Q3 2021 Harsco Corp Earnings Call
Good morning, My name is Holly and I will be your conference facilitator.
This time I would like to welcome everyone to the Harsco Corporation third quarter release conference call.
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 you would like to withdraw your question press the pound or hash key on your telephone.
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 parties are permitted without.
The express written consent of Harsco Corporation your per.
Participation indicates your agreement I would now like to introduce Dave Martin of Harsco Corporation. Mr. Martin Sir you may begin your call.
Thank you Paula and welcome to everyone joining us today I'm, Dave Martin of Harsco with me today is Nick Grasberg are our chairman and Chief Executive Officer, and in human AGA Harsco as senior Vice President and CFO. This morning, we will discuss our results for the third quarter of 2021 and our outlook for the remainder of the year. We'll then take.
Your questions.
Before I presentation, let me mention a few items first our quarterly earnings release as well as the slide presentation for the call are available on our website.
Currently 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 set.
Action 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 the earnings release as well as the slide presentation.
With that said I'll turn it over to Nick.
Good morning, everyone and thanks for joining us.
I would like to further acknowledged that our new CFO on human AGA is with us today.
As previously noted we are very fortunate to have recruited on schuman to harsco. He has held significant financial and operational roles at Siemens E Comm in cubic.
And he is already adding tremendous value to our company.
Turning to our results the third quarter was characterized by healthy underlying demand in our two core businesses Harsco environmental.
And clean Earth.
It also reflected cost inflation and supply chain disruptions across all three business units.
Overall harsco consolidated revenue was up 7% versus Q3 of 2020.
While adjusted EBITDA was up 22% on the same basis.
Demand in our rail segment was dampened by continued weakness in transit ridership, a slowdown in domestic freight traffic and.
And uncertainty as customers wait for the passage of the U S infrastructure Bill.
Another headlines from this morning's announcement is our intent to divest our rail segment during the first half of next year.
As we've indicated in the past Harsco rail is not aligned with our long term strategy to focus on and drive growth in businesses that provide environmental solutions to a broad mix of end markets.
However, harsco rail is a unique business with innovative solutions and our global reach with meaningful growth opportunities ahead.
We have received solicited expressions of interest from many parties over the past several months and expect a very competitive sale process.
I'll comment on each of our segments, beginning with harsco environmental.
Harsco environmental continued to perform in line with our expectations and we're pleased with its momentum.
Capacity utilization of the steel mills, we support remains lower than the levels of the first half of 2019.
And analysts expect low to mid single digit LST growth through next year.
Commodity prices along with the contributions from our so called Eco products previously referred to as applied products remains strong.
Looking ahead to 2022.
Against a continued positive outlook for the global steel industry and to decline to normalized levels of capital spending in our business we.
We expect the environmental business to deliver the highest EBITDA and free cash flow in many years.
Clean Earth experienced a moderate impact in the third quarter from cost inflation, and an excess of backlog of material requiring incineration.
Which negatively affected volume.
The recovery in contaminated soil continues to be a bit slower than anticipated due to delays in certain infrastructure projects.
Nonetheless, clean Earth's EBITDA in Q3 was close to our expectations.
And these pressure should abate throughout Q4 and become de Minimis by Q1 of 2022.
Similar to Harsco environmental we believe that clean Earth is set up to deliver another strong year of growth in 2022.
Underlying market demand new business and you had higher benefits from the esol turnaround and integration will be the primary drivers.
As noted our rail business had a challenging quarter due to cost inflation and the timing of equipment orders and shipments.
Many of our customers had been affected by their own supply chain issues and as a result maintenance programs are being put on hold.
While we expect to see some continued impact from these inflationary and supply chain issues. In Q4, we expect the situation to improve as we move through the first half of next year.
The passage of the U S infrastructure, Bill and the introduction of new products aimed at improving the efficiency of rail maintenance activities.
Also to support growth.
The other components of our business those being aftermarket technology and contracted services are.
Are performing in line with expectations and the outlook is encouraging.
Therefore, we believe the timing of the divestiture of the rail business should coincide with improving market fundamentals and deliver the value we expect for our shareholders.
I'll now turn the call over to a human.
Thanks, Nick and good morning, everyone.
Let me start by saying I am very excited to be here and a part of the harsco team I joined Harsco, because I saw the promise of the company's ongoing transformation to a single investment thesis environmental solutions company and the value creation opportunities.
I've enjoyed.
Getting to know and working with the harsco team over the past three months and my time with Harsco. So far has strengthened my optimism.
Our growth strategy is well defined and our financial priorities are unchanged.
<unk>, our free cash flow and reducing our leverage remains paramount to harsco and the key priorities for me as CFO.
There is strong underlying momentum within our businesses and the opportunities to grow both organically and inorganically are significant.
Now, let me turn to our results for the quarter and our outlook for Q4.
Harsco consolidated revenues in the third quarter increased 7% compared with the prior year quarter to $544 million and adjusted EBITDA increased 22% to $72 million.
The year on year improvement can be attributed to steady operational execution strong performance in our hospital environmental segment.
As well as growth in improvements within the hazardous waste line of business of clean up.
Harsco with adjusted EBITDA margin as a result reached 13, 2% in the third quarter with a 11, 6% in the comparable quarter of 2020.
Despite strong year on year improvement, our adjusted EBITDA was below guidance driven by new project delays from rail customers.
Cost inflation and supply chain constraints.
Transit ridership remains weak freight traffic has slowed.
And the uncertainty related to the infrastructure Bill has put pressure on customer capital and operating budgets.
The majority of the deferred sales for rail in the third quarter are now expected to be realized in Q4 or in early 2022.
Material cost inflation and supply chain pressures had a mid single digit EBITDA impact in the quarter relative to prior expectations.
Harsco with adjusted earnings per share from continuing operations for the third quarter was 20.
This figure compares favorably to adjusted EPS of eight in the prior year quarter.
Lastly, our free cash flow for the quarter was nominal this outcome was lower than anticipated for the quarter with rail and related delayed projects as the primary driver.
Please turn to slide five and our environmental segment.
Our environmental segment performed very well in the quarter.
Revenues totaled $270 million and adjusted EBITDA was $56 million.
Revenues were 21% higher than the prior year quarter, and EBITDA increased 40% year on year.
These details illustrate the positive operating leverage in this business.
Compared with Q3 of 2020, the EBITDA improvement is primarily attributable to increased demand for environmental services and.
And applied products on a global basis.
Steel market fundamentals remain strong.
Liquid steel tonnage or LST increased roughly 20% versus the prior year.
The outlook for steam consumption remains positive.
We expect to see some modest disruptions in the fourth quarter due to normal seasonality, but the industrial end market observers are predicting another year of growth in 2022.
Next please turn to slide six to discuss our clean Earth segment.
Compared to the second quarter of 2020 revenues increased 3% to $200 million with the hazardous materials business driving this growth.
With hazardous materials retail and health care activity was strong while volumes from the industrial sector were modestly lower than the prior year quarter due to disposal market constraints.
Also activity within our soils dredge materials business was modestly lower year on year. However, we did see sequential improvement.
With that said the improvement has been slow and recall that the soil remediation is a late cycle business that then trough until the fourth quarter of 2020.
Segment EBITDA increased to $21 million in Q3 of this year supported by higher higher.
Hazardous material volumes and he saw integration benefits.
These positive impacts were offset by investments to support cleanup and inflation related to containers and transportation.
We have seen a significant increase in the cost of steel containers and transportation and have taken action already which I will discuss in more detail later.
Lastly, on clean Earth, I'd highlight that our year to date free cash flow and now totals $39 million.
This total represents more than 70% of segment EBITDA.
Now please turn to slide seven in our rail business.
Rail revenues totaled $74 million and EBITDA totaled $3 million in the second quarter.
These figures are below those realized in Q3 of 2020.
The change in EBITDA can be attributed to lower equipment sales volume and higher costs.
I've mentioned earlier most of the deferred sales are expected to be realized in the next few quarters.
Also high end material costs impacted results.
Good a negative LIFO adjustment in the quarter of approximately $2 million, which had not been anticipated.
These impacts were partially offset by higher contributions from aftermarket parts and contracted services both in the U S and Asia.
Turning to slide eight which is our consolidated 2021 outlook.
As noted earlier by Nick and in our press release. These figures now exclude rail.
We will report as discontinued operations beginning in the fourth quarter.
Our adjusted EBITDA guidance is now 248 million to 256 million for the year.
While adjusted EPS is anticipated to be within a range of 51 to 54.
These figures consider 4 million of stranded corporate costs that were previously allocated to rail.
This outlook also includes 100% of harsco as interest costs and a pro forma estimated tax rate.
Our detailed segment outlook is included in the appendix of the slide deck.
And from a business segment point of view, our adjusted EBITDA outlook for environmental is essentially unchanged.
Meanwhile, our outlook for clean Earth, adjusted EBITDA is lowered by $5 million at the midpoint.
This change reflects the impact of higher container and transportation costs.
As well as a volume impact from and disposable disposal constraints.
Last quarter, we noted certain risk related to <unk>, including the impacts related to incineration and inflation.
These impacts however are larger than what we previously anticipated for the second half of the year.
Looking forward, we do expect these pressures to abate.
There are a number of disposal assets that have restarted.
Or are increasing output.
Also we have been pushing through price increases to offset the inflation.
Price initiatives take time as Europe, there driven by timing of contractual annual price increases in many cases.
And we expect to fully offset the cost increases we've seen year to date during the first quarter of 2022.
Also we remain very diligent on our cost structure, including corporate costs and the need for continuous improvement.
In this regard we recently launched a cost improvement program.
It includes targeted reductions at both clean Earth and rail.
These efforts are anticipated to provide annual run rate benefits of 10 to 15 million when fully realized in the second half of 2022.
Any nonrecurring costs related to this program as well as our recently announced decision to move our corporate office to Philadelphia are excluded from this outlook.
Let me conclude on slide nine with our fourth quarter guidance.
Q4, adjusted EBITDA is expected to range from 55 million to 62 million again this range excludes rail.
Clean Earth is expected to see a nice improvement year on year as a result of integration benefits and higher volumes, including in the soils dredge materials business line.
These impacts are expected to be partially offset by inflation and investments.
Environmental EBITDA is anticipated to be similar or slightly below the prior year quarter. This guidance contemplates a negative FX impact some contract exit costs and the less favorable services mix compared to Q4 of 2020.
Sequentially, we anticipate.
Got some seasonality will reemerge across our businesses.
And before opening the call to questions. Let me again reiterate our focus on reducing leverage and strengthening free cash flow.
We ended the quarter with a leverage ratio of 448 times importantly.
We are targeting a leverage ratio of approximately three times at the end of 2022.
This outcome would be consistent with our long term targets and reflects our optimism about our businesses and ability to sell rail.
Thanks, and I will now hand, the call back to the operator for Q&A.
Thank you if you would like to ask a question simply press Star then the number one on your telephone keypad, we'll pause for just a moment to compile the Q&A roster.
And your first question comes from the line of Larry Solow with CJS Securities.
Good morning, guys and thanks for taking the questions just a quick clarification on schulman, so essentially the guidance for the year from a continuing operations basis essentially.
The $2 48 to $2 56 is that comparative till like $2 55 to 265 number or somewhere around there or am I in the right ballpark, if we sort of add back with your original guidance was for rail.
Good morning, Yeah, just if you take the three segments.
Essentially environmental is unchanged cleanup as I mentioned at the midpoint is $5 million lower corporate cost when you add back the stranded cost as a couple of million better. So overall relatively close to our private previous guidance when you exclude rail.
Okay, and you mentioned environmental sounds like there's no real change there.
Obviously cost pressures I'm sure hitting that segment as well, although it seems more focused on the on the clean Earth piece, but has there been any any real change in terms of your outlook in terms of.
Demand.
On the environmental side, perhaps demand a little bit better than you expected.
But impact offset by cost pressures is that a fair statement.
Yeah, Hi, Larry It's Nick Yes, I think that's a fair statement that the market continues to develop largely as we expected it to.
The cost pressures in that business.
Or not is.
Acute.
As they are in clean Earth, a rail and we do have some ability to escalation clauses to recapture.
That inflation.
Okay and the question on sort of the end disposal bottlenecks.
That's sort of the incinerator piece or the inability to some sooner at some of your waste have you seen any improvement.
Over the last 90 days I believe some of this waste that you guys are referring to was actually being was also not only being center.
Incinerators, but all sorts of cement kilns, who can you use this waste is fuel and essentially incinerate. It. So if I'm not mistaken there was a particular customer that there was a holdup there has that started to improve.
And in Q4.
It has in fact, its gotten a good bit better I'd say the the biggest negative impact was realized in July and August.
Since then.
It's improved a good bit and I think theres a lot of optimism.
That if not in Q4, certainly by Q1.
<unk>.
That supply chain, if you will it should be back towards normal functioning.
Okay.
On the project side is that I thought you weren't you Werent building as much on the on the dredging side right on the wet soil. If you will it's more delays.
The dredging piece does pick up as well, but I assume.
A little bit of a push out is more or at least relative to your guidance was more on the draw.
Drier soil the infrastructure piece in our projects and stuff is that what youre, referring to yes, that's correct as well the dredge business actually is performing quite well.
As you know on the as you call it dry soil projects for us.
Generally focused in the mid Atlantic New England area and there are a few large projects that were.
Tracking and have good reason to believe that will be significant.
Processor of that material, but they have been delayed.
And your next question comes from the line of Jeff Hammond with Keybanc capital markets.
Hey, good morning, guys.
Yes.
Just just on rail I wanted to get a sense of.
I know you are selling that but just to get a sense of kind of run rate.
Are you is it is the growth rate in EBITDA growth about the same as what you thought before or is there a substantial amount of pushing to 2022.
Yes, I guess what I.
How I'd characterize it Jeff is that the.
Near term kind of earnings potential of that business really has not changed.
But as you know on the equipment side.
It can vary from quarter to quarter and I think currently we are seeing some delays so.
Our view is by the time, we begin to market the business.
That the trailing 12 months EBITDA.
At that time should approximate what we had been thinking.
Okay. That's helpful.
<unk>.
And then just on clean Earth can you just talk about what youre doing from a pricing standpoint.
To kind of deal with some of the.
Added costs and inflationary pressures.
Yes, so from a clean Earth's perspective.
The piece of business that doesn't have annual contracts are long term contracts in place we have pushed through price increases. These do depend on the category code, but we've pushed through price increases and are definitely recovering our cost for the contracts, which have annual escalations built in as these contracts come up for the <unk>.
We are pushing through price increases and those will get priced in dollars and as I mentioned that we expect in Q1 to have recovered from any inflation headwinds.
<unk>.
The price increases.
Okay, and then just last one.
You took down your free cash flow fairly substantially just talk through the moving pieces to the new free cash flow guidance.
Yes, so keep in mind the previous free cash flow guidance was including rail the new free cash flow guidance is pro forma without rail and the new guidance also includes 100% of the interest cost.
For Harsco.
Having said that in Q3, we did see some delays in projects and milestones related to rail payments.
But again, the two guidance isn't comparable our environmental business and our.
Peanuts business continue to generate good cash flow.
Okay. So.
The vast majority of the decline is rail either.
Short fall in <unk>, or what youre pulling out for <unk>.
That's correct. It's some slowdown in payments that are on our balance sheet is working capital and then also stripping out rail for the year.
Okay. Thanks, so much.
Yes.
Thank you. Your next question comes from the line of Rob Brown with Lake Street capital.
Good morning.
On the environmental business.
Wanted to get your view on kind of the growth rate that that business should see over the next year or two and I think you mentioned pretty positive guidance. How do you view the margin in that business getting to in terms of the EBITDA margin.
Yeah.
Yes.
Yeah, so from a top line perspective.
Really focus on volume.
We're looking at 3% to 5% top line growth.
And that business.
Balanced between the.
The mill services contracts and our ability to continue to expand.
The volume growth in our echo products.
The EBITA margins.
I think are pretty close to being.
All time highs, but we would expect.
To continue to see.
Margin expansion in that business through 2022.
The mix.
Should improve as we as we sell more eco products relative to the mill service business.
But again I think the.
As I've indicated before and I think you're aware that the best way to look at the business is really EBITDA minus kind of maintenance capex in terms of a margin.
So if you look at the capital that we'll spend next year for maintenance.
Maintenance as well as for renewal of existing contracts.
Subtract that from EBITDA and look at the margin.
That should expand.
One to two points next year.
Okay, great. Thank you and then.
On the clean Earth business.
Maybe just a little bit more about the constraints in the hazardous waste.
Processing is that is that something that you.
Have control over or is it really just something that you're waiting for the market to loosen, which you indicated it is but just help me understand the things you can do there or is it just waiting for the supply chain.
Mhm.
The vast majority, 80% to 90% of the material that we process.
Clean Earth hazardous waste is either recycled or repurposed the remainder.
Does need to go to either a landfill or incinerator.
For that portion that goes to incineration.
There have been capacity constraints.
At those facilities, where we ship our material.
Now that was.
A combination of a number of different factors that led to that situation.
And as I indicated.
That a constraint was really at its peak and.
In July and August and it's getting better facilities are reopening that were closed for maintenance.
Capacity is coming online.
And so forth. So we really do believe.
That situation too.
Two to get better here in Q4, and certainly be behind us in Q1.
And we estimate that.
On the industrial hazardous waste that we process.
That incineration capacity challenge affected revenue by about two percentage points or one to 2 million of EBITDA.
Okay. Thank you I'll turn it over.
And your next question comes from the line of Brian Butler with Stifel.
Hey, good morning, Hey, guys.
Good morning.
Just kind of on that proposal and you said it was about $1 million to $2 million of EBIT.
When you think of the other issue being the labor could you maybe.
Give us some quantification on kind of what the labor headwind was in <unk> and how to think about that in the <unk> and then into 2022.
Our bigger headwind from a cost perspective was the containers and transportation.
Labor as such we have had.
Some issues.
The whole industry in terms of drivers we've made some positive progress over the third quarter and that but the big.
A cost issue for US was the steel containers, where we've seen the cost of the containers go up significantly.
Over the last few months.
And how much of the Hudson was that maybe an EBITDA margin in the quarter.
$2 million to $3 million on the containers and some of the transportation stuff.
And is that improving in the fourth quarter like some of the other items like disposal or is that continuing.
The price is continuing but keep in mind, we're pushing through price increases to our customers to offset the higher inflation.
Okay and then.
Follow up question just on <unk> can you talk maybe about some of the possible potential impact from China's rolling blackout.
The steel business.
<unk>, how that kind of maybe trickles on to other parts of the.
Your business.
Yes, Hi, Brian.
We're fortunate in that the.
A few mills that we service in China, where we have quite sizable and long term contracts.
<unk> achieved whats calls in China, AAA certification from an environmental standpoint.
And.
What that means is that they will be much less subject to some of those.
Closure.
The temporary risks that other mills will be will be subject to.
So we really do not expect there to be a significant issue.
In our China business.
The winter months by these bodies rolling blackouts.
Okay, and then one last one just on the financials do you have a year to date free cash flow.
Excluding the rail business.
Yes, it's $6 million.
And that includes 100% of costs.
So $6 million. So your forecast for the third quarter is negative one to a positive $14 million is that the right way to think about it.
That's correct.
Basically 029 million positive to get to the five to 15.
Okay, great. Thank you very much.
And again, if you would like to ask a question simply press Star then the number one on your telephone keypad.
Your next question comes from the line of Chris Howe with Barrington Research.
Good morning, Nick Good morning Ghansham.
Good morning.
Morning.
I wanted to first off talk about the applied products.
Your expectations as we head into fiscal year 2022.
I was thinking of this in the context of some of your recent announcements surrounding sustainable asphalt products, what you've been doing your work in the U K.
And what your thoughts are on applied products overall, and what the potential is for the steel foam business.
Well, it's a very good question and I'm glad glad you raised it because it's a component of our business that we're very excited about.
Both in terms of its.
Revenue and profit potential as well as of course the benefits that the.
Such products provide too to the environment, which as you know is what were primarily focused on.
You are correct with respect to the the asphalt business in the UK, we had for years at a single facility that.
Really.
Generated the benefits that I, just mentioned as well as quite good margins.
And we're now one of our many initiatives and echo products is too.
Understand other geographies, where the requirements wood wood.
Would be satisfied to to build.
New facilities and so there are three there.
We've identified that we will be.
Gaining the permits and beginning construction of in 2022.
But that's a part of the business that if you look at the return on capital.
The consistency of that product with our.
With our environmental goals.
It's aligned very very nicely.
There are.
Other similar initiatives around.
Salt cakes in the aluminum industry and the ability of our all your salt technology to process those those salt cakes, our new full scale facility in Bahrain is up and running in achieving all of our.
Milestones and now customers potential customers are able to to visit.
Full scale operation, that's performing quite well as opposed to what had been just a single pilot plant in the U K, there's a lot of optimism around our all yourself technology as well.
So those are just two but.
I really do believe that over the next year or two three you will see from a mix standpoint revenue mix standpoint.
That shifting.
For us more and more towards echo products relative to the the core mill services. Although of course they are closely linked.
Thank you for that color.
One follow up it seems like over the course of fiscal year 2022.
There's going to be.
Room for additional capital priorities as we consider.
The formal process that's undergoing for rail.
I'm not talking about that specifically, but can you kind of outline how you see capital priorities for the business. If we think about the growth opportunities here in applied products.
Or are there opportunities that you see across the business.
Yeah.
As Shannon mentioned and of course, we're very aligned on this that the priority in 2022 will be free cash flow generation.
And reducing our leverage.
And at the same time, we expect the operational performance of both <unk>.
Harsco, environmental and clean Earth.
To be quite strong so we're really looking forward to a strong cash flow year.
And together with the proceeds from the divestiture of rail getting our balance sheet, where we'd like it to be at around three times Levered now.
There are.
Im happy to say very attractive <unk>.
<unk> opportunities investment opportunities for growth in both AG and in clean Earth.
But those 2022 will likely be secondary.
Two.
To the balance sheet.
Okay, and if I may squeeze one more in here really quickly apologies.
The infrastructure program as it relates to rail with the sale process undergoing how should we think about the inclusion or exclusion of that program.
We consider the timing of that formal process.
Uh-huh.
Well in the short term there are.
Handful of projects.
With customers that are somewhat.
Dependent upon clarity.
Around the infrastructure Bill.
Both in terms of what's included and also kind of the timing.
And Thats.
Part part of our commentary around.
Some of the push outs and revenue and profit on the equipment side of that business.
Clearly in the medium to longer term there are components of the infrastructure Bill.
That would be very attractive to many of our customers and we believe.
Will ultimately flow to.
Higher revenue.
Between us and those customers, but between now and when the.
The sale process commences in let's say is completed.
We expect.
With the passage of the bill that handful of related projects too.
To be to be realized in revenue.
Okay. Thank you.
And you do have a follow up question from the line of Larry Solow call, Let's see Jan security.
Most of my questions were answered there, but along the lines of the sort of sustainable stuff I think you also announced.
A little JV with.
With Mac sort I guess on sort of a new.
Process for steel slag is that something that over time.
Move the needle.
Yes, we think so of course, it's a $1 billion business or so and so.
Moving the needle.
It's.
It's a technology that allows us to improve the metal recovery from.
From the slag that we process.
For our customers and it's a technology that provides a much better return on investments.
It's probably more applicable to new contracts.
Or contra.
Contracts, where the existing technology needs to be replaced.
Got it so it's significant in that.
A very sound environmental solution.
With a good return.
But I would expect its adoption and rollout.
Could be over the next two or three years.
Gotcha and then Nick just what have you just last question on our thoughts on the timing of a potential sale of the rail business.
Do you think it could be a little bit of a challenge considering the businesses sort of underperformed the last couple of years.
Maybe perhaps it would be.
One is they're just taking it allowed to have a couple of quarters under your belt, where the business is performing.
And.
More in line with expectations.
Okay.
<unk> growth trajectory or not.
Obviously I'm not privy to.
Compensation is don't expect you to discuss them.
In a public forum, but I'm just curious.
The recent performance in the rail business could potentially push out our impact evitable sale of the business.
Yeah.
Well, it's a good question of course is something that we thought a good bit about.
We do believe that the underperformance in our rail business.
It was really driven by the market challenges that much of those we expect to diminish here over the next few quarters.
We also of course have to balance.
The.
The outlook for the business and the expected.
Proceeds of a divestiture against the need to.
Bring our balance sheet to where we'd like it to be and also to move ahead with our.
Our corporate strategy that we adopted two years ago.
<unk> become a <unk>.
Single thesis environmental solutions company so.
Balancing all of those.
Items.
We obviously have decided that we need to commit to divesting the business in the first half of next year.
And we do believe that we will get good value for the business.
Fair enough great I appreciate the color thanks, Nick.
Thank you.
And at this time there are no more audio questions. We will now turn the call back over to Mr. Martin for closing remarks.
Thank you for joining the call. Please feel free to contact me with any follow up questions. You may have as always we appreciate your interest in our scale and look forward to speaking with you in the near future have a great day.
And thank you. This concludes today's conference call. Thank you for your participation you may now disconnect.
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Good morning, My name is Holly and I will be your conference facilitator at this time I would like to welcome everyone to the Harsco Corporation third quarter release 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 then the number one on your telephone keypad. If you would like to withdraw your question press the pound or hash key on your telephone.
Key pad 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 recordings or redistribution of this telephone conference by any other parties are permitted without the expressed written consent of Harsco Corporation.
Her participation indicates your agreement I would now like to introduce Dave Martin of Harsco Corporation. Mr. Martin Sir you may begin your call.
Thank you Paula and welcome to everyone joining us today I'm, Dave Martin of Harsco with me today is Nick Grasberg are our chairman and Chief Executive Officer, and in human AGA Harsco, as senior Vice President and CFO.
This morning, we will discuss our results for the third quarter of 2021 and our outlook for the remainder of the year. We'll then take your questions.
Before I presentation, let me mention a few items first our quarterly earnings release as well as the slide presentation for the call are available on our website.
Secondly, 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 statement.
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 as well as the slide presentation.
With that said I'll turn it over to Nick.
Okay.
Good morning, everyone and thanks for joining us.
I would like to further acknowledged that our new CFO on human AGA is with us today.
As previously noted we are very fortunate to have recruited on Sherman to harsco.
Held significant financial and operational roles.
At Simmons E comm in cubic.
And he is already adding tremendous value to our company.
Turning to our results the third quarter was characterized by healthy underlying demand in our two core businesses harsco environmental and.
And clean Earth.
It also reflected cost inflation and supply chain disruption is across all three business units.
Overall harsco consolidated revenue was up 7% versus Q3 of 2020.
Adjusted EBITDA was up 22% on the same basis.
Demand in our rail segment was dampened by continued weakness in transit ridership, a slowdown in domestic freight traffic.
And uncertainty as customers wait for the passage of the U S infrastructure Bill.
Another headlines from this morning's announcement is our intent to divest our rail segment during the first half of next year.
As we have indicated in the past Harsco rail is not aligned with our long term strategy to focus on.
And drive growth in businesses that provide environmental solutions to a broad mix of end markets.
However, harsco rail is a unique business with innovative solutions and our global reach with meaningful growth opportunities ahead.
We have received solicited expressions of interest from many parties over the past several months and expect a very competitive sale process.
I will comment on each of our segments beginning with harsco environmental.
Harsco environmental continued to perform in line with our expectations and we're pleased with its momentum.
Capacity utilization of the steel mills, we support remains lower than the levels of the first half of 2019.
Analysts expect low to mid single digit LST growth through next year.
Commodity prices along with the contributions from our so called Eco products previously referred to as applied products remains strong.
Looking ahead to 2022.
Against a continued positive outlook for the global steel industry and to decline to normalized levels of capital spending in our business we.
We expect the environmental business to deliver the highest EBITDA and free cash flow in many years.
Clean Earth experienced a moderate impact in the third quarter from cost inflation, and then access of backlog of material requiring incineration.
Which negatively affected volume.
The recovery in contaminated soil continues to be a bit slower than anticipated due to delays in certain infrastructure projects.
Nonetheless, clean Earth's EBITDA in Q3 was close to our expectations.
And these pressures should abate throughout Q4 and become de Minimis by Q1 of 2022.
Similar to Harsco environmental we believe that clean Earth is set up to deliver another strong year of growth in 2022.
Underlying market demand new business and you had higher benefits from the he saw turnaround and integration will be the primary drivers.
As noted in our rail business had a challenging quarter due to cost inflation and the timing of equipment orders and shipments.
Many of our customers had been affected by their own supply chain issues and as a result maintenance programs are being put on hold.
While we expect to see some continued impact from these inflationary and supply chain issues. In Q4, we expect the situation to improve as we move through the first half of next year.
The passage of the U S infrastructure, Bill and the introduction of new products aimed at improving the efficiency of rail maintenance activities.
Also to support growth.
The other components of our business those being aftermarket technology and contracted services are.
We are performing in line with expectations and the outlook is encouraging.
Therefore, we believe the timing of the divestiture of the rail business should coincide with improving market fundamentals and deliver the value we expect for our shareholders.
I'll now turn the call over to our children.
Thanks, Nick and good morning, everyone.
Let me start by saying I am very excited to be here and a part of the harsco team I joined Harsco, because I saw the promise of the company's ongoing transformation to a single investment thesis environmental solutions company and the value creation opportunities.
I've enjoyed getting to know and working with the harsco team over the past three months and my time with Harsco. So far has strengthened my optimism.
Our growth strategy is well defined and our financial priorities are unchanged.
<unk>, our free cash flow and reducing our leverage remain paramount to harsco and the key priorities for me as CFO.
There is strong underlying momentum within our businesses and the opportunities to grow both organically and inorganically are significant.
Now, let me turn to our results for the quarter and our outlook for Q4.
Harsco consolidated revenues in the third quarter increased 7% compared with the prior year quarter to $544 million and adjusted EBITDA increased 22% to $72 million.
The year on year improvement can be attributed to steady operational execution strong performance in our hospital environmental segment.
As well as growth in improvements within the hazardous waste line of business of clean up.
Harsco was adjusted EBITDA margin as a result reached 13, 2% in the third quarter with a 11, 6% in the comparable quarter of 2020.
Despite strong year on year improvement, our adjusted EBITDA was below our guidance driven by new project delays from rail customers.
Inflation and supply chain constraints.
Transit ridership remains weak freight traffic has slowed.
And the uncertainty related to the infrastructure Bill has put pressure on customer capital and operating budgets.
The majority of the deferred sales for rail in the third quarter are now expected to be realized in Q4 or in early 2022.
Material cost inflation and supply chain pressures had a mid single digit EBITDA impact in the quarter relative to prior expectations.
Harsco as adjusted earnings per share from continuing operations for the third quarter was 20.
This figure compares favorably to adjusted EPS of eight in the prior year quarter.
Lastly, our free cash flow for the quarter was nominal this outcome was lower than anticipated for the quarter with rail and related delayed projects as the primary driver.
Please turn to slide five and our environmental segment.
Our environmental segment performed very well in the quarter.
Revenues totaled $270 million and adjusted EBITDA was $56 million.
Revenues were 21% higher than the prior year quarter, and EBITDA increased 40% year on year.
These details illustrate the positive operating leverage in this business.
Compared with Q3 of 2020, the EBITDA improvement is primarily attributable to increased demand for environmental services.
And applied products on a global basis.
Steel market fundamentals remain strong.
Liquid steel tonnage or LST increased roughly 20% versus the prior year.
The outlook for steam consumption remains positive.
We expect to see some modest disruptions in the fourth quarter due to normal seasonality, but the industrial end market observers are predicting another year of growth in 2022.
Next please turn to slide six to discuss our clean Earth segment.
Compared to the second quarter of 2020 revenues increased 3% to $200 million with the hazardous materials business driving this growth.
With hazardous materials retail and health care activity was strong while volumes from the industrial sector were modestly lower than the prior year quarter due to disposal market constraints.
Also activity within our soil dredged materials business was modestly lower year on year. However, we did see sequential improvement.
With that said the improvement has been slow and recall that solid remediation is a late cycle business that then trough until the fourth quarter of 2020.
Segment EBITDA increased to $21 million in Q3 of this year supported by higher hazardous material volumes and he saw integration benefits.
These positive impacts were offset by investments to support clean up and inflation related to containers and transportation.
We have seen a significant increase in the cost of steel containers and transportation and have taken action already which I will discuss in more detail later.
Lastly, on clean Earth, I'd highlight that our year to date free cash flow and now totals $39 million.
This total represents more than 70% of segment EBITDA.
Now please turn to slide seven in our rail business.
Rail revenues totaled $74 million and its EBITDA totaled $3 million in the second quarter.
These figures are below those realized in Q3 of 2020.
The change in EBITDA can be attributed to lower equipment sales volume and higher costs.
I've mentioned earlier most of the deferred sales are expected to be realized in the next few quarters.
Also high on material costs impacted results.
Good a negative LIFO adjustment in the quarter of approximately $2 million, which had not been anticipated.
These impacts were partially offset by higher contributions from aftermarket parts and contracted services both in U S and Asia.
Turning to slide eight which is our consolidated 2021 outlook.
As noted earlier by Nick and in our press release. These figures now exclude rail.
Which we will report as discontinued operations beginning in the fourth quarter.
Our adjusted EBITDA guidance is now 248 million to 256 million for the year.
While adjusted EPS is anticipated to be within a range of 51 to 54.
These figures consider 4 million of stranded corporate costs that were previously allocated to rail.
This outlook also includes 100% of harsco as interest costs and a pro forma estimated tax rate.
Our detailed segment outlook is included in the appendix of the slide deck.
And from a business segment point of view, our adjusted EBITDA outlook for environmental is essentially unchanged.
Meanwhile, our outlook for clean Earth, adjusted EBITDA is lowered by $5 million at the midpoint. This change reflects the impact of higher container and transportation costs.
Well as a volume impact from and disposable disposal constrained.
Last quarter, we noted certain risk related to peanuts, including the impacts related to incineration and inflation.
These impacts however are larger than what we previously anticipated for the second half of the year.
Looking forward, we do expect these pressures to abate.
There are a number of disposal assets that have restarted.
Or are increasing output.
Also we have been pushing through price increases to offset the inflation.
Price initiatives take time as Youre aware driven by timing of contractual annual price increases in many cases.
And we expect to fully offset the cost increases we've seen year to date during the first quarter of 2022.
Also we remain very diligent on our cost structure, including corporate costs and the need for continuous improvement.
In this regard we recently launched a cost improvement program, which includes targeted reductions at both clean Earth and rail.
These efforts are anticipated to provide annual run rate benefits of 10 to 15 million when fully realized in the second half of 2022.
Any nonrecurring costs related to this program as well as our recently announced decision to move our corporate office to Philadelphia are excluded from this outlook.
Let me conclude on slide nine with our fourth quarter guidance.
Q4, adjusted EBITDA is expected to range from 55 million to 62 million again this range excludes rail.
Clean Earth is expected to see a nice improvement year on year as a result of integration benefits and higher volumes, including in the soil dredged materials business line.
These impacts are expected to be partially offset by inflation and investments.
Environmental EBITDA is anticipated to be similar or slightly below the prior year quarter. This guidance contemplates a negative FX impact some contract exit costs and a less favorable services mix compared to Q4 of 2020.
Sequentially, we anticipate.
That some seasonality will reemerge across our businesses.
And before opening the call to questions. Let me again reiterate our focus on reducing leverage and strengthening free cash flow.
We ended the quarter with a leverage ratio of 448 times importantly, we are targeting a leverage ratio of approximately three times at the end of 2022.
This outcome would be consistent with our long term targets and reflects our optimism about our businesses and ability to sell rail.
Thanks, and I will now hand, the call back to the operator for Q&A.
Thank you if you would like to ask a question simply press Star then the number one on your telephone keypad, we'll pause for just a moment to compile the Q&A roster.
And your first question comes from the line of Larry Solow with CJS Securities.
Good morning, guys and thanks for taking the questions.
A clarification on schulman, so essentially the guidance for the year.
On a continuing operations basis essentially.
The 248 to $2 56 is that comparative till like $2 55 to 265 number or somewhere around there or am I in the right ballpark, if we sort of add back what your original guidance was for rail.
Good morning, Yeah, just if you take the three segments.
Essentially environmental is unchanged clean Earth as I mentioned at the midpoint is $5 million lower corporate cost when you add back the stranded cost as a couple of million better. So overall relatively close to our private previous guidance when you exclude rail.
Okay, and you mentioned environmental sounds like there's no real change there.
Obviously cost pressures I'm sure hitting that segment as well, although it seems more focused on the on the clean Earth piece, but has there been any any real change in terms of your outlook.
In terms of demand.
On the environmental side, perhaps demand a little bit better than you expected.
But impact offset by cost pressures is that a fair statement.
Yeah.
Yeah, Hi, Larry It's Nick Yes, I think that's a fair statement.
The market continues to develop largely as we expected it to cost.
Cost pressures in that business.
Or not is.
Acute.
As they are in clean Earth, a rail and we do have some ability to escalation clauses to recapture.
That inflation.
Okay and the question on sort of the end disposal bottlenecks.
That's sort of the incinerator piece or the inability to incinerate. Some of your waste have you seen any improvement.
Over the last 90 days I believe some of this waste that you guys are referring to was actually being was also not only being center.
Incinerators, but all sorts of cement kilns, who can you use this waste is fuel and essentially incinerate. It so.
I'm not mistaken there was a particular customer that there was a hold up there is that.
Started to improve in.
In Q4.
It has in fact, its gotten a good bit better I'd say the the <unk>.
This negative impact was realized in July and August.
Since then.
It's improved a good bit and I think theres a lot of optimism there.
That if not in Q4, certainly by Q1.
<unk>.
That supply chain, if you will should be back towards normal function.
And on the on the project side is that I thought you weren't you Werent building as much on the on the dredging side right on the wet soil. If you will it's more delays and we're hopeful that the dredging piece does pick up as well, but I assume the sort of little bit of a push out is more or at least relative to your guidance was more on the.
Drier soil the infrastructure piece in our projects and stuff is that what youre, referring to yes, that's correct as well the dredge business actually is performing quite well.
As you know on the as you call it dry soil projects for us.
Generally focused in the mid Atlantic New England area and there are a few large projects that we're tracking and have good reason to believe that will be a significant.
Processor of that material, but they've been delayed.
And your next question comes from the line of Jeff Hammond with Keybanc capital markets.
Hey, good morning, guys.
Yes.
Just just on rail I wanted to get a sense of you know.
I I know, you're selling that but just to get a sense of kind of run rate.
Are you is it is the growth rate in EBITDA growth about the same as what you thought before or is there a substantial amount of pushing to 2022.
Yeah, I guess what I.
How I'd characterize it Jeff is that the.
Near term kind of earnings potential of that business really has not changed.
But as you know on the equipment side.
It can vary from quarter to quarter and I think currently we are seeing some delays so.
Our view is by the time, we begin to market the business.
That's a trailing 12 month EBITDA.
At that time should approximate what we had been thinking.
Okay. That's helpful.
And then just on clean Earth can you just talk about what youre doing from a pricing standpoint.
To kind of deal with some of the added costs and inflationary pressures.
Yes, so from a clean Earth perspective.
For the piece of business that doesn't have annual contracts are long term contracts in place we have pushed through price increases. These do depend on the category code, but we've pushed through price increases.
And are definitely recovering our cost for the contracts, which have annual escalations built in as these contracts come up for renewal, we are pushing through price increases and those will get priced in dollars and as I mentioned that we expect in Q1 to have recovered from any inflation headwinds.
Through the bottom of the price increases.
Okay, and then just last one.
You took down your free cash flow fairly substantially just talk through the moving pieces to the new free cash flow guidance.
Yes, so keep in mind the previous free cash flow guidance was including rail the new free cash flow guidance is pro forma without rail and the new guidance also includes 100% of the interest cost.
For Harsco.
Having said that in Q3, we did see some delays in projects and milestones related to rail payments.
But again, the two guidance isn't comparable our environmental business and our.
Peanuts business continue to generate good cash flow.
Okay.
Okay. So.
The vast majority of the decline is rail either.
Following <unk> or what youre pulling out for <unk>.
That's correct at some slowdown in payments that are on our balance sheet is working capital and then also stripping out rail for the year.
Okay. Thanks, so much.
Thank you. Our next question comes from the line of Rob Brown with Lake Street capital.
Good morning.
On the environmental business.
Just wanted to get your view on kind of the growth rate that that business should see over the next year or two and I think you mentioned pretty positive guidance. How do you view the margin in that business getting to in terms of the EBITDA margin.
Yeah.
Yeah, so from a top line perspective, but really focus on volume.
We're looking at 3% to 5% top line growth.
And that in that business.
Balanced between the.
The mill services contracts and our ability to continue to expand.
The volume growth in our echo products.
The EBITA margins.
I think are pretty close to <unk>.
Being.
All time highs, but we would expect to.
To continue to see margin.
Margin expansion in that business through 2022.
The mix.
It should improve as we as we sell more eco products relative to the mill service business.
But again I think the.
As I've indicated before and I think you're aware that the best way to look at the business is really EBITDA.
Minus kind of maintenance Capex in terms of a margin.
So if you look at the capital that we'll spend next year for maintenance.
Maintenance as well as for renewal of existing contracts.
Subtract that from EBITDA and look at the margin.
That should expand.
One to two points next year.
Okay, great. Thank you and then.
On the clean Earth business.
Maybe just a little bit more about the constraints in the hazardous waste.
Processing is that is that something that you.
Have control over or is it really just something that you're waiting for the market to loosen, which you've indicated it is but just help me understand the things you can do there or is it just waiting for the supply chain to open up.
Mhm.
Well, the vast majority, 80% to 90% of the material that we process.
Our hazardous waste is either recycled or repurposed the remainder.
Does need to go to either a landfill or incinerator.
For that portion that goes to incineration.
There've been capacity constraints.
At those facilities, where we ship our material.
Now that was a.
A combination of a number of different factors that led to that situation.
And as I indicated.
That a constraint was really at its peak in.
In July and August and it's getting better facilities are reopening that were closed for maintenance.
Capacity is coming online.
And so forth. So we really do believe.
That situation too.
Two to get better here in Q4, and certainly be behind us in Q1.
And we estimate that.
On the industrial hazardous waste that we process.
That incineration capacity challenge affected revenue by about two percentage points or one to 2 million of EBITDA.
Okay. Thank you I'll turn it over.
And your next question comes from the line of Brian Butler with Stifel.
Hey, good morning, Hey, guys.
Good morning.
Just kind of on that disposal, you said it was about $1 million to $2 million of EBIT.
When you think of the other issues in the labor could you maybe.
Give us some quantification on kind of what the labor headwind was in <unk> and how to think about that into <unk> and then into 2022.
Our bigger headwind from a cost perspective was the containers and transportation.
Labor as such we have had.
Some issues.
The whole industry in terms of drivers we've made some positive progress over the third quarter and that but the big.
A cost issue for US was the steel containers, where we've seen the cost of the containers go up significantly.
Over the last few months.
And how much of a headwind was that maybe an EBITDA margin in the quarter.
$2 million to $3 million on the containers and some of the transportation stuff.
And is that improving in the fourth quarter like some of the other items like disposal or is that continuing.
The price is continuing but keep in mind, we're pushing through price increases to our customers to offset the higher inflation.
Okay and then.
Follow up question just on <unk> can you talk maybe about some of the possible potential impact from China's rolling blackout.
The steel business.
<unk>, how that kind of maybe trickles on to other parts of the.
Your business.
Yes, Hi, Brian.
We're fortunate in that the.
A few mills that we service in China, where we have quite sizable on long term contracts.
<unk> achieved whats called in China, AAA certification from an environmental standpoint.
And what.
What that means is that.
They will be much less subject to some of those.
Closure of the.
Temporary risks that other mills will be will be subject to.
So we really do not expect there to be a significant issue in our China business.
Through the winter months bodies by these rolling blackouts.
Okay, and then one last one just on the financials do you have a year to date free cash flow.
Excluding the rail business.
Yes, it's $6 million.
And that includes 100% of cost.
<unk>.
So $6 million. So your forecast for the third quarter and negative one to a positive $14 million is that the right way to think about it.
That's correct.
Basically 029 million positive to get to the five to 15.
Okay, great. Thank you very much.
And again, if you would like to ask a question simply press Star then the number one on your telephone keypad.
Your next question comes from the line of Chris Howe with Barrington Research.
Good morning, Nick Good morning Ghansham.
Good morning.
Good morning.
I wanted to first off talk about the applied products.
Your expectations as we head into fiscal year 2022.
I was thinking of this in the context of some of your recent announcements surrounding sustainable asphalt products, what you've been doing your work in the U K.
And what your thoughts are on applied products overall, and what the potential is for the steel foam business.
Well, it's a very good question and I'm glad glad you raised it because it's a component of our business that we're very excited about.
Both in terms of its.
Revenue and profit potential as well as of course, the benefits that <unk>.
Such products provide too to the environment, which as you know is what were primarily focused on.
You are correct with respect to the the asphalt business in the UK, we had for years at a single facility that.
Really.
Generated the benefits that I, just mentioned as well as quite good margins.
And we're now one of our many initiatives and echo products is too.
Understand other geographies, where the requirements wood wood.
Would be satisfied to to build.
New facilities and so there are three there.
We've identified that we will be.
Gaining the permits and beginning construction of in 2022.
But that's a part of the business that if you look at the return on capital and the consistency of that product with our.
With our environmental goals.
It's aligned very very nicely.
There are.
Other similar initiatives around.
Self kicks in and.
In the aluminum industry and the ability of our all your salt technology to process those those salt cakes, our new full scale facility in Bahrain is up and running in achieving all of our.
<unk> milestones and now customers potential customers are able to to visit a full scale operation that's performing quite well as opposed to what had been just a single pilot plant in the U K, there's a lot of optimism around our all yourself technology as well.
So those are just two but I've.
I really do believe that over the next year or two three you will see from a mix standpoint revenue mix standpoint.
That shifting.
For us more and more towards echo products relative to the the core mill services, although of course they are.
Closely linked.
Thank you for that color.
One follow up it seems like over the course of fiscal year 2022.
There's going to be.
A room for additional capital priorities as we consider.
The formal process that's undergoing for rail.
I'm not talking about that specifically, but can you kind of outline how you see capital priorities for the business. If we think about the growth opportunities here in applied products.
Or are there opportunities that you see across the business.
Well as Sherman mentioned and of course, we're very aligned on this that the priority in 2022 will be free cash flow generation.
And reducing our leverage.
And at.
At the same time, we expect the operational performance of both harsco environmental and clean Earth.
To be quite strong so we're really looking forward to a strong cash flow year.
And together with the proceeds from the divestiture of rail.
Getting our balance sheet, where we'd like it to be at around three times Levered now.
There are.
Happy to say.
Very attractive capital opportunities investment opportunities for growth in both AG and in clean Earth, but.
Those 2022 will likely be secondary.
Two.
To the balance sheet.
Okay, and if I may squeeze one more in here really quickly.
<unk>.
Yeah.
The infrastructure program.
Related to rail with the sale process undergoing how should we think about the inclusion or exclusion of that program.
As we consider the timing of that formal process.
Uh-huh.
Well in the short term there are a handful of projects.
With customers that are somewhat.
Dependent upon clarity.
Around the infrastructure Bill.
Both in terms of what's included and also kind of the timing.
And Thats.
Part of our commentary around that.
Some of the push outs.
Revenue and profit on the equipment side of that business.
Clearly in the medium to longer term there are components of the infrastructure Bill.
That would be very attractive to many of our customers and we believe.
Will ultimately flow to.
Higher revenue.
Between us and those customers, but between now and when the.
The sale process commences in let's say is completed.
We expect.
With the passage of the bill that handful of related projects too.
To be to be realized in revenue.
Okay. Thank you.
Yeah.
And you do have a follow up question from the line of Larry Solow call, Let's see Jan security.
Actually most of my questions were answered there, but along the lines of the sort of sustainable stuff I think you also announced.
A little JV with.
With Mac sort I guess on sort of a new.
Process for steel slag is that something that over time.
Move the needle.
Yes, we think so of course, it's a $1 billion business or so and so.
Moving the needle.
It's.
It's a technology that allows us to improve the metal recovery from.
From the slag that we process.
For our customers and it's a technology that provides a much better return on investments.
It's probably more applicable to new contracts.
Or contracts.
Contracts, where the existing technology needs to be replaced.
Got it so it's significant in that.
A very sound environmental solution.
With a good return.
But I would expect its adoption and rollout.
Could be over the next two or three years.
Gotcha and then Nick just what have you just last question on our thoughts on the timing of a potential sale of the rail business.
Do you do you think it could be a little bit of a challenge considering the businesses sort of underperformed the last couple of years.
Maybe perhaps it would be.
Why is there just thinking out loud to have a couple of quarters under your belt, where the business is performing.
And.
More in line with expectations.
And its growth trajectory or and I, obviously I'm not privy to your compensation is don't expect you to discuss them.
In a public forum, but I'm just curious if you know the.
Recent performance in the rail business could potentially push out our impact inevitable sale of the business.
Yeah.
Well, it's a good question of course is something that we thought a good bit about.
We do believe that the underperformance in the rail business is really driven by the market challenges that much of those we expect to diminish here over the next few quarters.
We also of course have to balance.
Sure.
Uh huh.
The outlook for their business and the expected proceeds.
Proceeds of a divestiture against the need to bring.
Bring our balance sheet to where we'd like it to be and also to move ahead with our.
Our corporate strategy that we adopted two years ago too.
<unk> become a.
Single thesis environmental solutions company so.
Balancing all of those items.
Items.
We obviously have decided that we need to commit to divesting the business in the first half of next year.
And we do believe that we will get good value for the business.
Fair enough great I appreciate the color thanks, Nick.
Okay.
Okay.
And at this time there are no more audio questions. We will now turn the call back over to Mr. Martin for closing remarks.
Thank you for joining the call. Please feel free to contact me with any follow up questions. You may have as always we appreciate your interest in our scale and look forward to speaking with you in the near future have a great day.
And thank you. This concludes today's conference call. Thank you for your participation you may now disconnect.