Q2 2022 Harsco Corp Earnings Call
Good morning, My name is Chad and I will be your conference facilitator at this time I would like to welcome everyone to the Harsco Corporation second 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 and the number one on your telephone keypad.
You would like to withdraw your question. Please press Star then two on your telephone keypad.
Also this telephone conference presentation and accompanying webcast made on behalf of Harsco Corporation are subject to copyright by Harsco Corporation and all rights are reserved no recordings or redistribution of this telephone conference by any other party are permitted without the express written consent.
Oscar Corporation.
Your participation your participation indicates your agreement.
I'd now like to introduce Dave Martin of Harsco Corporation. Mr. Martin You may begin your call.
Thank you Chad and welcome to everyone. Joining us this morning, I'm, Dave Martin from Harsco with me today is Nick Grasberg are our chairman and Chief Executive Officer, and in Schuh, and AGA Harsco, as senior Vice President and Chief Financial Officer.
This morning, we will discuss our results for the second quarter and our outlook for the year. We'll then take your questions.
Before our presentation, let me mention a few items first our quarterly earnings release and slide presentation for this call are available on our website.
Second we will make statements today that are considered forward looking within the meanings of the federal Securities laws. These statements are based on our current knowledge and expectations that 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 uncertainties excuse me see the risk factors section in our most recent 10-K.
The company undertakes no obligation to revise or update any forward looking statements.
Lastly on this call we will 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 the call to Nick.
Yeah.
Thank you, Dave and good morning, everyone and thanks for joining us today.
As you have seen our adjusted Q2 results were consistent with the preliminary results, we released a few weeks ago.
Our second quarter was a challenging quarter for us, especially in our clean Earth segment.
Inflation in energy transportation and disposal costs in clean Earth continued to accelerate beyond what we anticipated in our January and April price increases.
Our July price increase was by far the largest and broadest increase ever implemented at clean Earth.
This was implemented successfully through coordination with our customers despite significant contractual limitations.
Coupled with certain cost reduction actions the impact on second half EBITDA should be $30 million to $35 million roughly doubling the EBITDA margin compared to the first half of the year.
Over the past four quarters, the cumulative gap between inflation and price was a negative $25 million or so what clean earth or about three points of EBITDA margin.
We are committed to eliminating this gap moving forward through pricing and cost reduction actions.
I've been running clean Earth with the support of the corporate team over the past three months.
The opportunity to leverage our asset base and our value proposition to customers is clear.
Our targeted EBITDA margin of 15% remains achievable.
I am excited to lead this business as it realizes its potential.
Before I discuss harsco environmental I'll provide an update on the sale of our rail segment.
The sales process for rail is ongoing and we remain in discussions with certain strategic parties.
However, a change in economic conditions, including in the M&A market.
And business complexities with rails European contracts has slowed the divestiture process.
Overall as we've said before of Harsco rail is a unique business with the very positive long term fundamental outlook.
The company remains committed to selling the business on a disciplined basis.
Thereby creating value for shareholders further updates will be provided as appropriate.
Yeah.
Turning to Harsco environmental the segment performed well during the quarter and revenues increase over the prior quarter.
Due to increased demand.
On human will discuss the impact of foreign currency and inflation.
Overall, the fundamental business is strong we did see some pockets of weakness in steel volumes in Europe .
Which were offset by higher volumes in India and China.
We implemented price increases in most regions and we expect a G to fully offset the impact of inflation through its annual price escalation mechanism early in 2023.
Yeah.
In summary, each of it demand in each of our businesses remains healthy our businesses operate more or less under long term contracts that were negotiated at a time when inflation was not existent and our supply chains were strong.
The labor market was also supportive of our needs.
Times have certainly changed and we are adapting to this new reality, but fundamentally our end markets our competitive positions.
And our value propositions are well aligned to create shareholder value going forward.
Okay.
I'll now turn the call over to a human.
Thanks, Nick and good morning, everyone.
Please turn to slide four.
Second quarter revenues from engineering operation.
3%.
Third with the prior year quarter to $481 million, including a 4% headwind from FX translation.
This increase resulted from higher milk services, and equaled product demand and price and environment.
Three nuts growth was mainly attributable to price.
Adjusted EBITDA totaled 49 million, which is consistent with our July update.
As we noted at that time. This result was below our may guidance, mainly due to unprecedented inflation impacts and peanuts.
The cost of third party transportation diesel container and disposal were all much higher than anticipated.
These factors contributed to see EBITDA being approximately 12 million below EMEA outlook.
Meanwhile, environmental was at the low end of our May guidance due to the strengthening of the U S. Dollar.
This foreign exchange impact was approximately 3 million in the quarter.
Our scores GAAP loss per share from continuing operations in Q2 was $1.34 while adjusted earnings per share was one cent.
In the quarter or unusual items included a noncash goodwill impairment of 105 million and the total impact of the unusual items was $1.27 per share after tax.
Lastly, our free cash flow for the quarter was $131 million, including the impact of our accounts receivable securitization, which was completed in June .
We see this transaction as a prudent financing decision to lower our interest costs and leverage ratio.
We ended the quarter with a leverage ratio of just under five times against the covenant of five five times and liquidity of more than $130 million.
Please turn to slide five and our environmental segment.
Segment revenues totaled $278 million and adjusted EBITDA was 53 million.
Revenues increased 2% on higher services and eco products volume, partially offset by exchange rate translation impact of approximately $20 million.
Meanwhile, adjusted EBITDA decreased by 5 million year on year.
This change reflects the impact of FX translation and higher operating costs, mainly with an eco product. It also includes the impact of fewer asset sales relative to the second quarter of last year.
Let me also comment on the diversity of our customer base and a G and the related benefits given the energy and gas supply situation in Europe .
First we have limited exposure to certain countries that are most reliant on Russian gas such as Germany.
Secondly, any disruptions to date have been offset by higher volumes in other countries or regions.
And we'd expect this dynamic to continue and the overall impact do a chi to remain limited as long as demand remains intact within Europe and elsewhere.
Please turn to slide six to discuss cleanup.
For the quarter revenues totalled $204 million and adjusted EBITDA was $5 million.
Compared to the second quarter of 2021 revenues increased 4%, including the impact of price.
While adjusted EBITDA decreased $14 million year on year.
This change reflect inflation and the cost items I mentioned earlier net of price.
As Nick mentioned, we've taken additional and aggressive actions to price and cost reductions to offset inflation.
Price is the larger driver our customer discussions are going well and a large part of these price increases are now effective.
These efforts will boost margins in the second half and we expect to recoup the inflation impact by early 2023.
Now, let's turn to our 2020 to outlook on slide seven.
Consistent with our update in July our schools. Adjusted EBITDA is now expected to be within a range of 210 to 220 million. Additionally, we now anticipate that free cash flow, excluding rail will be between $115 million to $125 million, which reflects the benefit of our AOR sick.
<unk>.
You can find our full year segment guidance within the appendix of the slide deck.
Let me conclude on slide eight with our third quarter guidance Q.
Q3, adjusted EBITDA is expected to range from 54 million to $59 million.
We expect environmental adjusted earnings to be modestly below prior year results FX and inflationary impacts will be partially offset by higher volumes and new contracts.
We'll see good sequential improvement, but its adjusted EBITDA is anticipated to be below the prior year due to inflation pressures net of price.
Lastly, corporate costs should be approximately $10 million for the third quarter.
Thanks, and I will now hand, the call back to the operator for Q&A.
Thank you we will now begin the question and answer session.
To ask a question you May Press Star then one on your Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Okay.
And the first question will be from Michael Hoffman from Stifel. Please go ahead.
Hi, Nick on Chairman, David Thank you for taking the questions.
I appreciate the candor to lots of Ceos Duck and weave around Bad news you just stood up and took it.
On the rail side.
Do you still believe you'll get a transaction announced in 'twenty two.
You know I do I think that's more likely the notch.
As we indicated though are there ongoing discussions in the.
I would say apart from the weakness in the M&A market the largest <unk>.
Factor and in the timeline at the moment.
Is kind of assessing the remaining a risk on a few of our large European contracts you know our view of that risk is somewhat different than the view of those interested in the business. So we're working through.
A number of those issues now.
Third issue what would be if if you look at the expected EBITDA in the second half of this year for rail.
It's a good bit higher than it was in the first half now much of that is in backlog, we've talked earlier in the year about the.
Pretty significant recovery in the North American market for our equipment and so we took a lot of orders in early in the year those should be shipped in the latter half of the year.
But in this economic environment I think there's some concern among the buyer group as to whether or not we can realize that higher EBITDA in the second half so.
So those are the issues that we're kind of navigating with with buyers now but to be clear the level of interest in the business remains very very high.
Okay. That's helpful.
Well, we wouldn't take the observation that you don't have a demand issue, there's a cost issue.
That's an easy sort of yes kind of response, but can we dig a little into.
And specifically in clean Earth, the quality of the revenues that you're seeing what are what's your view of that and the and then in light of where now officially in a recession. Despite the government wanting to redefine it.
What's your view on the sustainability of the trend on the demand side, we get what you're doing on the cost side I'd just like I understand what your view is about the demand side.
Yeah.
Well if in quality of revenue you referred to kind of.
Margin by customer of course, that's heavily impacted now by by price and so we we we believe that the margins will return in the second half to where they were by and large across our three.
Segments that being industrial waste retail waste and in health care waste.
We've not yet seen Michael any indications that are the volume demand will soften.
Based on the overall economic situation.
The situation so we remain.
I would say fairly optimistic on our ability to to.
To grow volumes.
And each of those three segments in the coming quarters, we have seen some softness in the health care retail and industrial have been fine in the case of industrial actually I would say somewhat strong.
So we're working with our partner Stericycle.
To better understand.
What we can and should do to bring some of the health care volumes back, but but to answer your question overall, we're not really seeing any.
And any signs that the volume will soften due to the economy.
Okay and in my view a quality also is the recurring nature of our revenues as opposed to discretionary. So you feel pretty good about there's pretty good consistent recurring aspect of these volumes.
Yes, certainly on the on the hazardous waste side is as you know when our soil business that.
A healthy amount of their volume is in fact recurring but I'd say, a third or so is based on projects.
Debt that are generally do not recur.
And so.
Yeah.
And then the healthcare piece just to dig just a little bit I mean visitations were down it looks like elective surgeries are slow.
Basically the health care systems, overloaded with demand and not enough people that peers from our perspective does that consistent from your perspective.
Yes, it is okay.
I'm, assuming on the securitization I get the move to help shore up anybody's concerns about the balance sheet. Just so we're clear. This is a one time, you'll get the benefit of it and then next year I'm.
And back to an operating driven cash flow story so.
We should be modeling a down year over year and 23 is that correct.
Uh huh.
Michael The total facility is 150 million, we drew down 120 in June so theres, another $30 million left and that the ongoing facility. So that won't be a reduction in the amount that we will securitize. It makes economic sense to do it.
And so there'll be a continuation of the securitization going forward at the current levels or slightly higher even okay. So.
With that let's say just for sake of argument pulled all 150, Assam going into next year with a $1 50 based plus whatever you do operationally so whatever incremental improvements in cash generation from the two segments. That's the way to think about it.
Yeah, that's correct the 150 Wolfgang.
Well, it's pulled forward and then it's a continuation of ongoing operating cash flow that will drive our free cash flow next year. Okay. And then what did you do with the cash did you pay down debt.
We did okay.
Okay.
What I had for now thank you okay. Thanks, Michael Thanks, Michael.
And the next question is from Larry Solow from CJS Securities. Please go ahead.
Great. Good morning, Thanks for taking the questions, maybe just sticking with that with the clean Earth theme and Nick you mentioned, you're kind of taking over the business I know that I think David Stanton left I think there was freight after your your calls I don't know if you actually publicly commented on that before this but maybe you could just sort of look back I know you. You know you had when you came into this.
Company, who did a lot with the environmental business turned down around a lot. Maybe you can sort of from a high level I know there are somewhat different businesses, but sort of compare and contrast, some of the some of the issues that clean Earth and and you know what you did in environmental and how maybe you could bring some of that experience overtime to the clean air side.
Well clearly.
The predominant issue now as inflation right and.
Over the past couple of years I think we have received a healthy degree of benefit from combining.
Our legacy clean Earth business, and the Esol business that we acquired from from Stericycle.
And we saw margins increase.
Increase you know two or three points as a result of that but of course that is all being masked by inflation now and in this July price increase will.
In large part.
Remedy that that situation.
But I would say in general.
The opportunities and clean Earth.
Evolve around process change and execution.
There are a number of.
I'll say best practices that we have and clean earth in certain facilities and regions, then arent replicated elsewhere.
There are significant cost reduction opportunities available to us when we are.
Implement the price and change the process changes and the associated I T tools to accommodate those.
And logistics are a more efficient routing in sourcing certain lanes that we outsourced today at two or three times the cost.
So there's just a number of things that we're doing now then to be honest had been underway.
But the execution.
<unk> has a has been a bit lacking so we are driving that execution and that discipline in the process change very hard just as we did in the case of.
Of as Harsco environmental years ago.
Got you Okay. I appreciate that color just a couple of specifics on the on the cleaners and the Q2 results I know you mentioned I think revenue was up 4%.
Hum.
Just kind of I would think it would've been up more I guess, you weren't getting much price yet.
Which is kind of takes me back to you know it seems like you know.
The Miss this quarter qualitatively look very explainable, but.
It's not like prices started to rise with less I know they really accelerated over the last couple of months, but I think if I take go back to Q1 call you spoke about sort of putting in a lot of price increases during the second quarter is it just somewhat of a lag even in the second quarter. I know you sort of doubling up on that are not maybe not quite doubling down but.
Putting a lot more price increases in the back half, but it seems to me like there was a little bit slow to come when we kind of saw fuel and other things rising for the last 12 months, you know even with the acceleration lately.
Yeah, well the price increase that was effective April 1st was really in advance of that significant acceleration.
And in.
Inflation both.
Both in terms of transportation cost of diesel fuel and our disposal costs and those types of things. So yeah, I mean that that price increase clearly was not sufficient to.
To cover that we had underestimated what what the inflation would be in Q2.
Right. Okay. That's fair enough just switching gears real quickly on the environmental piece, just just to clarify so the.
The $20 million impact on.
The revenue impact to revenue ex currency the currency.
Would've actually been 9% plus right and that's because he isn't in and that kind of pretty strong growth is.
Some of that is I imagine it's a lot of these contracts what sort of cost plus so as costs are rising so you actually get some payback on that is that right.
Yeah. So the revenue growth would have been stronger.
Without the currency impact we have.
Growth in our mill services revenue, we have growth in our.
Equaled products revenue and also we have benefited from price increases we have annual escalations built into our contracts and then a lot of contracts are diesel is a pass through so as the price of diesel went up we got some benefit of that also.
Right and that 3 million number you referenced that that's the EBITDA impact from currency I guess right.
That's correct 3 million to our expectations.
<unk> guidance for the quarter and 4 million year on year roughly.
Got it okay. Great. Thanks also I appreciate the color thanks, guys.
Thank you.
But for the full year the impact of FX on.
H M Ebitdas 99 to 10 yeah.
And then the the price inflation gap in H E that would be analogous to the $25 million in clean Earth is about 10 on a full year basis.
Thank you and the next question will be from Rob Brown from Lake Street Capital markets. Please go ahead.
Hi, good morning.
I just wanted to clarify in the morning to <unk> pricing increases that you've had or are the new contract is sort of more flat or do they have more protections in there for inflation or are these sort of repriced annually and that if inflation changes you've got some risk on the margins or how much risk now is it most contracts compared to what you've had.
Yeah, well, that's certainly been a significant challenge for us that I believe we have now overcome that challenge was many year I'll say most of the contracts.
We did not allow for price increases at the magnitude that we're required to offset inflation.
So we've been working very closely with our customers, helping them understand the inflation that we've been subject to and it. It's it's actually been a a a a good process and in that there's not a single case to date, where a customer has refute.
Used the the price increase or chosen to to take their business elsewhere. So we've.
The the realization on what we were targeting is is actually quite high.
But it took a bit of time because again in many cases the contracts did not did not allow for price increases of that.
That size.
Yeah.
Okay, which of course, those contracts will be changed in the future right to accommodate this type of inflationary environments, perhaps recurring at some point.
Okay, Okay good to hear.
And then on the spoke to this you touched on it a little bit but how is the demand environment in that in that segment are you seeing.
Kind of project activity.
No period, where you see a lot of activity, but how is the food business.
Business demand right now.
Demand in the hazardous side is fairly steady I would say and we have a number of.
Our bids outstanding now to for new business and in hazardous waste with a number of large retailers and.
The trends there for us.
<unk> had been had been positive.
You may refer to on the in our soils and dredge business. We do expect the second half of this year.
To be a good bit stronger than the first half because many of these projects that.
That we've been tracking here are being released then and so were.
Processing, a lot of that material as we as we speak.
Okay. Thank you I'll turn it over.
The next question will be from Devin Dodge from BMO capital markets. Please go ahead.
Yeah. Thanks, Good morning, just maybe to start off with can you help us to understand that is that you know more than $30 million of profit improvement that you've targeted how much is price and how much is cost improvement and then how much incremental pricing actions remain to be taken you know given some of that contract.
Actions that you've talked about.
Yeah, so that that 30 million.
Say 25, or so as price are the remaining five is cost.
And that five of courses.
Larger on an annualized basis, so we will get the benefit of the annualized effect in 2023.
So think of the cost is more kind of $10 million to $15 million on an annualized basis.
Okay. Okay. Thanks for that.
And maybe just you know in the CE Division you know can you give us an update on the consolidation of driver check in systems.
And just trying to get a sense. If this initiative was positive or negative to the margin pressures.
That you saw in Q2.
Well, it's certainly been positive and in fact I was on a truck last week.
Looking at the.
The new software and how it how it operates and how it leads to efficiency and and and so it's probably difficult to quantify.
Exactly what the benefit is there's certainly a a compliance or a risk mitigation a component to the value of it also.
But at this point, it's a it's largely rolled out and in every one of our our trucks.
Okay. Okay, and then just one last one here I look I think we recognize it's still pretty early here are probably more focused on the second half of this year, but are you able to frame you know what that clean Earth financial forum, which could be like in 2023 or at least you know identify kind of a moving buckets or talk.
What's that you think you can achieve.
Yeah, well I think when when you consider the annualized effect of what we're doing with respect to price and cost.
And look at where the run rate will be coming out of the year into 2023.
You know clearly we expect at this point for the EBITDA in clean Earth in 2023 to be substantially higher.
And then this year.
Okay. Thanks, I'll turn it over.
And the next question will be from Jeff Hammond from Keybanc. Please go ahead.
Hey, good morning, guys.
Hey, Jeff just to on a clean Earth, one I guess just update us on kind of project activity and visibility in soils dredge. It still seems like its running negative visibility for that turning the corner and then just on this 30 million savings just wondering like is this all incremental.
Or was some of this kind of contemplated pre.
Pre the the pre announcement and et cetera.
Yeah.
Well the $30 million is all incremental.
The price increase.
It kind of began in terms of our.
Planning and coordination of it kind of middle of Q2.
Again, it effective July July 1st state the cost reduction.
Yeah, I would say has developed over the last several weeks.
And it will be executed within a few weeks.
And soil dredge.
Yeah, so on soils dredge it a couple of the major projects.
You would be aware of on the east coast to five recently started.
So they're providing a significant lift to.
The volume in the second half one of the challenges that we're having in that business. Though is also the the shortage of of trucks to bring an inbound material.
And so that that is a and that's of course implicit in our guidance here for the second half, but that's.
That's something that we don't have a lot of control over we're working very hard to to.
To find ways to get that material into our facilities to process, but it's a it's been a challenge.
Okay, and then I know you talked about you know executing execution can be better but just.
If we can level set kind of your view of of kind of the clean Earth business around.
Competitive dynamics cyclicality pricing power and just structurally.
Structurally how you're thinking about the business.
Yeah, I think we've learned recently that in terms of pricing power are we're in a very strong competitive position and again, we have a very.
Valuable set of federally permitted a hazardous waste processing facilities.
That that only one other can can match so when youre looking at some of these major retailers or major industrial companies that have a a a nationwide footprint that's a great value.
To them so our pricing.
Our leverage I think is quite quite high.
I'll say competitively.
You may recall that in our business model, we do not own disposal assets, we do not own incinerators, we do not own hazardous landfills.
And that of course is part of our value proposition to customers is over time, we work to reduce.
The amount of material that needs to flow to disposal.
In this environment, though with there being extreme capacity limitations on incineration.
And therefore, much higher prices and also in some cases Sims.
Simply having to forgo revenue because we cannot gain access to incineration that's affecting the business.
It's never been an issue in this.
And this business before there's always been plenty of capacity and what's the volume of material that we have we've.
Been able to to use that to leverage.
Price.
Our cost to us so it's a very unique environment and theres a lot of.
Capacity coming online over the next couple of years, but it's a it's it's a continuing in the short term for sure.
I think in terms of the overhead structure theres still an awful lot of opportunity and work to be done to bring the overhead structure down to where it can be in the first step of that we're taking here in the next the next few weeks, but there will be.
Our second and third phases of that.
Okay, and then and then if we if we kind of exclude that.
Securitization is the lower free cash flow just a function of kind of the lower profitability or is there anything else in there.
That's correct it slow up profitability, if you remember our clean Earth segment.
We're between 70 and 80% of its EBITDA to free cash flow so as.
As the EBITDA outlook came down.
It had a corresponding knock on effect on cash that we're trying to minimize.
Okay. Thanks, so much guys.
Thank you.
And again, if you have a question. Please press Star then one.
The next question is from Zane Karimi from D. A Davidson. Please go ahead.
Hey, good morning, gentlemen.
Hi, Dan.
Hearing the second half should have improved dynamics.
Really for the soil in dredging business can you speak to the differences in contract structures between that and the hazardous waste contracts and while margins are historically stronger and that's soils dredge business to what degree are those contracts being updated as well.
Yes, well there they're all in the process of being updated.
The soils dredge business.
There's a mix component there in terms of the type of material that we that we process.
And at the moment, that's having a larger impact on margins then that inflation.
Yeah.
Okay.
Thank you for that and then just one nitpicky thing here can you speak to the difference in the GAAP operating income provided today compare to that updated about two weeks ago.
I think there was about $2 million difference.
Yeah that was then mainly in goodwill if you go.
To go back to a.
Pre released estimated goodwill impact to be approximately 100 million.
We finalized our global environment model running through our internal controls and testing the final goodwill impairment was $105 million.
Okay. Okay, great. Thank you very much.
Thank you.
Ladies and gentlemen, this concludes our question and answer session I would like to turn the conference back over to Dave Martin for any closing remarks.
Thank you Chad and thank you for everyone that joined US. This morning, please feel free to contact me with any follow up questions and as always we appreciate your interest in harsco and look forward to speaking with you soon take care.
Thank you Sir.
<unk> has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
Yeah.
[music].