Q1 2021 Harsco Corp Earnings Call
Good morning, My name is Lori and I'll be your conference facilitator at this time I would like to welcome everyone to the Harsco Corporation first quarter 2021 earnings Conference call. 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 and the number one on your telephone keypad. If you would like to withdraw your question press the pound key on your telephone keypad.
Also this telephone conference presentation and accompanying 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 express written consent of Harsco Corporation.
Your participation indicates your agreement I would now like to introduce Dave Martin of Harsco Corporation. Mr. Martin you may begin.
Thank you Lori and welcome to everyone joining us today I'm, Dave Martin VP of Investor Relations for Harsco.
With me today is Nick Grasberg are our chairman and Chief Executive Officer, and Pete mined in Harsco as senior Vice President and CFO. This morning, we will discuss our results for the first quarter of 2021 and our updated outlook for the year. We'll then take your questions.
Before our presentation. However, let me mention a few items first our quarterly earnings release as well as the 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 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 the earnings release today as well.
The slide presentation with that said I'll turn it over to Nick.
Good morning, everyone and thanks for joining us today is Dave just noted Pete mining is with US today you may recall.
<unk> discussed his retirement plans on the last earnings call.
So let me start with a brief update on the search process for our new CFO.
I've been very happy with the degree of interest in the role.
We're on certainly qualified candidates.
But due to timing factors related to certain candidates current rules, we are not yet in a position to announce a successor.
Therefore, I have asked Pete to extend his tenure to ensure a smooth transition to the new CFO.
And he has agreed to do so so Peter on behalf of the board I truly appreciate your ongoing commitment to our company.
I would also like to welcome John Quinn to the Harsco Board of Directors, we announced John's appointment a few weeks ago.
This addition demonstrates our ongoing focus on ensuring that we have the right balance of expertise and experience on our board.
John has the requisite financial and strategic acumen as well as a deep understanding of the environmental services industry.
He is a terrific fit with our board and the management team and we're thrilled to have him joined the harsco family.
I am encouraged by Harsco strong start to <unk> 2021 with performance exceeding our expectations across all three of our segments.
Our results for the first quarter reflect the outstanding execution of our team as well as an improvement in the overall macroeconomic environment.
When we reported our fourth quarter results visibility into the year for our rail segment and the clean Earth contaminated materials business was limited due to the impact of the COVID-19 pandemic.
However, we saw a clear shift during the course of the first quarter and today each of the end markets that we serve is gaining momentum.
As a result, we have raised our outlook for the full year and while the updated outlook reflects improvement in each segment. The most significant change is in our rail business.
I'll comment on each of our segments, beginning with harsco environmental.
We now expect to H is EBITDA in 2021 to exceed that of 2019, and perhaps even approached that of 2018, which was the highest in many years.
Margins were also quite strong despite the higher capital spending this year, owing to deferrals from 2020 each.
EBITDA minus capex margins should be about 10% with EBITDA margins of 21% to 22%.
They also believe the outlook for the business beyond this year to be very encouraging when we consider a return to more normal capital spending levels, the quality of our contracts and our ongoing shift to less capital intensive environmental services.
In addition to this steel mill utilization rates remained well below historical highs.
Upside driven by a bullish outlook for infrastructure projects and consumer spending.
I will also note promising developments related to our all yourself technology and other innovations aimed at Bala rising steel slag.
Such projects are critical to achieving a cheese ambition of becoming a leader in environmental safety and governance and the global metals industry.
With a strong cash flow profile.
Our clean Earth segment continues to perform well and we are delivering on our commitment to maximize the value from last year's Esol acquisition.
While also taking advantage of the benefits of a market recovery.
After realizing more than $10 million of synergies last year, we anticipate at least another $20 million this year.
The primary drivers relate to lower disposal on procurement costs combined with increased operational efficiencies and sizeable SG&A savings.
Hazardous waste volumes across our industrial retail and health care customers were better than we anticipated in the quarter.
Nearly all categories now above pre COVID-19 levels.
We were also winning more business in these markets and the pipeline of business opportunities continues to grow.
Overall, the esol business is showing its resilience stability and growth, which along with its attractive cash flow and the synergies support our investment thesis to combine the business with clean Earth.
As I said earlier, our rail segment has improved its outlook for this year with EBITDA now about one third higher.
Than our previous guidance.
The primary driver is our aftermarket program in Asia, followed by stronger demand in our core North American market.
And opportunities in the European utility vehicle market, which we lead continue to advance.
I'm also pleased with the trends in our operations and supply chain that are serving to reduce cost and improve customer service.
Overall, the improved outlook and the high degree of strategic interest in the business provides us with increased strategic flexibility and opportunity to unlock value for our shareholders in the future.
I'll now turn the call over to Pete.
Thanks, Nick and good morning, everyone.
So as Nick just mentioned, while I am still very much looking forward to retirement I have pushed it out a bit.
As I mentioned last quarter as committed to the board in all harsco stakeholders to help ensure a seamless transition to my successor.
And that will continue to fully support Nick in the company as CFO until we had the successor in place and successfully on boarded.
So with that said, let me turn to our results for the quarter.
Please turn to slide four in our consolidated financial summary for the first quarter.
As Nick noted we are very encouraged by our strong start to the year.
Harsco as revenues totaled $529 million and adjusted EBITDA reached $66 million in the first quarter.
These figures are higher than both the prior year quarter as well as Q4 of last year.
Also our Q1 EBITDA was above the high end of the guidance range, we provided in February.
Compared with guidance each of our segments performed better than we'd expected all contributing to our solid results.
Typically we experienced seasonal impacts in the first quarter of the year, particularly in clean Earth and harsco environmental.
However, this year the seasonality effect was not as evident as markets continue to recover from the pandemic effects.
Harsco environmental benefited from higher services and applied products demand in the quarter as well as favorable commodity prices and lower SG&A spending.
At clean Earth, we benefited from stronger demand and that has waste management business and better margin performance.
And at rail, we benefited from higher aftermarket and contracting contributions.
Well some of these positive impacts in rail were timing related rail Nonetheless had a strong quarter. We are increasingly optimistic that we're starting to see improvements in the rail market.
Compared with the first quarter of 2020 Harsco as consolidated revenues increased 33%.
You saw accounted for the majority of this growth followed by revenue increases within both our environmental and rail segments.
Harsco as adjusted earnings per share from continuing operations for the first quarter was 15 cents.
On this figure compares to adjusted EPS of <unk> 16 cents in the prior year quarter.
As you know strengthening our balance sheet and financial foundation have been among our key priorities and in early March we completed a very successful refinancing amending and extending our revolving credit facility and refinancing our existing term loans with a longer term offering.
Our term loan offering was significantly oversubscribed and all told this transaction enabled us to push out our debt maturities more than two years provide increased financial flexibility and lower our financing costs.
The annualized savings to us as a result will be approximately $3 million.
Our free cash outflow for the quarter was $32 million consistent with our expectations and prior year performance.
As we've discussed in the past Q1 is typically the low point for our cash flows during the year for various reasons, including the timing of interest and pension payments as well as incentive compensation payments.
Our cash performance is expected to improve meaningfully for the remaining quarters of the year.
Now please turn to slide five and our environmental segment.
Revenues totaled $258 million and adjusted EBITDA was $54 million, representing a margin of 21%.
These results compare favorably to the prior year quarter, when EBITDA totaled $43 million and our margin was 18%.
Our incremental margins on the revenue change year on year were strong and Q1 marked the second consecutive quarter that margins exceeded 20%.
Compared with Q1 of 2020, the EBITDA improvement is primarily attributable to higher services and applied products demand globally, and a more favorable mix of services.
Steel consumption and production at our customer sites continues to improve.
S T or steel production increased roughly 4% versus the prior year.
Relative to the prior year quarter, we also benefited from our ongoing efforts to control spending.
These actions include the permit personnel reductions that we discussed last year as well as other improvement measures implemented about a year ago in response to the pandemic.
We also benefited from certain Brazilian sales and use tax credits totaling just under $2 million in the quarter and these are presented in the other category in the bridge.
It's more broadly the trends within the underlying metals industry remain positive we've experienced solid growth in recent months and we see room for further improvement ahead, as we continue to execute against our portfolio rebalancing as well as from positive trends within the industry.
The utilization rate for our customers averaged 78% in the first quarter, which remains well below normal operating rates.
Next please turn to slide six to discuss our clean Earth segments.
For the quarter revenues were $189 million and adjusted EBITDA totaled $15 million.
Growth compared to the first quarter of 2020, primarily reflects the inclusion of esol and our has waste line of business.
While we don't report you saw separately given the integration of the business. We are pleased to see that he saw in our hazard waste business performed very well on the quarter.
You saw revenues are now above pre pandemic levels with he saw in Q1 seeing its highest quarterly revenue and margin since we've owned the business.
Also our integration efforts remain at or ahead of our plan.
Free optimistic about the margin improvement opportunities in the coming quarters, and we are on track to realize the $20 million of integration benefits this year.
The positive impact from our has waste business was partially offset by lower contributions from our contaminated materials business as well as the personnel investments in nonrecurring expenditures for I T and rebranding that we discussed last quarter.
Okay.
The contaminated materials business within clean Earth continues to lag as we had expected.
This dynamic reflects limited nonresidential construction activity and constraints on governmental infrastructure investments during the first quarter in the metro areas, where we operate.
Now with that said the business did improve sequentially through the quarter and.
We expect this trend to continue throughout the year.
More specifically March was the best month for our contaminated materials business since last summer and there have been indications in some locations, including New York City that previously halted spending on infrastructure will restart.
Our outlook contemplates that are contaminated materials business will strengthen for the remainder of the year beginning in Q2.
Now please turn to slide seven in our rail business.
Rail revenues totaled $82 million, while the segment's adjusted EBITDA totaled approximately $6 million in the first quarter.
The EBITDA figure compares with $8 million in the prior year quarter.
The change relative to the prior year quarter can be principally attributed to lower aftermarket sales and earnings in Asia.
And this impact was partially offset by higher contributions from equipment and contracting services business lines.
Rail is aftermarket sales into Asia were particularly strong in Q1 of last year.
And this year as you recall in February we discussed our reduced visibility on Asia aftermarket sales and this dynamic is apparent in our Q1 results.
But with that said, we've recently become more optimistic about our Asia aftermarket business for the year based on recent market developments and new orders from key customers.
Our revised 2021 outlook for rail, which I'll discuss shortly reflects this positive development.
Lastly, let me highlight that our rail backlog remains healthy at approximately $420 million, representing a slight decrease from the prior quarter. As we continued machine development work and production under a long term contracts.
And while not apparent from the sequential change in our backlog, we have experienced an improvement in order and inquiry rates over the past couple of months, including from our major customers in North America.
We had a few nice wins internationally as well and bidding activity globally has picked up and we hope to have at least a couple of significant wins in the upcoming quarters of this year.
These positive developments are also reflected on our revised and improved 2021 outlook for rail.
So turning to slide eight which is our consolidated 2021 outlook.
Our adjusted EBITDA is now expected to be within a range of $295 million to $310 million.
Up from our prior guidance of $275 million to $295 million.
And our adjusted earnings per share is now expected to be within a range of 82 at <unk> 96 per share versus 59, and 76 cents per share previously.
These positive revisions reflect favorable trends in each of our businesses as I outlined earlier.
For environmental the improved outlook reflects higher anticipated volumes and commodity price as well as a better mix and lower spending.
For clean Earth. The improved outlook is principally driven by has waste volumes and margins.
And for rail our guidance now considers a more favorable outlook for aftermarket outside of North America, including in Asia.
And also for domestic equipment sales as I mentioned earlier.
Our corporate cost for the year are now expected to range from $36 million to $37 million up modestly from our prior guidance largely to reflect higher incentive compensation expense.
Meanwhile, lower interest expense and a lower effective tax rate positively impact our EPS outlook.
Also we continue to target free cash flow before growth capital spending of more than $100 million and we expect total free cash flow of between 35 and $55 million for the year.
Our capital spending for the year is anticipated to be near $160 million, which is higher than normal due to the deferral from 2020 spending in harsco environmental.
And as I mentioned last quarter, I expect that our capital spending beyond 2021 will normalize to levels well below our current year forecast.
Lastly, it's worth highlighting that this outlook strengthens our leverage position.
The coming quarters, our net leverage ratio is expected to improve and we anticipate that this ratio will fall below four times at year end.
So let me conclude on slide nine line with our second quarter guidance.
Q2, adjusted EBITDA is expected to range from $73 million to $79 million.
Resultant results in each segment are anticipated to improve sequentially.
Environmental and clean Earth will also see improved performance compared to the prior year quarter.
More specifically compared with Q2 of 2020, we expect <unk> results to improve meaningfully due to increased services in applied products demand higher commodity price and lower SG&A spending.
Clean Earth results are also projected to increase significantly as higher contributions from each business line is expected to offset the impact of investments and higher spending.
And lastly rail EBITDA in Q2 is anticipated to be similar to the comparable quarter of 2020 as higher equipment and technology contributions will be offset by lower aftermarket and a less favorable mix.
So let me close by saying that despite the unusual conditions. We've all experienced this past year I'm very pleased with the performance discipline and focus on execution by our teams in each of our businesses.
Through it all we've remained steadfast and keeping our people safe while delivering strong results.
Harsco is off to a strong start in 2021, delivering solid operational and financial performance in the first quarter and exceeding our expectations in each of our businesses.
We are confident in the strengths of each of our businesses and the direction of our strategic transformation.
That concludes our prepared remarks, and I'll turn the call back to the operator for questions.
Thank you at this time I would like to remind everyone. If you would like to ask a question. Please press Star then the number one on your telephone keypad. If your question has been answered and you wish to remove yourself from the queue press. The pound key our first question comes from the line of Michael Hoffman of Stifel.
Hi, Thanks for taking the questions on Pete welcome back.
On a little bit longer.
I would like to focus on free cash flow, if we could for a moment.
Can you.
This isn't meant to be a criticism I just want to understand the what's going on here.
Pretty good.
Mental improvement in the EBITDA at the midpoint.
And the free cash conversion of that EBITDA is better than the whole company.
But but I'm confused why it isn't more given that the capital spending at the mid points unchanged. So what's what's eating up some of that.
EBITDA transferring into cash.
And the revised guidance.
Yeah, Michael it's Pete so as we've talked about before we do have a number of headwinds in 2021 from a cash perspective, including some things that are carryover carryover from the cares Act as you know there are some pension payments that we have to make some some sales tax and payroll taxes that need to be made we also had the other things we talked about last quarter insurance cost and some increase in core.
Costs.
But in addition, some of the growth that we're talking about in the revised guidance Michael is going to be occurring later in the year is as we as we grow the business, particularly in rail that'll that'll have a little bit of a drag on working capital. Some of the revenue that will generate in the second half of the year will be realized into cash until the following year. So that's part of the driver in <unk>.
As you know in Q1, we had a few drags as well Q1 is a typical low point for us from us from a cash flow perspective. It has been for me every year I've been here the biggest elements or interest payments that we have to make pension payments that we have to make and we also pay our incentive comp from the previous year in the first quarter all of those have a drag.
And I guess the final point I'll make is seeming to be a consistent trend as we end up having a number of fairly significant cash collections in the early weeks of the.
Subsequent months that we normally 10 would normally collected the at the end of the quarter months last month in the quarter and those carried over into that into the next quarter in the case of Q1, those total about $10 million to $15 million of receivables that we had slated to collecting in March ended up coming in a week or two early week or two of April.
Okay. So.
If I'm offsetting a negative in <unk> are we positive on every quarter and it's more so in two and then it tempers and three and then 10% for because of the working capital drag so that the way to think about it.
In the second half of the years are big cash periods, Michael So it's going to increasingly get better but that the third and fourth quarter tend to be our biggest quarters from a cash flow perspective, but.
Also leveraged right.
Okay got it sorry.
Oh, sorry, we also have the typical levers we have some capital spend in Q4 that sometimes gets deferred into the following quarter. So we haven't we have a couple of levers to pull as well, but by and large the cash flow tends to be back half weighted.
And.
And I'm focused on cash because I think ultimately that's.
The true barometer of the transformation of this company is the ability to really sort of meaningful change the cash conversion ratio. So in 'twenty. Two you mentioned in your prepared remarks. This time than you did in <unk>. The 22 would have a less capital spending do I just take out the 60 million on growth as the starting place plus.
On the working capital.
On the timing on on the on the order to cash cycle related to the second half on on rail.
Part of the growth capital this there'll be some growth capital spend but it won't be anywhere in the neighborhood of $60 million plus theres. Another say 20 million or so that was a carryover of maintenance cap expenditures from last year that occurring this year. So there's that there's the working capital matters you mentioned, but we are as you know nothing's really changed.
Actually he has gotten a little bit better in terms of our targeting of a 10% of revenue free cash flow figure in the 'twenty two timeframe, that's still our target and we're on track for that so there's a couple of blips and timing issues in the quarters during the year here, but by and large we're still we're still heading solidly towards that that conversion rate.
And then a quick question just on segment and then I'll.
Pass it on the soils business, how big of a deal is.
He is saying New York is going to be fully reopened July one even if the governors decided he was going to fight that at the moment, but.
Is that a meaningful difference in what could be the activity on the soil side in the second half.
Yeah, I would say it is we have already Michael as Pete noted built in a good bit of recovery in that business.
Throughout the balance of the year and as you intimate New York is by some margin our largest.
Region. So so yes on and that's that's built into our into the outlook that we just shared with you.
Perfect Alright, I'll pass it on thank you nice job opening up.
Okay.
Your next question comes from the line of Jeff Hammond of Keybanc capital markets.
Hey, good morning, guys.
Hey, Jeff.
Are you able to give US you saw revenue in the quarter or what the what the core was an FX contribution and environmental.
The FX I'll take the last one first the FX is negligible during the quarter virtually material.
You saw revenues in the quarter were about $190 million.
We don't.
That's total or clean Earth right.
45, so I can give you total clean Earth mothers 135.
Okay. That's helpful and then.
So rail you upped outlook.
And I know like the last couple of years, you've kind of.
At a high level outlook, and then and then some stuff got pushed to the right. So just maybe talk about the cadence of rail.
How backend loaded as the growth.
And then how you see the shape of this kind of parts recovery or China recovery.
Hum.
Yeah, well, Jeff asked in previous years, the rail revenue and EBITDA.
Split is second half weighted maybe a little more this year than in previous years.
Although the.
The updated and very positive assumption on aftermarket.
The aftermarket business in Asia will be in Qs, two and three and maybe some in Q4 and as you know the the margins on that are quite high but.
Through the first two months of the year, we really had not seen much lift in the business.
And that was reflected in the original guidance that we provided but good March was a very strong month not only in terms of.
Our bookings, but also.
Opportunities that came on their radar screen that had previously not been on the radar screen. So.
It's really a pretty substantial change in our outlook for the rail business, it's primarily.
On the on the freight side on the aftermarket side, we're not seeing much of a recovery even in the outlook.
On the on the metro or the passenger part of the business.
But nonetheless, it's a it's fairly broad based geographically.
And.
And with both aftermarket and equipment.
Okay. So <unk> I think you said comparables that both top and bottom line.
For rail.
Comparable yes, Q2 should be.
Should look quite good.
This year versus last year in Q2 top line, we'll see growth on the EBITDA figure should be.
Comparable.
Okay.
Okay, and then it looks like your guide for <unk>.
Clean Earth.
As.
For cash.
At the midpoint EBITDA to be up kind of $20 million, but I think you said you saw savings is $20 million. So maybe just walk through the other moving pieces I know theres. Some some additional spend and then maybe just how you think underlying incrementals are on the base growth.
Yes.
I'll start on your commentary.
Here as well, but the incremental cost we talked about before those are those are significant if you recall, we mentioned that we had expected and clean earth to have about a $6 six or so million dollars of more or less nonrecurring costs that would be incurring in 'twenty one related to some it investment as well as some rebranding activities.
Theres also some some corporate some central cost and cleaner that were being.
Added to choose to basically.
The larger business and then as you recall there was a $3 million additional corporate allocation that was made to the clean Earth business. So.
We're talking about all of those factors more or less going away are staying consistent and 22 six.
$6 million will go away the rest of it will stay within the business and we will see growth in terms of the has waste business and the kind of the mid single digits area.
The.
I guess, that's really pretty much at this stage.
Okay. Thanks, guys.
Your next question comes from the line of Larry Solow of CJS Securities.
Good morning, Thanks for taking my questions Pete.
Good to hear your voice again.
Hopefully.
Your replacement is not too far away, but you know everybody appreciate you staying on.
I guess my first questions are sort of on the on the rail segment and Nick you made some comments about strategic interest I know you guys have.
Not hidden the fact that eventually you look to to sell this asset.
Obviously, we would think you would look to improve performance a little bit I think it's been a struggle. The last couple of years, but hopefully with the strong backlog and things starting to clear things should get better could you maybe just discuss your thoughts on timing would you actually be able to complete a sale.
Ill, where EBITDA is at $25 million or.
We were thinking more along the lines of you probably wouldn't be able to do something until you sort of progress towards maybe not that 100 million EBITDA goal that you have three to five years from now, but some were significantly higher than where we are now can you maybe discuss from a high level thoughts on that.
Yeah, well first of all Larry with respect to looking back versus forward on on EBITDA, We would expect.
The buyer universe to be focused on the the forward number again, our backlog is quite strong we have a lot of visibility.
Two.
A significant lift in EBITDA year over year.
Not to mention.
The benefits from additional infrastructure spending and a gradual return and the AR and the passenger or metro market, which is about half of our business. So I think that the visibility to a much better performance is there and we would certainly expect.
The ultimate value for the rail business to reflect that.
Post to looking back at the as you say 25 or so million of EBITDA in 2020.
I'll also say that.
The maintenance of way sector.
Uh huh.
It continues to be viewed as a very attractive sector by a number of strategic players that either have a modest presence or a limited presence and in that in that space. So we're.
As we've said before but perhaps even more so now quite confident that the interest from strategic buyers is extraordinarily high.
So if you match that with the improving outlook in the business and the strong backlog, we think that.
On the.
Net of process, if we were to undertake one.
To divest the business would yield a very good outcome for shareholders.
Fair enough and the only reason why I ask just because I know I think recently I know Nordic Dorko different company than you, obviously, but I think they were on being bought out for about 10 times EBITDA.
So I just struggle a little bit on.
Why an acquirer might want.
We are willing to pay.
20 times.
Past EBITDA or 10, 12, Tom future without the confidence that EBITDA is going on maybe they need a little more confidence because if we look back I think two years ago. We were at 25 million EBITDA and thought we would be double that by now and were obviously had some issues but.
We're still at that $25 million number so.
I thought maybe you would have more leverage when you actually are demonstrating improvement.
Vs, hoping for improvement and I don't mean to say that in a bad way, but.
That's fine back.
Back in 2018, EBITDA on the business was about $50 million.
We had clearly an operational challenge on one hand, and then the impact of COVID-19 on the other so I think we have pretty good visibility and we can demonstrate historically.
Relatively recent history that the EBITDA was in that $50 million range and again I think you would need to look at backlog as any any buyer would and get guy interval that the backlog supports that type of EBITDA lift and I'm confident that it does.
And what just sticking with that what what is sort of is it just COVID-19 I understand COVID-19 has certainly hurt your aftermarket sales in the U S and there was a.
Certainly a blip there in China, and Asia, which hopefully it seems like youre getting a little bit.
Better recovery there than you had thought or some some sales back from that from that part of.
The globe, but in terms of the the big piece of backlog I know that's mostly international.
Multi year on big contracts on new equipment.
That's just been has there just been delays on deliberately because of COVID-19 is that hampered your ability in the last 12 18 months to actually realize some of this backlog into sales.
Yes. Some of it certainly is a is driven by by COVID-19 as you know during during the pandemic the supply chains kind of froze up and in some some areas.
Customers were unable to accept.
Except product in some cases, we had COVID-19 challenges with respect to our production.
Production. So there's no question that our debt that COVID-19 had a pretty significant impact on our ability to.
To grow the business and and achieve our EBITDA ambitions in 2020, and but again based on the month of March and what we've seen in April.
We're pretty confident that that's behind us.
Okay and then just last question on clean Earth. If you can just just for clarification or maybe just frame the picture a little bit better for us.
Between the hazardous waste side, you had the hazardous waste side of the clean Earth on when you would your combined with you saw and then and then there's this whole other piece of it.
Clean Earth, which before you.
The dredging in the soils piece.
The dredging and flow piece by itself was down.
Like a 50% number or something last year I don't can you break that out exactly but can you walk hazardous waste good okay, and it's coming back faster can you just maybe.
Break out the different pieces, so we get an understanding of what you.
How much debt dredging and more importantly, the soils dropped last year.
And.
Essentially could cut recovery over the next couple of years.
Yeah Yeah.
Well I I like to think about it relative to 2019 of course, which was pre COVID-19.
And if you look at the the sum of the soils business and the dredge business, which we kind of view as a as a segment within clean Earth.
Do you expect that segment, if you will to be down relative to 2019.
By 15% to 20% in 2021.
Now we and.
It was a good bit down in Q1, we're seeing signs of that coming back as I think Pete and I alluded to.
So that that is about 20% of the in terms of revenue the clean Earth segment overall that soils dredge component.
Within so the other 80% of the cleaner segment as hazardous waste.
And as you know the majority of that being in knee and the esol.
Portion and we do expect on a full year basis for 2021.
The revenue and volume and the he saw hazardous waste to be back in line with or maybe a little bit better than what we saw in 2019, what's lagging a bit is the the legacy clean earth hazardous waste and most of that volume that we process.
Like that and ESAU.
Where we collect the waste directly from our customers most of the legacy clean Earth has waste comes from brokers.
And that that waste is generated predominantly from much smaller businesses, many of which have not come back.
From the COVID-19 impact as have the larger accounts that you saw serves.
So that business we.
We do not expect on a full year 2021 basis to be quite back to where it was in 2019.
So that's kind of how I think about it I think about 20% of the business being the contaminated and dredged.
Business and that that remains down and will likely relative to pre pandemic levels be down 15% to 20% on a full year basis. This year the other 80%.
Hazardous waste most of that being you saw.
Gotcha, great very helpful. I appreciate the color. Thanks for the quick thanks for the thoughts.
Once again, if you'd like to ask a question. Please press star One. Your next question comes from the line of Rob Brown of Lake Street capital.
Good morning.
Sticking with sticking with clean Earth, you talked about margin expectations of improvement how much of that is dependent on on volume and how much of that is within your own control and maybe you could talk to the kind of ultimate goal of margins in that business, where do you see that being over the next couple of years.
Yeah Yeah.
Well, let's start with Esol I'm very happy to say that the margins in Aesop since we acquired that business.
Nearly doubled from about 5% to 10% a lot of that is the the self help work that we've done that we've mentioned the $10 million of benefits that we realized last year and then an incremental 20 or so that we expect to realize this year. So we certainly expect those.
He saw margins over time.
To get up in this day, 15% to 20% range.
As I said, there's a good bit more benefit to be created this year through the self help initiatives.
Plus as we look into 2022.
The ability to.
Take out a significant amount of SG&A.
Across clean Earth and esol.
Will further boost margins because up to this point, we've been very focused on building the foundation in that business and so we've not yet.
<unk> reached the point, where we feel comfortable taking out the SG&A that we know we can once that foundation is in place, which we think will be later in the year.
So you saw margins are certainly trending in a very very strong direction on the legacy clean Earth side.
The contaminated materials business is a pretty good margin business and a lot of that margin is driven by filling up the plants filling up the facilities and that's what's been soft through COVID-19.
So when when that begins to come back and the our processing facilities.
Approach.
Capacity, where they were in 2019 that really provides a nice lift to those to those margins.
But I continue to believe overall that the segment clean Earth plus you saw in.
In 2022, and 2023 is going to.
Returned back to kind of the high teens maybe.
Maybe even 20% level of EBITDA margin.
Yeah.
Okay great.
And.
Maybe on the environmental business, if you could talk about the commodity price environment, how how that helped in the quarter on how you see that during the year.
Yes, I think that benefit was.
A couple of million dollars it was less than 2 million $2 million, mostly due to nickel prices correct.
Yes.
Yeah.
And that's kind of the ebb and flow that we see year on year out.
You may pick up a couple of million of benefit you may lose a couple of million of benefit.
But at the moment.
Those prices are a bit higher than they were at this time last year.
Okay, great. Thank you I'll turn it on.
Your next question comes from the line of Chris Howe of Barrington Research.
Good morning, everyone.
Welcome back Peter.
Thanks.
Following up on some of Rob's questions I wanted to talk about you saw them.
You mentioned the synergistic improvements that continue to flow through with your self help work as we think about he saw more so on a top line perspective relative to its end markets.
Through the remaining balance of this year into fiscal year 'twenty. Two can you talk about how that is anticipated to benefit you saw on margin and now that you've had it.
Under your ownership for a period of time.
How.
Are these contributing factors weather top line or from a cost standpoint.
Proving your outlook for margin potential within esol.
Mhm mhm.
As I noted we've been very happy with the roughly doubling of margins that we've realized in the first year of ownership.
And.
The expectation.
Our ambition is to roughly double margins again over the next couple of years again, a lot of that driven by self help certainly volume is a part of that.
As we've looked at the Esol business.
And better understood the drivers of that top line of the volume growth.
We think theres, a significant amount of opportunity for us.
To kind of increase net volume growth in the business kind of beyond where the the market would be over the next year or two and so we're we're quite focused on that and a lot of work has gone into the commercial organization our commercial practices on.
All the white space that we see out there by better executing on the front end of the business.
And so there's a very high degree of confidence and optimism.
And.
And both clean Earth Andy saw.
On the top line potential over the next few years.
That's great I appreciate the color and as we look at opportunities within clean Earth.
Whether as it relates to E solar outside of you. So are you seeing any change in competitive dynamics.
That may open a window.
Of opportunity for harsco on an inorganic basis within clean Earth debt.
In a sense offset.
The legacy clean Earth as that recovers.
I'm, sorry did you say organic or inorganic.
Inorganic.
Inorganic.
Yeah, well as we've indicated.
<unk>.
We have an ambition to grow the cleaner segment, both organically and Inorganically and we would expect.
To have a balance sheet to begin to do that later this year and into early 'twenty, two and we're very focused on identifying those opportunities inside and outside of our business and so I think it's quite clear that you will see.
US doing just that it's an industry that.
We remain somewhat fragmented.
We have pretty good visibility to the <unk>.
Availability of businesses that we think would fit well with what we're trying to do.
At the moment, we are quite busy internally focusing on the self help initiatives in.
As we discussed in and rebranding and new organizational structure all of those kinds of things, but I see late this year early into 'twenty two.
Both our internal capacity as well as our balance sheet capacity to invest in inorganic growth opportunities to be aligned.
And that that's that's the expectation.
Perfect and my last question or should I say my first question prior to the follow up inclination was on the rail segment, you talked about Asia aftermarket improving.
As it relates to Asia aftermarket and some of the other buckets like pro trend technology and some of the other aftermarket geographic regions can we talk about mix in the context of the remaining balance of this year perhaps.
We could see.
A different seasonal shift.
When comparing the first half to the second half as we move into fiscal year 'twenty two.
Should aftermarket.
Come back stronger than expected.
Combined with technology.
Yeah, I think that that is certainly implicit in our updated guidance we came into the year.
And it was.
Part of our initial guidance.
Much less visibility to the aftermarket programs in Asia, which as you know are quite attractive from a margin standpoint. So.
So relative to the original guidance.
We have seen a mix shift.
On the updated outlook more towards aftermarket and technology.
And that's certainly helping margins and providing a nice lift to EBITDA.
Great and one last quick one if I may.
On outlook for environmental continues to improve.
Can you, perhaps add some more color.
Into the different positives that youre seeing within applied products.
As we start to move through the balance of the year and on a.
What your long term picture is for applied products.
Given its positive contribution to the segment.
Yeah.
Well, it's a great question and of course, it's a major area of focus for us given that it's less capital intensive.
And provides a very clear environmental solution to the waste streams that we process and of course, our applied products platform now is broader than it's ever been because we're now.
Serving the aluminum industry as well as the steel industry.
And so.
So all I can say is that if you look at the innovation pipeline and the various stages.
Opportunities that we're pursuing and where those are now relative to where they were say a year ago.
We are really very pleased with the the outlook in applied products.
I think youll see a much larger revenue and EBITDA impact of applied products in 2022.
Then 2021, although 2021, certainly is up a very solid double digits in terms of topline and EBITDA relative to 'twenty 2020.
But nearly all of the innovation.
That we're focused on in that right.
Right now as related to applied products.
Thank you that was our final question for today I will now return the call to Dave Martin for any closing comments.
I'd like to thank everyone for joining the call and also please feel free to contact me with any further up further follow up questions and as always we appreciate your interest in harsco and look forward to speaking with you on the future.
Have a great day.
Thank you for participating in the Harsco Corporation first quarter 2021 earnings Conference call you may now disconnect.
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Yeah.
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