvements on our record backlog.
The impact of Covid on capital spending in both the freight and transit transit sectors has been dramatic.
Although the freight sector is recovering spending on maintenance of way of equipment will lag by a few quarters.
And the transit sector remains particularly weak.
Another challenge for our businesses overcoming the margin loss associated with the large Chinese aftermarket program that is winding down.
Fortunately, our backlog and the launch of new products and our global reach should enable us to outperform the market this year.
While our project score of met its objectives in terms of capacity of data analytics, it uncovered more opportunity to improve net.
Factoring costs, then we could realize.
Just a few comments on our portfolio.
As noted previously in aggressive slate of internal initiatives and our financial leverage will likely push the next major step on our portfolio of transformation into next year.
We also continue to focus on the best Avenue to create shareholder value with the rail business.
But our strategic ambition remains clear continued.
Continuing our transformation to a pure play environmental solutions company.
Now over to Pete.
Well, thanks, Nick and good morning, everyone. So please turn to slide five in our consolidated financial summary for the fourth quarter.
Harsco revenues totaled $508 million and adjusted EBITDA totaled $62 million in the fourth quarter.
Our revenues increased 27% over the prior year quarter with esol contributing most of the growth followed by revenue increases within both our environmental and rail segments.
The revenue increase for Harsco environmental is noteworthy as Q4 was the first year on year increase in revenues for the business and the number of quarters.
The reflects both successful execution of our strategy and the positive trends in the underlying markets.
Relative to the third quarter revenues were little changed as continued growth from the Q2 lows for environmental and hazardous waste processing were offset by increasing market pressures related to COVID-19 within our contaminated materials and rail businesses.
Our fourth quarter adjusted EBITDA of $62 million was near the high end of our previously disclosed guidance range.
EBITDA for Q4 improved both sequentially and year over year, reflecting the business reasons I mentioned earlier and the actions we undertook in response to the pandemic in 2020.
Harsco as adjusted earnings per share from continuing operations for the fourth quarter was 12 cents. This adjusted figure excluded costs for the esol integration and severance costs related to additional restructuring actions in the environmental.
The actions of <unk> supplement those taken in the first quarter of 2020 and illustrate our focus on continuous improvement and further strengthening the business results.
The esol integration process remains ongoing.
Related external costs are now essentially complete.
For 2021, we don't expect to incur any significant external integration costs. However, there will be other internal integration costs, which I'll outline later in my remarks.
Lastly, our free cash outflow was $8 million in the fourth quarter net.
This outcome, while below our expectations was largely the result of higher than anticipated capital spending and the timing of receivables collections.
With respect to receivables some customers chose to managed payments at year end with this cash subsequently received by US in the first and second week of 2021.
And these factors are considered in our cash flow guidance for the current year, which I'll discuss later.
Now please turn to slide six and our environmental segment.
Revenues totaled $246 million and adjusted EBITDA was $52 million representing.
Our margin of 21%.
This EBITDA figure of $52 million compared to $51 million in the prior year quarter and $40 million in the third quarter of 2020.
Overall these were very strong results for <unk>, the attractive incremental margins against the comparable periods.
We're very pleased with these results as they demonstrate the increasing resilience of the segment. Despite the persistent impacts of the pandemic.
Compared with the fourth quarter of 2019, the EBITDA change can be attributed to higher demand for applied products in North America, and lower SG&A spending.
And as lower administrative spending as the result of our actions linked to the pandemic the flex our costs as well as permanent reductions some of which were taken in the fourth quarter as I mentioned earlier.
Steel consumption and production at our customer sites continues to improve.
The <unk> T or steel production volume increase from the third quarter was strong more than 10% sequentially.
Relative to the prior year quarter customer LST also improved incrementally.
This marked our first positive year on year comp for <unk> since early 2019.
The increase was however, modest in the benefit was largely offset by a less favorable mix of services as shown on our bridge.
It is encouraging nonetheless to seed the market recovery accelerate and financial performance strengthened within the steel industry in recent months.
I would also emphasize that the industry continues to operate well below its normal utilization rates, which for our customers average just over 75% in Q4.
So we look forward to further capitalizing on additional growth as the industry continues to recover.
Lastly, harsco environmental as free cash flow totaled $5 million in the quarter and totaled $69 million for the year.
This full year figure compares with free cash flow of $13 million in the prior year with the improvement during 2020, driven by lower Capex and cash generated from working capital.
Next please turn to slide seven to discuss our clean Earth segment.
For the quarter revenues were $185 million and adjusted EBITDA totaled $16 million.
Growth compared to the fourth quarter of 2019 reflects the inclusion of esol in our hazardous waste of line of business.
This impact was offset by lower contributions from our contaminated materials business line, which continues to face pandemic related impacts.
The change in our contaminated materials performance also reflects the challenging comp to the fourth quarter of 2019, which was a very strong period for the business for a mix point of view, both for soil and dredged material processing.
Also as we've discussed before our corporate cost allocation to clean Earth also impacted the year on year EBITDA comparison.
Relative to the third quarter of 2020 revenues were approximately 5% lower than adjusted EBITDA declined $16 million.
These changes reflect lower soil in dredge revenues in Q4, and again of less favorable mix across all the way streams relative to the sequential quarter.
Hazardous waste volumes were modestly higher quarter on quarter.
Next clean Earth's free cash flow was again very strong for the quarter the.
The segment's free cash flow totaled $17 million in the quarter for.
The year of totaled $55 million versus adjusted EBITDA of $58 million.
Lastly on Esol, we are pleased with its results in the second half and we remain ahead of our plan on integration.
You saw contributed approximately $20 million of EBITDA in the second half of the year, which represents a meaningful improvement year on year.
The benefits realized from synergy or improvement initiatives now total approximately $10 million with the largest improvements coming from disposal optimization and commercial levers.
This total was higher than our original goal for 2020.
Looking forward, we still have more work ahead of us to complete the <unk> integration. This year areas of focus and investment in the coming quarter will be integration logistics procurement site productivity and the current in additional commercial opportunities to name a few.
We remain confident that we will reach our improvement targets by year end and I will discuss the anticipated 2021 benefits within our outlook in just a bit.
So now please turn to slide eight in our rail business.
Rail revenues reached $77 million, while the segment's adjusted EBITDA totaled approximately $2 $5 million in the fourth quarter.
This EBITDA figure compares with the loss of $2 million in the prior year quarter.
The improvement relative to the prior year can be principally attributed to lower manufacturing costs and higher contracting contributions from new contracts in North America and Europe.
These positive factors were partially offset by lower short cycle equipment and aftermarket results.
Relative to the third quarter of 2020, the changes in our aftermarket business also led to the slight decrease in EBITDA sequentially.
Lastly, let me highlight that our rail backlog remains healthy at just over $440 million.
Representing a slight decrease from the prior quarter as we continued production under our long term contracts.
As we mentioned with our third quarter results economic or business conditions within the rail maintenance of way market remained challenging.
Many customers continue to defer required maintenance spending and equipment replacement or upgrade expenditures the.
This pandemic related trend continued throughout the entire fourth quarter.
With that said rail industry metrics are improving and we expect of Harsco rail will begin to see the benefits from this positive trend in mid 2021.
And for this reason we are optimistic that business conditions will see improvement in 'twenty one.
As it progresses, putting our business in the right direction to achieve some of the financial goals, we've discussed in the past.
Turning to slide nine which is the high level summary of our full year 2020 results.
For the full year revenues increased to $1 9 billion.
And adjusted EBITDA totaled $238 million.
Also our free cash flow was $2 million.
So let me start by saying that given the extremely difficult environment. We all saw in 2020, I am very proud of the extent and depth of the actions and processes. We put in place as the result of the pandemic to protect our people continue serving our customers and support our financial health.
From a financial point of view, we trimmed the capital spending by roughly $65 million and pushed out project spending.
We took advantage of the cares act legislation and deferred other payments.
We also took actions to reduce our cost structure by more than $20 million with some of these being permanent savings as I mentioned earlier.
And secondly, the acquisition of Esol accelerated our strategic transformation and as I mentioned earlier, our integration work to date has exceeded our expectations.
Also related the Esol, you will recall that we successfully raised capital to fund this acquisition during a period of extreme market volatility.
We ended the year with net debt of $1 $2 billion of leverage ratio of four six times and liquidity of more than $300 million.
We are also now evaluating opportunities to take advantage of attractive credit markets to extend our debt maturities by another three years and provide even more financial flexibility.
Yes.
Regarding our segment outlook on slide 10.
There is no need to remind everyone of the continuing volatility in the end markets caused by the pandemic.
However, we believe we have enough visibility on our businesses to provide outlook commentary for 2021.
Of course this assumes there are no significant negative pandemic related market developments from what we see presently.
With that in mind in summary, each business is expected to show improvement compared with 2020.
Starting with Harsco environmental revenue is projected to increase of 10% to 15%.
Adjusted EBITDA is projected to increase approximately 20% at the guidance midpoint.
The business drivers for <unk> in the year will be higher customer output and related services demand increased applied products volume growth initiatives and new contracts.
Next for clean Earth, we are guiding to adjusted EBITDA of $72 million to $78 million for the year on revenues of approximately $790 million.
We anticipate the CES pro forma revenue growth will be within a range of 3% to 5%.
While we expect double digit pro forma EBITDA growth for the business.
Higher revenues will support the EBITDA growth, but the primary earnings driver for <unk> in 2021 will be integration or operational improvement benefits.
We expect to realize an uplift of roughly $20 million from our actions taken to date and those contemplated in 2021.
Most of these efficiencies will be operationally, driven including lower disposal and transportation costs.
We also anticipate some commercial benefits as well.
And as I alluded to earlier these benefits will be partially offset by additional support costs and investments.
And it's important to note of portion of these expenses of approximately $6 million to $8 million, comprising largely duplicative costs for integration and branding will not recur in 2022.
We've also allocated an additional $3 million of corporate costs to clean Earth.
This asset allocation and the nonrecurring expenditures will total approximately $10 million for the year.
Lastly for rail, we project topline growth of 15% to 20% and adjusted EBITDA growth of 25% at the guidance midpoint.
For the year higher equipment technology, and contracting sales will offset the impact of of weaker parts mix.
Reduced Asian aftermarket demand and investments including R&D.
And lastly, corporate costs are anticipated to be within a range of $33 million to $34 million.
Turning to our consolidated 2021 outlook on slide 11.
Our adjusted EBITDA is expected to increase to within a range of $275 million to $295 million.
This guidance translates to adjusted earnings per share of <unk> 59, its NAV.
The six cents.
The EPS range contemplates interest expense of $63 million to $66 million and an assumed effective tax rate of 36, 38%.
Lastly, we're targeting free cash flow before growth capital spending of $100 million.
After considering all Capex, our full year free cash flow should range from $30 million to $50 million.
This forecast anticipates net capital spending will be within a range of $155 million to $175 million.
And this amount of compares with net capex of $114 million in 2020.
Most of the increase attributable to growth in renewal expenditures in environmental that were deferred in 2020.
While capital spending will increase year on year, we will continue to employ strict spending discipline as.
As in 2020, Capex remains an important lever to support free cash flow.
Also at this point I expect that our capital spending beyond 'twenty, one will normalize to levels below our current year forecast.
Also note that our projected free cash flow of ranges include cash payment deferrals from 2020, including those related to the cares act of roughly $12 million to $15 million.
But looking past 2021, our cash flow generation will increase as Capex normalizes and the cash payment deferrals from 2020 are behind us.
We expect to see consolidated run rate free cash flow generation in excess of 6% to 8% of revenue by the end of 'twenty two.
So let me move to slide 12, with our first quarter guidance.
Q1, adjusted EBITDA is expected to range from $52 million to $58 million.
Compared with the first quarter of 2020, we expect <unk> results to improve due to lower administrative spending and a more favorable service mix.
Clean Earth results are projected to be modestly higher as he saw contributions will offset the impact of lower contaminated soil and dredge volumes and the nonrecurring expenses I mentioned earlier.
We also assume that we'll be able to make up in March some volume that was lost in January and February due to weather conditions in the northeast and in Texas.
Rail results are anticipated to be lower year on year as a result of lower aftermarket volumes and mix.
Also of corporate costs are expected to be modestly higher due to timing of expenditures and some normalization of costs.
Lastly of any comment on this year's phasing.
As you'll likely conclude we expect our results to strengthen as the year progresses.
Factors to consider regarding the spacing include the seasonality of AEG in clean Earth, the impact of growth investments and the maturing of new sites and environmental the.
Timing of synergies of clean Earth, and the conversion of our rail backlog and anticipated improvements in the rail maintenance of way market.
So before I hand, it back to the operator for questions and seeing as this will be my last Harsco annual earnings call before my retirement next month.
To make a few brief comments.
While my wife, and I are extremely excited about and very much looking forward to my retirement and entering the next stage of our lives. It is hard not to have mixed emotions.
I look back fondly and proudly at my time here at Harsco and there is so much I will miss.
Above all mix excellent leadership counsel and friendship these past six years, which I value of immensely for which I am extremely grateful.
I will also greatly Miss my colleagues on the executive leadership team, who are far more than just colleagues.
And finally, I will Miss the World Class Global Finance and it organizations I've had the privilege to lead and the countless members of the Harsco team I've met and worked with each of whom clearly reflects the values and culture of this exceptional organization. Thank.
Thank you all for your friendship and support.
Yeah.
Yes, I will certainly miss much but rest assured I'll be watching eagerly and optimistically as a shareholder as harsco continues to achieve success.
So thanks for bearing with me and I'll now turn the call back to the operator for questions.
At this time, if you'd like to ask a question you may do so by pressing Star then the number one on your telephone keypad again that is star one of you would like to ask a question, we'll pause for just a moment to compile the Q&A roster.
Your first question is from Larry Solow of CJS Securities.
Good morning, and thanks for taking my questions and Peter.
Most of the very long, but the and I enjoyed it and wish you the best of luck.
Thanks couple of questions absolutely just a couple of questions.
So of clean Earth. So.
Little bit surprised a little bit of of sequential drop from the performance in Q3 of them sort of if we look at for what the Q3 run rate was which I realize was the.
How do you saw on under your belt by the if we sort of take that Q3 run rate.
For 2021 guidance of sort of in line to even maybe even all of a below that so I'm just trying to parse some of the the moving parts out there.
Assume it would be going up a little bit of Covid hopefully starts to wane and then your integration starts of advance. So maybe you can give me a little color on that.
Yeah. Thanks, Hi, guys. This is Pete so the.
The biggest driver by far of course relates to the contaminated materials the soil related business that I mentioned earlier and if you recall that business was hit pretty substantially in the early days of Covid. As construction was ceased on many projects for a period of time and that kind of set us back in the in the Q2 and Q early Q3 time frame.
And that's the things, we're going to get better, but if you recall the resurgence occurred of of the pandemic kind of in the fall and that had another impact, particularly in regional northeast where most of our business is located.
There were additional projects that were being deferred there is nonresidential construction that was pushed back and then they were often on projects that were stopped.
Now the good news about this if there is the bright spot I guess I should say is that the backlog for that business in terms of the volume of of soil that will be excavated and remediated. It remains very strong. So we see this as very much of a deferral as opposed to an elimination of these revenues will come back.
But for the most part in the in.
2021 there.
Okay, Okay, and then how about how about on on the rail segment obviously.
You know the backlogs remain very high.
It sounds like in terms of operating efficiencies and getting the plant up to full speed through.
Through the consolidation is that completely behind you now.
Obviously, you're you're looking for an increase this year, but we've kind of expected the sort of 15% to 20% of Chris. The last couple of years on haven't seen it. So I'm just kind of kind of concerned a little bit the things keep getting pushed to the right in terms of the backlog and.
Do you still sort of see the you know you had our ultimate goal of sort of reaching $500 million of revenue on 100 million EBITDA do you still feel at the division can do that and you know maybe on a three year period or something.
Yeah.
Yeah. It's a good question Larry first of all.
As I noted.
The rail business was really in a position to have a very strong 2020.
The.
If not for the impact of Covid.
The backlog continued to grow with launching new products for the footprint was expanding into the.
It continues to expand into new geographic markets that are attractive.
And the.
On the operational.
Benefits of the so called project score.
We're we're.
Were favorable as well so clearly.
The big impact this year was was COVID-19 on.
The the freight side and about half of our business serves the the freight sector and the other half the transit sector and we're seeing some recovery in the freight sector really nothing to speak of on the on the freight side.
On that affects both the equipment aftermarket as well as some of our high margin technology sales.
Sales to the sector. So.
The issue really is.
Our front end.
The issue for us.
With that said there is certainly is has further to go on the operation and supply chain side.
We achieved the the project score objectives.
There clearly is a further efficiency to gain.
And then through operations of based on the learnings of project score.
So yes, it's frustrating because we to your point of continued to be optimistic about this business in 2020 Covid really.
Knocked us off the track so to speak looking forward.
No we have not at all day minute star.
Our optimism and our expectations for this business over time.
And I continue to believe.
There is really good evidence of this again based on the backlog in <unk>.
And the the number of large contract opportunities that that remain available to us.
And the operational upside to achieve those those figures of 500 million and the 100 million of EBITDA I remain.
Quite confident we can do that but to your point, it's certainly been pushed to the right.
Got it Okay fair enough I appreciate the color. Thanks a lot.
Your next question is from Rob Brown of Lake Street capital.
Good morning.
What are you sticking with rail.
As it pushes the red when's, the visibility sort of improve as it is it is it really COVID-19 driven or how much visibility will you do you have in that business and when do you sort of start to see an uptick on how long does that take the hit hit the revenue.
Yeah.
Well, we certainly have decent visibility on the equipment side and that's manifest in the in the backlog I think it's the the aftermarket and there's what we call poetry on our technology sector of the business.
Sort of shorter cycle and.
And the the visibility is therefore, much less and even on the equipment side.
The the the core of the range is really the North American Tampa market and those are shorter lead time items than some of the other equipment.
And we're really expecting that to bounce back.
In the second half of the year and I think based on the.
Of the chatter in the the conversations with our class one customers, we believe that will be the case.
Okay and I just wanted to clarify you talked a little bit about weakness in the aftermarket in Asia is that a is that a market timing of weakness or was there a change in the market through the.
For the.
Yeah. So we've had of multi year program to supply what we call upgrade kits to to the.
The grinding fleet are grinding fleet in China.
That program is largely winding down because for the most part the machines have been upgraded.
And secondly, China rail there was the large ultimate customer.
It has really been hit hard by the by the pandemic.
So that was a very high margin program, we certainly have a pipeline of of aftermarket opportunities in China to replace the the grinder kits overtime.
But that's not all going to be replaced this year and so there was a GAAP.
And the EBITDA in the rail this year because of the winding down of one program and the timing of the restart of of the next series of programs.
Okay, Great and then and then last question on on clean Earth.
You gave on the adjusted EBITDA number. The did that include you said net of $3 million of corporate allocations of put the $72 million to $78 million of adjusted EBITDA that includes the corporate allocations of is that correct.
Yes, that's correct.
Okay.
Great. Thank you I'll turn it over.
As a reminder, if you would like to ask a question. Please press star one youre on.
Next question is from Chris Howe of Barrington Research.
Good morning, everyone.
Yes.
And good to talk to you Pete.
And best of wishes on your retirement.
Definitely enjoyed the relationship we've had thus far.
Thank you.
Following up on some of the questions we've been getting on the rail segments as we move from the first half for the second half of fiscal year 'twenty, one I assume things will become incrementally better as technology starts to come back.
And you start to gain.
The more aftermarket business.
But perhaps.
You can comment on those two pieces, specifically technology and aftermarket.
And what your expectations are for those as the part of the mix as things improve.
And when you expect those two pieces to kind of get back to or more towards where we were pre COVID-19.
Well you are correct in terms of the the.
The sequential lift in the business, which we expect from half one to half two.
And certainly part of that is the technology in the aftermarket.
And a good bit of the shortfall in <unk>.
EBITDA expectations in 2020.
Was in those two areas and for the most part the those programs have not been cancelled the.
It's certainly been deferred.
Based on budgetary constraints and lack of visibility.
On the freight in particular on the transit Arena.
So that's the expectation that the second half is going to be stronger.
The really across all three of our segments of equipment aftermarket and technology.
But from a margin standpoint, the lift that we're expecting in the second half as is weighted towards the higher margin aftermarket and technology.
The platforms.
That makes sense.
Another question on the rail segment, you had mentioned you're still.
You'll have your sites and you still believe in the long term potential of the rail segment.
Previously $100 million of EBITDA of $500 million of revenue, but as we kind of look forward to.
To the right for the business.
On the backlog has remained consistently strong.
How do you balance of the backlog strength.
And the realization of its growth potential with the timing of your strategic initiatives as we.
The kind of move out into fiscal year, 'twenty, two and even fiscal year 'twenty three.
Given your movement towards the pure play environmental services company.
Yes, Chris So of course, that's a that's a very good question and very much top of mind for repeat myself and others in the organization.
It's a difficult balance because on one hand, we're as I mentioned quite optimistic about the prospects of other of our rail business over time.
There are also benefits to the timing potentially of of transactions. So.
We're very much.
Thinking through how the how to balance those those two we do believe.
When we undertake a of process for the the rail business.
That it will be a very competitive process. There are a number of of buyers that have expressed interest and that would derive significant strategic benefits from it when you consider.
Our pipeline the footprint new products of growing installed base that will yield good aftermarket opportunities going forward. So there's an awful lot to like about the business.
And so we're quite confident that of process would be quite successful and that we will.
When we receive a strategic multiple for it.
But I really can't indicate at this point, what the best timing will be but it is very much top of mind.
That's helpful. Thank you for.
The color and one last question just the shift gears away from rail.
You commented about.
On the ESG performance of the business, perhaps you could share some more granular detail into the E. The S. The G.
And how that's being received it seems to be of more common question of these days.
Yeah.
Well I appreciate the question.
We have.
Allocated an awful lot of resource to our ESG.
Journey and initiatives here over the past 18 months or so and when you when you look at.
The S and the G. The social and governance issues and I think harsco has for some time now.
<unk> had very strong programs in place.
As evidenced by our performance on safety and the engagement of our employees and the governance.
Processes, where I believe we are kind of best in class.
But nonetheless, we continue to focus on on the essence of the G and there's always room for improvement its really on the the E. The environmental side, where we've.
Really seen some significance.
The improvements.
Honestly based on focus on communication I think we've had a good environmental story.
The talent harsco for some time, we just hadn't been telling it.
And when you add to that a stepped up our focus in each business led by.
The corporate cost.
Call It ESG function.
We've seen.
We've really seen very good leverage on on those results and as we.
We have seen the metrics moving in the right direction and of communicated those the.
The various agencies have taken note.
The industry press has as well Newsweek magazine.
Put us on a prestigious list for the first time ever.
So we like where we're going and of course, it's very closely linked.
And to where we're headed strategically you really can't separates.
The ambition to be a top tier environmental solutions company.
From being a top tier ESG company. There. They are one of the same and the complement each other very well.
And I look forward to the continuing to the.
<unk>.
The progress on ESG at the same pace, we did in 2020 of which was which was quite quite notable.
That's excellent. Thank you for your color and I'll hop back in the queue to allow others the chance.
Your next question is from Jeff Hammond of Keybanc.
Hey, good morning, guys.
Hey, Jeff.
Best of luck to you Pete it's been great working with the over over these years.
Thanks, Jeff.
So just on clean Earth.
You know I think I think of what you're implying is basically the pro forma the kind of the organic growth for both of the businesses. This is kind of in the low to mid single digits, which seems kind of low just given the easy comps on the improving macro so I don't know if it's just.
The soil piece being a headwind in the first part of the year or are you seeing kind of more modest sequential.
Improvements in the hazardous side as well.
Yes, I think it's both it is primarily.
And the contaminated materials, our soils business as Pete indicated Q4 was actually the low point surprisingly, even weaker than Q2 and three.
In terms of non res construction in the northeast and mid Atlantic, where we're where we're focused so so that that business is.
As primarily what's what's holding back.
What.
Should be more of a mid to high single digit.
<unk> lift year over year, the the hazardous business the.
The expectations are I think in line with with the expectations, both ours and the broader market.
And we simply don't have the visibility yet on the contaminated materials side.
To be a bit more aggressive.
We certainly expect it to bounce back we just don't know one.
Okay, and then just on.
I'm just trying to work through the bridge on EBITDA for clean Earth I'm sure you had some corporate costs coming in and then it sounds like some some branding and other investments.
Is there a way to talk about.
What the.
You know incremental integration savings are and what you think the underlying incremental margins are on that 3% to 5% pro forma growth.
Yeah. So.
I'll take try to take it in bits and pieces, Jeff and we can see we can you can ask the question of if you like.
The first of all of the duplicative costs, I mentioned earlier and the corporate allocation. They total of about $10 million or so when the little more $10 million in 2021, that's what we expect to incur those costs as I mentioned earlier are nonrecurring. So they should go away in starting in 'twenty two.
The allocation won't go away, but the the incremental duplicative costs will go away.
At the same time, we are expecting to achieve and realize about $20 million of benefits from the integration and optimization efforts that we've got underway. So when I when I quoted the $20 million net realized anticipated benefits that was net of of the.
Cost incurred.
The margin.
Got it.
Sorry for just the underlying incremental on the growth.
Yeah, so the incremental margins there should be 30% to 35% on the growth going forward for the combined business.
Okay.
And then just last one on corporate so the corporate cost line is going from 20 to 33 34.
And it seems like you've been kind of allocating some of the corporate costs back in the.
The clean Earth.
It's driving the.
The big increase there.
Yes, so it's really three of the three components that make up the total it's what I referred to as normalization. So theres, some compensation and travel and of that type of a <unk> type of expense normalization, which probably accounts for about half of that 11, or so $11 million to $12 million Delta than we've got increase in professional fees things like.
Oddities for example are increasing and there is the insurance costs for some of our policies, which I mentioned back in Q3.
Net are increasing year on year as well that's the bulk of it the additional cost allocated to esol represents incremental costs that are related to specifically.
He saw which is why we're increasing the allocation to the clean Earth segment.
Right, Okay, Okay, great. Thanks, guys.
Your final question is from Brian Butler of Stifel.
Hi, Thank you for taking my questions.
Hi, Brian.
Just the first kind of a high level can you give some color on what the magnitude of the revenues that were displaced kind of related to the pandemic and then maybe how much is how much is expected in 2021 guidance coming back.
Well the varies by segment.
For the quantification of what I can tell you but.
Steel production, which of course effects of the <unk> business was down 12% year on year on that had a pretty substantial impact those those.
In any in hazardous waste business there was.
Probably a 15% year on year impact in the early part of the year and as I mentioned earlier, we see that coming back to some degree in 2021 with the exception of of the soils business, which was down at a much greater percentage and that will come back a lot slower over 'twenty and 'twenty one.
And the rail business was even more dramatic still on most of it occurred in the in the second half of 2020.
I will get back on.
Right.
That's helpful. Just on just to kind of the high level of it.
2021 guidance expecting that the business that was losses.
Coming back half to where it was or you know, it's not fully coming back I'm, assuming that's not that's what's included in guidance, but theres some amount and I was just trying to get a feel of that.
Very little is coming back and that expectation of guidance are the majority of it.
Yeah. So let me let me just take the question by business as Pete did.
So in the Harsco environmental.
The guidance anticipates that really all of the the COVID-19 related impact on our revenue.
In total.
Will be recovered by the end of of of.
<unk> 2021.
In the end.
On the clean Earth segments, that's true for hazardous waste as well.
But not for soil.
So I would say theres probably.
The 50 million or so maybe a little more of revenue and contaminated materials.
The debt, where it will be short versus kind of the pre COVID-19.
Run rate on the contaminated materials side.
In rail.
There are number of puts and takes when you think about this aftermarket program in China.
That of course was <unk>.
Somewhat linked to COVID-19, but mostly not.
And so that that will not be replaced this year, and that's probably $10 million to $15 million of margin.
On the China aftermarket program in terms of equipment.
And other aftermarket and technology.
We certainly will be.
A good bit ahead by the end of 'twenty one.
Compared to what we the volume that we that we sold in 2020.
Perfect Thats very helpful.
And then I look at clean Earth, and just kind of think about the baseline margin as we get through kind of the noise of 'twenty and 'twenty, one coming back post integration.
How should we think about that that margin progression into 'twenty, two and what that baseline level of should be.
Yeah, So I would expect and I think Pete and even I alluded to it a bit there is a on SG&A investment in the business.
That's needed to sustain the the integration effort.
That will will be coming out.
And in 'twenty, two not to mention the.
I think we mentioned the incremental $20 million of integration benefits this year.
And as we see that then out of.
Full year basis in 2022, we would expect a few hundred basis point lift in the EBITDA margin.
In the consolidated clean Earth platform of legacy clean Earth, plus he saw and then I would say over the next two years, we expect between the one and 2.1 for 200 basis point lift each year.
In the in the margin of the business.
So we'd be looking at probably of five to six points less.
Lift in EBITDA margins.
Over the next few years with a good chunk of that coming in 2022.
Okay, Great and then one last one just when you think about the growth capex, they're spending can you give a little color on kind of what the.
What do you guys look at internally on on a return basis kind of what the IRR is on that on that money on maybe a thought on where that is versus the strict cost of capital.
Yeah.
Yes. So the return that we target is generally 18 plus percent and depending upon the type of.
Service the geography of the profile of the customer you know that that can can vary.
Oftentimes it's over 20%.
On the the payback period importantly is generally.
The two and a half to three and a half years. So the these investments that we that we're making this year.
Well, we expect.
As we as we do good returns over time.
The the payback is is not of course immediate.
The.
You know we've.
As we noted as we as we change the.
The the focus of that business to being more environmental.
Which brings with it of less capital intensive profile.
We expect that that growth capital and even the maintenance capital to decline over time. So we would expect our total capital in and.
And the harsco environmental to be $100 million or so.
In 2022.
Versus the 160 or so this year.
And that's that's how we then get to that 8% to 9% free cash flow to revenue in 2022 and again the target over time.
And we have a lot of initiatives in place to do this would be 10% plus free cash flow to revenue.
Great. Thank you so much for taking my questions.
Yes.
There are no further questions in queue I'd like to turn the call back to Nick for any closing remarks.
Okay. Thank you Shelby.
I'd also like to make a few comments about about Pete.
Here in closing.
I'd certainly like to thank Pete.
For us I'll use the word in Numerable.
Contributions that he's made to our company over the past six years.
Certainly to our financial an it organization certainly to our businesses.
But I think more importantly to our values based culture I mean, he he's been a terrific fit into this organization.
With me and the rest of the team and he is a highly highly respected across the company.
At the same time, he's been a very close partner to both me and the executive team and.
I hear this every day, how much Pete will be missed by by his colleagues are again across the company not not just his organization.
But his impact on the business the relationships that he has formed.
You know there are many many of his colleagues will greatly miss.
Misspeak.
I'd like to.
Wish Pete and his wife, Bianca and is happy to say growing family.
Only the best in his retirement and will will really Miss Pete, but I know Pete will always be available to us.
And here's the big part of who we are and heal of remain.
In many ways committed to this company for some period of time. So thank you Peter Thank you Nick.
Okay. So I'd like to thank all of you for joining us today and I wish you a good day.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
[music].
For us.
[music].
Yes.
[music].