Q4 2021 Harsco Corp Earnings Call

Okay.

Okay.

Good morning, My name is salary and that will be your conference facilitator. At this time I would like to welcome everyone to the Harsco Corporation fourth quarter release conference call. All lines have been placed on mute to avoid any background noise. After the speakers' remarks, there will be a question and answer peer.

If you would like to ask a question. During this time simply press Star then the number one on your telephone keypad.

We'll actually withdraw your question please press the pound key.

Also.

This telephone conference presentation, and accompanying webcast made on behalf of Harsco cooperation.

Subject to copyright by Harsco Corporation, and all rights are reserved no recordings 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 Please begin your call.

Thank you Valerie and welcome to everyone. Joining us this morning, I'm, Dave Martin VP of Investor Relations for Harsco.

With me today is Nick Grasberg, 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 fourth quarter of 2021, and our outlook for 2022 before our presentation. However, let me mention a few items first the quarterly earnings release as well as the slide presentation for this call are available on our website.

Second we will make statements that today that are considered forward looking these statements are based on our current knowledge and expectations and are subject to certain risks and uncertainties that may cause actual results to differ from those forward looking statements.

For a discussion of such risks and uncertainties see the risk factors section in our most 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 . A reconciliation to GAAP results is included in our earnings release as well as the slide presentation with that said I'll turn the call to Nick.

Good morning, everyone. Thanks for joining us, especially in light of the events unfolding in Ukraine, and the impact on the financial markets.

I would like to begin by expressing my appreciation to our employees for their remarkable efforts and contributions during 2021.

Our team overcame the personal and professional challenges of the pandemic, including illness remote work staffing shortages and changing health and safety protocols.

Our leadership team takes great pride in the values and the culture of our company.

Perhaps never more so than over the past year.

Our 2021 financial results reflect those efforts.

Harsco as continuing operations.

That is our environmental and clean Earth segments plus corporate.

Produced 20% growth in both revenue and adjusted EBITDA.

And adjusted EPS increased by two five times.

Demand in most of our environmental businesses improved following the Covid impact in 2020.

Although the effects of inflation supply chain bottlenecks and labor shortages dampened our results to some degree.

Particularly in the second half of the year.

Our rail business, which is now reported as discontinued operations face continuing demand weakness for maintenance of way products and services, which impacted its financial results.

Inflation and supply chain constraints also had an adverse effect on our rail business, especially on our long term contracts with major European real customers.

However, we believe many of the challenges faced in 2021 and rail were timing related.

While the underlying business remains fundamentally strong.

As evidence we are now seeing clear signs of strengthening demand in our core North American market.

Driven in part by the passage of the infrastructure Bill.

And Kevin will provide more detail on the results for the quarter and the year. So let me shift to a discussion about our strategic outlook for 2022.

As many of you may recall, a few years ago, we declared our ambition to become a single thesis environmental solutions company.

A company with improved growth prospects are better cash flow profile.

And one providing services and products that meet an acute societal need.

In this context, our top strategic objective this year is to divest our rail business.

Thereby taking another significant step in achieving our ambition.

Along with building a healthier balance sheet.

Our remaining two platforms harsco, environmental and clean Earth.

Our each market leaders with compelling economic and environmental value propositions and meaningful growth prospects.

Throughout the cycle each segment should generate cash flow in excess of 10% of revenue.

After funding capital needs related to maintenance or contract renewals.

As previously stated 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, rail is a unique business with a global reach and significant growth opportunities.

I noted earlier the market dynamics in the rail business have started to improve.

And as a result, we expect 2022, EBITDA and cash flow.

To reach more normalized levels based on the recovering demand and a cost reduction program executed last quarter.

In line with the plan, we laid out on our last earnings call. We are on track to launch a formal sale process in the coming weeks.

And we expect a very competitive process.

Our 2022 outlook for continuing operations reflects ongoing growth in both revenue and EBITDA.

And a significant increase in cash flow, particularly in harsco environmental.

In terms of revenue demand drivers will remain strong and will be somewhat mitigated by the effects of a stronger U S dollar and the exits from a few major contracts.

Pricing gains are expected to offset inflationary pressures.

Earnings and margin growth will be robust and clean earth as we realize the full year effects of integration benefits.

In higher prices in addition to strong underlying demand.

Earnings growth will be more muted and harsco environmental owing to currency commodity prices and.

And tax benefits received last year.

Free cash flow will increase by about $50 million due primarily to lower capital spending and working capital and harsco environmental.

And higher cash earnings in both segments.

Our guidance also assumes the impacts of a tight labor market and supply chain disruptions will persist through the first half of the year.

Before I turn the call over to on Schuman, I'd like to spend a minute on our environmental social and governance initiatives.

We continue to make significant progress on our ESG journey and on integrating ESG into our strategic planning processes at harsco.

You can see some of our ESG highlights from 2021 on slide four.

Clean Earth and Harsco environmental improve their safety records in 2021, helping us achieve our company wide goal of a total recordable incident rate below one.

Our business brought a record number of new environmental solutions to market.

In fact, 30% more than in 2020.

We also successfully implemented the first year of our new annual incentive plan modifier.

That links executive pay to a number of strategic objectives and ESG targets.

We continue to see positive responses from our investors and ESG ratings groups.

Including most recently, a 20% improvement in our ESG rating from sustained Olympics.

So in summary, we delivered a solid year, we're making meaningful meaningful progress on the execution of our strategic roadmap.

And our outlook for this year provides us with confidence in our ability to drive shareholder value creation.

I'll now turn the call over to instruments.

Thanks, Nick and good morning, everyone.

Please turn to slide five.

Our school Q4 revenue from continuing operations increased 7% compared with the prior year quarter to $462 million and adjusted EBITDA totaled $58 million.

This adjusted EBITDA is consistent with our Q4 guidance.

Relative to our expectations results were impacted by business mix and FX movements and environmental.

Clean Earth was impacted by continuing labor challenges.

Clearly for drivers our technicians and inflation.

We offset these items with lower spending including at corporate.

Compared with the prior year quarter adjusted results were similar.

Improved results at clean Earth, and lower corporate spending were offset by the change in environmental EBITDA as expected.

<unk> adjusted earnings per share from continuing operations for the fourth quarter was 22.

This figure compares favorably to adjusted EPS of nine and 10.

In the prior year quarter as well as the guidance we provided at the beginning of the quarter.

Our tax rate in Q4 benefited from an adjustment to our deferred tax valuation allowance in Brazil.

Lastly, our free cash flow for the quarter was a deficit of $8 million, which was modestly below our guidance. Our cash flow variance is mainly attributable to clean Earth, where an oracle implementation in the fourth quarter weighed on cash performance.

Please turn to slide six for our environmental segment.

Segment revenues totaled $268 million and adjusted EBITDA was 49 million.

Revenues increased 9% on higher volumes and commodity prices.

Meanwhile, adjusted EBITDA decreased by 3 million year on year.

This change reflects a less favorable mix of services and higher operating costs, including within eco product as well as site exits and negative FX translation impact.

Next.

Please turn to slide seven to discuss our clean Earth segment.

For the quarter revenues totaled $194 million and adjusted EBITDA was $16 million.

Compared to the fourth quarter of 2020 revenues increased 5% with solid red services, as well as industrial and health care customers within hazardous materials contributing to the growth.

Both volume and some price contributed to the higher revenues with our soil dredge volumes, reaching the highest level since the beginning of the pandemic.

Meanwhile, <unk>.

Segment EBITDA increased to just over $16 million in Q4 of this year.

The increase relative to the fourth quarter of 2020 reflects the positive revenue trends offset partially by inflation and less favorable business mix.

Now please turn to slide eight.

For the full year revenues from continuing operations increased to $1 8 billion and adjusted EBITDA increased to $252 million.

Our EBITDA margin was stable during the year of just under 14%.

While there were a number of moving pieces for harsco during the year. The overall results for continuing operations were consistent with our guidance provided at the beginning of 2021.

Strong execution as well as cost management, offset the impact of inflation and supply chain pressures during the year.

Meanwhile, free cash flow without rail was essentially zero during the year.

With the change versus 2020 attributable to the 30 plus million increase in capital spending in 2021.

Much of this capex was deferred from 2020.

Before I turn to the outlook, let me comment on a few items, including leverage pension and rail.

First on pension funded status for euro and improved by $140 million.

From year end 2022 are underfunded position of $93 million.

Secondly, we ended the year with net leverage of four six times and net debt of $1 3 billion.

As you are aware.

Reducing our debt is a key financial priority and we plan to use our 2022 cash flow and the proceeds from selling rail to lower leverage.

And thirdly on slide nine rail as Youre aware is now reported under discontinued operations and we are optimistic on our ability to complete a transaction this year.

During the fourth quarter, we recorded two special items in rail, which totaled 36 million.

The first item was approximately $2 million for our cost out program that will deliver $8 million of annualized savings.

The second was a $33 million charge for estimated future costs to complete fixed price contracts with three European customers.

These contract adjustments relate primarily to inflation and supply chain challenges that are materially increase the anticipated costs and delayed our progress on these projects. We are required to record these losses upfront.

Rail's adjusted EBITDA in 2021 totaled approximately $21 million and we expect its performance to improve meaningfully in 2022.

Our current expectation is that rail EBITDA will be much closer to its normalized EBITDA of approximately $40 million.

Now, let's turn to our 2022 outlook, starting with slide 10.

You'll find our segment guidance.

Both segments are expected to realize growth in adjusted earnings in 2022 after seeing strong growth in 2021.

For Harsco environmental revenues expected to grow at a low single digit rate.

The FX headwind is roughly 200 basis points using year end 2021 rates.

EBITDA margins for environmental I expect it to be similar to 2021 levels.

The business drivers for AG in the year will be higher customer output and related service volumes and increased eco product volumes, partially offset by FX and exit.

For clean Earth revenues are anticipated to grow low to mid single digits with most of this growth from hazardous materials line of business also we expect.

The EBITDA margins to increase approximately 100 to 200 basis points.

Beyond higher revenues.

EBITDA drivers for clean Earth include the impact of price increases to offset inflation in our cost out program with the goal of lowering SG&A.

Lastly, corporate costs are expected to be between 40 and $42 million.

Versus corporate costs of $34 million in 2021, the change in corporate costs can be attributed to compensation, including incentive compensation as well as pending insurance travel and other smaller items.

Turning to slide 11, which is our consolidated 2022 outlook.

Our adjusted EBITDA is expected to increase to within a range of $255 million to $275 million.

This EBITDA guidance translates to adjusted earnings per share of <unk> 50 to 66 cents.

This EPS range contemplates net interest expense of $61 million to $63 million.

And an assumed effective tax rate of 37% to 38% versus the 24% rate in 2021, when we benefited from the Brazil tax allowance adjustment.

Lastly, we're targeting free cash flow of $30 million to $50 million excluding rail.

This forecast anticipates net capital spending will be within a range of $125 million to $130 million, which is lower than our net capex of $141 million in 2021.

Improving our free cash flow is a critical priority for harsco, along with lowering our leverage.

The increase in cash flow for 2022 is a step in the right direction and we are targeting better performance in the coming years.

Let me conclude on slide 12, with our first quarter guidance.

Q1, adjusted EBITDA is expected to range from 47 million to 52 million.

Environmental adjusted earnings are expected to be lower due to exit the business mix and FX impacts.

And I would remind you that our Q1 2021 results benefited from a Brazil sales and use tax credit of $2 million, which will not be repeated in 2022.

Clean Earth adjusted EBITDA is anticipated to decline modestly on lower volumes from retail and industrial markets due to driver shortages as well as less favorable soiled rich mix. In addition, corporate costs should be modestly above the comparable figure in Q1 2021.

Thanks, and I will now hand, the call back to the operator for Q&A.

Thank you Sir at this time as a reminder, please press star one on your telephone keypad for questions at this time.

To withdraw your question. Please press the pound key.

And the first question will come from the line of Michael Hoffman of Stifel.

Morning, Shannon, Nick and Dave Thank you for taking the call.

Question I think so.

So look I got to ask the strategic question because might as well get it off the table early.

With U S oncology potentially being traded away.

Why it is the market should the market not look at that as a missed opportunity for harsco.

Well.

The focus strategically for clean Earth is going to be much more on repurposing and recycling waste ban on putting it on the ground to be Frank.

And more than anything.

U S ecology as a hazardous landfill business.

And that that does not interest are strategically.

I think it's really that simple as we look at.

Acquisition opportunities going forward, we think the the landscape.

Is quite full of those opportunities for us.

More in line with our strategic ambition for clean Earth. So we don't at all viewed as a missed opportunity was not a fit for us.

Okay Fair enough, that's what I think we just need to get that off the table and then.

On the street analysts there are several of US on this phone call. We clearly didn't model 22, right. So what didn't we get right given where your guidance says.

What are we missing so we do this better because you don't need the headline that says you're missing guidance.

I'm missing consensus.

Yeah.

Well I think I'll start with with Harsco environmental and I.

I do want to acknowledge that.

If you look at the cash flow performance.

Of the AG and the EBITDA minus Capex margins, which.

Would argue are the largest drivers of value in that business those are all trending.

Quite quite well higher than the EBITDA increase year over year. So as we think about value creation drivers in <unk> from a financial standpoint, we think much more about cash flow and EBITDA minus capex margins and so we're.

Quite pleased with the 3% to four point increase that we expect year over year in 2022 versus 2021.

In terms of revenue and EBIT EBITDA there are a number of.

Factors that are holding the growth back one is currency.

Unfortunately, we're seeing today and even stronger dollar and a reaction to.

The invasion of Ukraine, we will see where that settles out.

Of course.

That is is adverse to our business from a translation perspective.

Secondly, with the very high energy prices in Europe , right now in some geographies three and four times, what they had been some of our customers are cutting back on production.

And of course, we're leveraged to volume and so as they cut back production that affects our revenue and profit.

To say at this point, where that's going.

But we've modeled that in as the adverse impact throughout 2022.

I'll also say that.

With respect to revenue there was a large contract in the UK.

One of our largest in the world where the site was purchased from its UK owner by a Chinese steel company, whose.

Whose model as to in source, what we do.

And so that happened and the impact in 2021 was somewhat muted because we had a.

Gain on the sale of the assets as we as we exited.

But that lost revenue and profit certainly affecting the business in 2022.

So those are I'll say the drivers of revenue and EBITDA performance in AG.

Perhaps being a bit less than what the market expected.

I will say that I'm very happy with how our team is executing on the things that we can control.

Those factors that I, just mentioned are largely outside of our control. We are doing everything we can from a cost standpoint to mitigate the impact of those and in fact, we have a number of new contracts that will come online later in the year. So the trends that we're seeing in the first quarter and <unk> year over year or certainly reverse later in the year.

Some of these major contracts come online.

So as we look at the revenue growth in AG.

Kind of a like for like basis year over year were up four 5%.

I think roughly in line with what you would expect given where the steel market is at the at the end. We've also modeled in some slightly lower commodity prices, which of course are proving very difficult to predict but many of those commodity prices that affect our <unk>.

Our margins are at historic highs are near historic highs. So we've been a little more conservative in our assumptions on commodity costs.

So turning to AG or I'm, sorry clean Earth.

I'll start by saying that.

I have no doubt that we are building a better business every single day and clean Earth I think you know Michael and others that the environmental solutions business that we bought from Stericycle was very poorly run business. We're in.

Extractive benefits of that integration everyday in fact, the the targeted benefits on a net basis in 2021 were in line with our plan and there were a lot of.

Offsetting items, there, but I think we're very happy with the integration benefits.

We did not anticipate hopefully coming out of the the worst impacts of the pandemic.

That we'd have this tightness in the labor market.

And there is also a lag in our ability to cover and price the inflation that we saw.

So I think that impact in the second half of the year and clean Earth was upwards of $10 million on a net basis to earnings as I mentioned, we do expect in 2022.

For those inflationary pressures to be offset by price.

But we're taking perhaps I'd like to thank a very conservative or cautious view.

On our ability to get back to full staffing levels.

We're down 15% to 20%.

And the truck drivers that we need to collect and therefore allow us to process the waste in our facilities.

So that is clearly hurting us it's something that we're focused on every single day.

And we're making a number of changes in how we hire and onboard truck drivers to remedy the situation.

But it affects again, both both revenue and profit so.

One could accuse us of being a bit overly cautious.

But thats the stance that we're taking in our in our guidance, but again I would point.

Our investors to the progress, we're making in cash flow and the balance sheet.

And an EBITDA minus capex margins, which in a capital intensive business like ours.

Those I think are the fundamental drivers.

So one last tease out then on clean Earth, if you could get the labor what would the difference be in your guidance on clean Earth.

Okay.

Yeah, just when you if we could have say, 10% more drivers.

We would have been above consensus.

That existed for us for clean Earth.

A few million dollars higher than EBITDA.

Okay. That's very helpful. I think that helps us to understand the leverage of that thank you for taking the questions.

Thank you Michael.

Thank you and the next question will come from the line of Larry Solow of S. J S Securities.

Great. Thanks P J.

I'm following up on Michaels question, there on clean Earth.

Is it basically just.

You're not able to meet demand as demand above.

Yes, obviously, what youre able to serve so it's really just a labor shortage. So I'm really just a little surprised.

Revenue guidance is there money I would actually think within place and you're getting pricing. So it sounds like your volume growth.

Yes.

'twenty two is minimal that really just.

You're basically saying, it's a it's a shortage meet demand or is it demand issue as well.

Yes, no it's not it's not an underlying demand issue.

We simply are not able to.

Serve and process the demand that we're seeing in the business because of the shortage now another dynamic early in the year and affects the first quarter. Therefore, as some of our account churn.

So.

On the retail side in particular, it's quite common ware.

You win new accounts and you also lose accounts and if you look at the impact that that churn.

That is adverse to us in the in the first quarter in particular and then if it comes to switch to a positive later in the year. So.

If you just considering the first quarter revenue that that's another factor that's affecting our rice.

What about all I know you had a little bit there was some a hold up you had some waste.

You Couldnt pass onto process.

It has been.

How did your facility.

Basically impacting all the stock moving in has that log jam begun to clear up or.

That's still also imply.

Yes. Good question no it has begun to clear up.

It is not yet where we'd like it to be where we're at let's say the incineration capacity was.

Earlier last year, so no we're not not back to more normalized levels.

You May know there is a lot of incineration capacity coming online in the next year or two.

So we think this is all going to flip around.

But for now it continues to be a bit of a challenge.

Not not as material as it was to our business in quarters, three and four.

But it is still in effect.

Any any issues if it's more on that in terms of labor and stuff more than hazardous side, how about the soil side. What's the outlook. There is that also impacted by.

Labor shortages in.

Rich.

Turning to growth.

Thing that I thought that would be growing this year, a little bit more and so kind of surprised to see the overall topline low singles.

Yes, no the labor shortages affecting that that the soils are the contaminated materials segment as well and more of an indirect way.

Many of these large.

Non res projects have been delayed because of labor shortages, we received most of our contaminated material through third party.

Logistics, not not our own but of course, they're facing the same challenges that we are but so the underlying demand. Unlike on the hazardous side and.

In contaminated continues to be.

Relatively weak certainly not back to pre pandemic levels.

Right and that is.

Mind, you the highest margin business, we have within our cleaner segments.

Is the processing of those contaminated materials.

Right. Okay and then my last question just on the rail business.

So it sounds like you're still pretty optimistic you'll have a sale completed.

This year, if not by mid year is that.

Yes.

I think what I heard right.

Yes.

That's right Larry again, we're frustrated or disappointed with the demand.

Situated.

In the second half of the year in 'twenty, one relative to what we expected, but I noted that there are some clear signs of that improving.

And.

We have 15 20 different potential buyers to continue to express very strong interest that will be part of our process. So we expect it to be quite competitive and therefore give us the ability to.

To move the process along at a relatively fast.

And youre not concerned that the last few quarters that kind of been disappointing in terms of I.

I get it.

Our longer term business the backlog is very strong and certainly <unk>.

Long term picture looks very good.

If I'm a buyer might concern at the last few quarters have been disappointing.

Maybe not step in right or maybe want to get a little bit less pay a little bit less because of that.

Yeah.

It's certainly a data point that they will we will look at but again I think we have pretty good visibility to demand returning.

And we certainly can.

As we kind of normalize what happened in the second half of the year for the demand increases that we're seeing.

We think is on human noted that we'll be able to successfully position the business.

One with EBITDA of around $40 million. If you look over let's say the last five years, taking 2020 out for obvious reasons.

The business has averaged EBITDA of $35 million to $40 million.

And again, we're not we're not relying simply on <unk>.

Strengthening demand to get to that $40 million, we took out.

758 million of cost in the fourth quarter that we will get most of the a full year benefit of it is in the run rate for the business. So I think between the benefits of the cost reduction and <unk>.

Clear signs of higher demand.

And again the infrastructure Bill.

Allocated $66 billion.

To the market that we serve just in the U S right.

Right.

And a lot of that has to passenger rail passenger rail has been by far the weakest part of our business and we have some of the highest margins.

And passenger rail and so we need that to come back.

And the infrastructure Bill aimed at passenger rail will be a big big help to the business.

Got it okay, great. Thank you very much I appreciate the color there.

Thank you Sir the next question will come from the line of Jeffrey Hammond of Keybanc capital markets.

Hey, guys. This is michel more on for Jeff.

I was just curious if you guys could maybe just give a bit of detail on on how rail performed in the quarter maybe relative to your.

Internal expectations and maybe talk about the signs of early momentum in the first quarter here so far thanks.

Yeah, Yeah. So.

Weakness in the rail business is mostly on the equipment side and of course, that's a fairly lumpy business any at any given point, we're looking at 25% to 50 different opportunities to sell harsco rail equipment and of course, we assigned probabilities to the success of those within a given quarter and Thats an inexact.

Science at best.

And so as we came into the second half of the year in our.

Our judgment was that.

<unk> that most of those.

Orders.

Would in fact be placed.

Many of the March it's not affect our.

An issue of having lost the orders.

Think of a single.

Equipment sale that we've been tracking that has gone elsewhere to be honest things just continue to get pushed out.

A lot of it was related to.

Customers in the U S waiting for clarity on the infrastructure.

Bill which of course now now we have.

And so.

I can't really.

I don't think overstate the importance of the passengers that bill.

The effect it will have on our business here in North America and in Asia as well we.

Global business, we're tracking a number of opportunities in Asia.

That largely because of COVID-19 .

We will continue to get pushed out so they are still on the radar. We still think the orders will be placed.

It's a question more of a when not if.

Okay. Thank you that's helpful.

Excuse me.

And then I was wondering if you could talk about maybe just the implied cadence through the year on the top and bottom line. It seems like you're expecting a pretty big pick up kind of in the back half of the year is that.

From infrastructure.

Infrastructure spending or is it.

That kind of a combination of labor and supply headwinds from falling off thank you.

Just I assume you're talking about continuing operations now so from from a continuing operations perspective keep in mind there is <unk>.

Personality in the business with <unk>.

Q1, usually being the weakest quarter of the four for both our score environmental and for clean Earth.

Q2, and Q3 are usually our strongest quarter. So there's just natural seasonality in the business.

Thing is as we Nick mentioned.

We go forward, we looked at a few changes to onboarding and bringing on new drivers. So we have assumptions of that shortage improving during the course of the year, which will definitely help us.

So that definitely improves the business and we also talked about some cost out and efficiency that also would start kicking in later part of the year or so.

For 2022, we expect the second half to be weighted slightly higher from a seasonality perspective than the previous year.

Okay, Great I'll pass it along thanks.

Thank you.

Thank you.

And the next question will come from the line of Rob Brown of Lake Street capital markets.

Hi, good morning.

Hey, good morning.

Getting back to the clean Earth business I know, there's some moving pieces right now, but what's sort of the growth rate in that business that you see over the next sort of five years I think I think your guidance was in the high single digits I think in the past you've said sort of low to mid single digits growth in that business, but what should that business be in terms of revenue growth rate over over a few year period here.

Has that changed from your prior thinking.

Yes, I think over a cycle.

Would expect volume growth to be kind of GDP GDP plus a few points.

Pricing of course, we think should always.

At least cover inflation so.

You tell me what the inflation number as I can.

Increased revenue by that amount at least.

But I think volume growth again over a cycle is probably GDP plus plus a few points and <unk>.

As we think of our business and our model of increasingly focused on recycling and repurposing and that we hear that often from many of our big customers. So thats what theyre looking for.

As opposed to.

Burning it or burying it.

We think over time, that's going to enable us.

To do a bit better than the market to.

To be honest.

So.

What that translates into.

In terms of incremental volume.

It's difficult to say, we just finished our <unk>.

Long range planning process for clean Earth, and we really believe.

Based on all of those factors I, just mentioned and our ability to leverage.

A relatively high cost base.

That will be declining over time as some of our it investments.

Enable us to become more efficient on the labor side.

We think we'll double EBITDA in the business over the next three years and so that's roughly.

Getting close to a $1 billion business with $150 million of EBITDA. That's what we're that's what we're targeting.

And that's organic.

And so if you look at the revenue components that I mentioned plus leveraging in reducing.

That cost base.

How you get there.

Okay, great. Thank you. Thank you that's a great target.

And then on the I know it is.

Maybe a little early but the acquisition activity in that in that market do you sort of alluded to a couple of strategic.

<unk> you want to go and have a pretty good landscape there to do it.

What's sort of your thinking about acquisitions from your balance sheet can support.

And how does that add to what youre thinking.

Yes, it's a good question.

Certainly Rob we're not focused on acquisitions this year right.

We're all aware of our balance sheet.

Yeah.

On a relative basis more value to be created by what we're doing organically in the business to increase revenue and profit.

Then.

Acquisitions would do to create value.

So thats really the focus the focus is to execute that plan that I, just reference to double EBITDA and take this to a $1 billion business organically, but absolutely over time, our ambition is to increase the platform through acquisition.

I think it's more likely.

It will be.

Bolt on type acquisitions as opposed to anything of.

<unk>.

A real size at least as we look across the landscape today.

And we think that that's where we can create the most value.

Okay, great. Thank you I'll turn it over.

Okay.

Thank you and again, ladies and gentlemen to ask questions. Please press star one now.

And the next question will come from the line of Chris Howe Barrington Research.

Good morning, everyone.

Hi, Chris.

Alright.

With the formality of the sale process of rail already underway.

Over the next few weeks, we'll make some progress on that as we head towards mid year.

You already asked the question about how the business has been fairing versus your internal expectations. So I wanted to follow up on that and ask about the rail backlog and can you talk about the evolution of the rail backlog over the next six to 12 months indirectly what I'm getting at is.

Although it'll be challenged from quarter to quarter it may be volatile.

Perhaps the outlook is unchanged from a demand perspective.

And can you talk just more about the mix of the backlog and your level of confidence in that as you head towards a sale.

Uh-huh.

Well, we certainly expect the backlog to increase throughout the sale process period in particular.

On the technology side, which is an aftermarket side, which are a bit more oriented to passenger rail in the U S. Those are very high margin.

Products.

I also think on the equipment side kind of the heart of the range for harsco, the grinders and the tampered here.

Here in North America, and also in Asia, I think we will see a nice pickup in the.

The backlog there, but I think the Mart D. The mix.

Should be a richer mix than typical.

Given the focus of the infrastructure Bill on passenger rail and the products that we have that.

That or.

Sold into that market.

Okay. That's helpful.

The infrastructure both here in the U S.

Is a benefit to the rail segment, what about outside the U S. Can you talk about other programs or funding like programs that may benefit the rail segment.

Yeah, well I think the European market has remained fairly strong.

We're all disappointed in ultimately the profit that we will earn on these large contracts, but the fact is we'll have over 100.

New Hi, Tec machines installed throughout Europe .

With the with the who's who in the rail industry in Europe Deutsche Bond in the Swiss National Railway and network rail in the UK and so those markets have stayed strong in the aftermarket potential in our business on those 100 plus machines.

Difficult and that will that will certainly play into the valuation of our business in Asia.

Im not aware of any any stimulus.

Infrastructure like programs that have been introduced again the challenge for us.

All of us that serve the Asia rail market has been those projects have just been delayed.

So we really don't need a stimulus type.

Package our program in Asia, we just need that.

That logjam to break in them to get back to.

A more normalized level of order flow.

Thank you that's helpful.

One last question here for me and I'll hop off the queue.

Applied products can.

Can you just give us an update on applied products and kind of what you are.

Outlook is within the strategic outlook you provided.

Yeah, Yeah, well that's a good question, thanks for asking about applied products and by the way, we now call them Echo products no longer applied products.

So we have a few million dollars of revenues and echo product.

Area.

Volume trends have been quite good and echo products. The challenge has been in a few of them.

Inflation on the input costs. So we have a business called steel fault.

That we're expanding that.

That takes.

Steel slag and effectively energy and bitumen and other things and it makes a road based material.

That is a very environmentally friendly process and product.

But with energy prices and bitumen prices being where they are the margins of <unk>.

Suffered now again volumes have been good and we're actually going to bring online in 2020 to two new steel fault plants and we're actually.

Hoping to move forward on the first in the U S.

So a lot to be excited about.

From a volume standpoint, we just need to recur.

Recover in price and again theres a bit of a lag there the challenges that we faced on the input side.

Alright, thank you.

Yep.

And again that is star one for questions at this time.

And we do have a follow up from the line of Michael Hoffman with Stifel.

Hi, Nick.

Clearly the questions around rail everybody's trying to figure out can we get paid well enough to delever the balance sheet. So help us understand what the bankers are doing in the document room. So when these two sellers look.

The implied EBITDA number is going to be big enough between aftermarket DC discounting back the aftermarket potential the size of the backlog in the run rate.

As we all know these assets are sold basically something around 10 times in the last three or four of them. So if we're starting at 10 times, how do we get everybody comfortable.

The buyers are going to see a number that gets you delever.

Well first of all our expectation.

It would be a little beyond 10 times.

You look at maintenance of way assets in particular historically.

So.

And again there've been other businesses that are traded.

But not nearly the profile of ours right to the breadth of our business the geographic reach of our business, our new product pipeline, our installed base as I mentioned in Europe and elsewhere, it's a very unique asset and those that want to build a platform and maintenance of way and there are.

A handful of strategics that very much want to do that.

This is a very very scarce asset.

So.

That's why I think there is.

We have data points around the performance of the business over the past six to 912 months.

But the strategic value of this business also needs to and will be very very much a consideration for the value that we receive.

But yes.

We've been putting a lot of effort.

And they're preparing for a.

A very robust process. So we've commissioned a very detailed market study on the maintenance of way sector as an example.

Which will help speed up the process.

I think it's fair to say that there are a number of interested buyers that probably need to better understand the maintenance of way space.

So there'll be some educational along the way.

But we're really setting up our process in terms of.

What we're doing in advance to prepare for it.

And also with the outreach that we've received.

For it to be highly competitive and for us to have a good bit of leveraged throughout the process to keep it on track.

Okay.

That's terrific I think that helps bring clarity to give that back to clean earth.

Sure.

So thank you for saying the $1 billion and the $150 million in three years.

There might be some.

Pushback in that original cleaner.

Margins, obviously, you saw virtually none.

Presentation is diesel might to.

Mid teens on its own.

So the blended theoretically should be better than 15% what's different today versus when this all started in the first deal on clean Earth and <unk>.

<unk>.

Yeah.

Well I think.

It's fundamentally around the contaminated materials business and us assuming a relatively lower growth rate.

And that business than on the hazardous side.

And we also.

We believe that one of the real strategic.

Choices that we've made around digitizing the business and therefore, improving the transparency of the data flow the analytics improving the customer experience all of those things, we're going to be investing in pretty consistently over the next two or three years, we think that will help the top line.

But certainly those investments over the next few years as we as we.

<unk> will have a bit of a dampening effect on margins.

But that's a strategic choice that we've made.

We have already.

<unk>, an awful lot of positive feedback from our customer base.

Not only in what we've done in that arena, but the commitment that we're making to it going forward. So that's that's a real strategic differentiator.

That we're investing in the business.

Just to be clear for everybody digitizing is connecting the customer.

Okay.

Can we sustain.

Sustained affiliations, but all of them.

Greg Billings and all that that's what you're getting to yes, absolutely and even in our trucks, let's say so being more efficient.

In our in our routing and the data flow and usage of it.

To our drivers and others.

In the field so.

It's both in efficiency.

Goal as well as a kind of a customer intimacy satisfaction type objectives.

Okay last question for me given your emphasis and I appreciate the point Youre, making recycle repurpose.

But as you and I are both aware there is a certain amount of the waste is prescriptive really directed to have to go.

So when you think about the $10 billion, that's has ways and the $14 billion, that's industrial services of which I think about five.

Our applicable to custom.

Customers in markets you want to tackle so we're playing with sort of $15 billion is trustable market inside the 10.

What is what's your piece of that that you can convince the customer you have the option to do an <unk> as opposed to it has to go to.

An incinerator or it has to go into.

Fuel's processing operation or something of that nature, how everybody understand that addressable market given how you want to position. This.

Yeah.

Michael I don't have that estimate off hand, I certainly can get back to you, but the fact is we.

We hear every day from customers that are I'll say kind of defaulting.

Two.

Land filling and incinerating that they would love another option.

So yes, there will always be I would think.

<unk> has a strong term.

But some types of waste that.

We will be required.

Two.

To be disposed of in landfills and incinerators, but we believe there is a real trend.

Towards recycle and repurpose and so we think there is on a relative basis.

Volume growth.

And share if you will of the hazardous and hazardous waste market for us to to win over time following that approach.

Okay, but youre right its never going to go away.

Never going to go away.

No no there's certain amount of it is prescriptive really has to go because the regulation says you got to do this.

But there is there's a lot of interest out there today that doesn't have to go there if theres a better a better answer and that's what we're focused on that better answer.

Okay. That's what I was trying to cat alright.

Thank you.

And at this time there are no further questions in the queue I will now turn the call over to Mr. Martin for follow up comments.

Thanks, Valerie and thank you for everyone that joined US. This morning, please feel free to contact me with any follow up questions and again, we appreciate your interest in harsco and have a great day take care.

Thank you for your participation in today's conference call you may now disconnect.

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