Q3 2022 Harsco Corp Earnings Call
Okay.
Good morning, My name is Debbie 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 holding a question and answer period, if you would like to ask a question. During this time simply press star and the number one on your telephone keypad.
If you would like to withdraw your question. 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 recording or redistribution of this telephone conference by any other party are permitted without it.
Expressed written consent of Harsco Corporation.
Your participation indicates your agreement.
I would now like to introduce Dave Martin of Harsco Corporation. Mr. Martin You may begin your call.
Thank you Debbie and welcome to everyone. Joining us this morning, I'm, Dave Martin VP of Investor Relations for Harsco.
With me today at Grasberg, our chairman and Chief Executive Officer, and Pete <unk>, <unk> Senior Vice President and CFO .
This morning, we will discuss our results for the third quarter as well as our outlook. We will then take your questions.
Before our presentation. However, let me mention a few items first our quarterly earnings release as well as the slide presentation for this call are available on our website.
Second we will make statements today that are considered forward looking within the meaning of the federal Securities laws. These statements are based on our current knowledge and expectations and are subject to certain risks and uncertainties that may cause actual results to differ from these forward looking statements.
For a discussion of such risks and uncertainties see the risk factors section in our most recent 10-K 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 now turn it over to Nick.
Thank you, Dave and good morning, everyone. Thanks for joining us today.
The third quarter was above our expectations as adjusted EBITDA improved both year over year and sequentially.
These results reflect our leading position in the environmental waste markets.
Strong execution in our clean Earth segment is implementation of new operational initiatives began to deliver results.
In fact clean Earth's recorded its best quarter under Harsco ownership and EBITDA margins improved significantly.
First of all environmental was challenged by softening industry fundamentals, although what's competitive position has never been stronger.
And we see opportunity to gain further market share in the coming quarters. Following the bankruptcy of a major competitor.
Looking ahead to the fourth quarter, which is seasonally our slowest quarter. We expect these trends in both segments to continue.
Accordingly raised our full year profit guidance.
Pete will provide further details on our financial results and projections in a few minutes, but before he does that.
I'd like to take a moment to discuss our corporate strategy and the actions, we're taking to position harsco.
For value creation, both in the near and long term.
We remain committed to our ongoing efforts to reshape our portfolio and focus exclusively on providing environmental solutions to a broad range of end markets.
Our progress is not always come in a straight line. However, this leadership team has become accustomed to moving decisively.
To address macroeconomic challenges and a fixed businesses, where we have discovered underlying problems.
So a good example of this is our mill services business within Harsco environmental.
A few years ago, the business was saddled with a large number of underperforming contracts.
Poor returns on capital and was lacking process discipline.
As a result, we were losing market share and our margins declined.
We refocused the business reduced cost and improved our capital allocation process and discipline.
And the business is now a much more solid business with a deep and talented leadership team.
In a strong position relative to our competition.
The challenges we face today and mill services are largely external and.
And we expect the effects of the recent downturn in the steel industry to be at least partially mitigated in 2023.
Price increases cost reduction and new business.
Okay.
Similar processes underway within our clean Earth segment, which was augmented through the acquisition of Esol in February of 2020, just prior to the Covid outbreak and is now dealing with the impacts of inflation.
Short answer of disposal capacity in a tight labor market.
We believe in the value clean Earth delivers to harsco into our customers and we're implementing a revised plan to help it achieve its potential.
We have refocused the business on executing operational initiatives related to pricing disposal costs transportation efficiency.
And reduction in head count.
We've also made several leadership changes and clean Earth over the past several months and we've streamlined the organization and to become that much more aligned and decisive.
Our third quarter results reflect these changes and I believe the business is better positioned to strengthen margins and become less volatile in the future as a result of these changes.
Yeah.
In the second half of this year EBITDA and EBITDA margins at clean Earth should be nearly three times those of the first half of the year.
Price increases to offset inflation had been a large contributor as of numerous cost reduction programs.
For the year, the inflation impact net of price will be about $10 million in clean Earth.
But we anticipate this gap to reverse and to become a positive contributor to our margins next year.
Our success in executing price increases demonstrates the value of our asset base and the value proposition of our reuse and recycling services.
Our customers have been extremely supportive of price increases with the notable exception of Stericycle.
Despite the fact that our contract with them provides us broad ability to recover increases in costs.
So after several discussions with stericycle and providing evidence of the extraordinary inflation and transportation and disposal costs.
We have filed a lawsuit against Stericycle and Delaware Court.
We will nonetheless continue to provide stericycle outstanding service under our contract.
And this dispute does not give stericycle the ability to terminate our ultra or contract.
Looking ahead to next year I fully expect clean earth to deliver significant growth in revenue EBITDA and margins, specifically revenue should increase high single digits.
And EBITDA margin should be a few hundred basis points higher than this year.
Much of this will be driven by the already executed price increases and our continued cost reduction actions related to transportation disposal containers and SG&A.
In addition, we are seeing positive momentum with new business due to a much improved customer service levels and upgraded it interfaces with our customers.
Overall, our line of sight to the targeted 15% EBITDA margin over the next 15 years or the next few years is clearer today than it was in the past.
Importantly, I should note that this 15% target does not include the potential benefits of processing P. Fast contaminated soils in response to the Epa's recently announced proposals.
Nor does it reflect the benefits of growth and other targeted markets such as lab pack hospitality <unk> and health care.
Turning now to Harsco environmental.
The record high energy prices in Europe , and the weakening demand for steel.
This led to a significant reduction in steel production many of the European sites that we support.
Pockets of weakness also exist elsewhere, including in North America.
Inflation and the strong U S. Dollar are further pressuring results.
We expect these headwinds to be mitigated in 2023.
Cost reduction actions, we're putting in place and the impact of annual price escalators next year.
Which together, we believe may lead to EBITDA cash flow and margin growth even in a mild recessionary environment.
Our value proposition and harsco environmental linked to high service levels of innovation and safety.
This is allowing us to be selective in choosing the most attractive growth opportunities.
For Harsco sustainability is not only embedded in the services that we provide to our customers, but it's critical to how we manage the business and we view the mission of our company.
Highlighting the internal progress were making we recently published our annual ESG report, we continue to see improvement in our safety performance, especially in harsco environmental and in rail.
And we're very focused on reducing our incident rate and clean earth to match the industry, leading levels and our other businesses.
<unk> environmental and clean Earth, together launched 38, new environmental solutions last year, a 30% increase compared to the prior year.
And we are on track to reduce our carbon emissions by 15% in 2025 from a 2019 baseline.
And finally as always we're committed to continuing to engage with shareholders and other stakeholders on ESG matters.
Our financial priorities remain unchanged with a primary focus on reducing our financial leverage to around three times.
Through divesting the rail business, improving earnings and boosting cash flow.
Progress towards this goal has been affected by supply chain and inflationary pressures in our rail business and higher working capital levels and Harsco environmental <unk>, China business.
Nevertheless, we fully expect the cash flow and balance sheet profile of harsco to improve over the next few years.
Driven by EBITDA to cash flow conversion and clean Earth modest capital spending improved working capital and Harsco environmental lower cash interest is leverage falls into.
And declining pension costs.
I'd like to address the sale of the rail business directly just for a moment.
The core rail business, which we have operated for decades is an excellent well respected business throughout the world.
And as an ideal platform upon which a buyer could build or used to complement an existing platform.
As we have discussed disclosed and discussed in prior periods. We have a few large mainly European contracts, which are more complex in nature and as a result of a variety of issues have been delayed.
For example, we have seen supplier issues, resulting in extraordinary inflation and delivery delays in turn resulting in these contracts being unprofitable in the short term.
And delaying the associated cash flow.
We've been actively working with the customers and with our suppliers to find ways to address the operational and contractual issues.
The good news is that with the passage of time and the actions that we've taken.
The future financial and operational risks associated with these contracts have been greatly reduced.
We expect buyers to be able to look past these isolated issues and recognize that with governments poised to invest heavily into public transportation infrastructure.
The Harsco rail remains a very attractive asset.
I'll now turn the call over to Pete.
Thanks, Nick and good morning, everybody.
So let's start by turning to slide six.
Compared to the prior year Harsco as third quarter revenues from continuing operations increased 4% to $487 million, Despite a 5% headwind from foreign exchange translation.
The increase was primarily driven by the success of higher services pricing and cost actions and clean Earth, which we discussed as part of our improvement initiatives on the August earnings call and as Nick mentioned earlier.
Clean Earth's saw revenue growth of 11% in the quarter and revenues in our environmental segment increased 7% before the impact of foreign exchange translation.
Adjusted EBITDA totaled $70 million, which is above our prior your prior guidance and represents an improvement both sequentially and year over year.
The stronger performance can again be largely attributed to margins and clean Earth, where we pushed price to offset cost inflation and successfully began executing on our restructuring program and other cost reduction initiatives in the quarter.
These benefits were partially offset by weaker than anticipated performance in environmental resulting in part from lower volumes in Europe , and North America as steel producers have reduced production in response to rising energy and other costs.
Harsco as GAAP earnings per share from continuing operations in Q3 was one cent while adjusted earnings per share was <unk> 10 cents.
Our free cash flow for the quarter was a net usage of $31 million.
For Harsco environmental the primary factors affecting our free cash flow performance included lower cash earnings coupled with delays in collecting certain customer balances mostly in Asia.
For clean Earth free cash flow was impacted by growth and working capital timing items.
This quarter also included our semiannual interest payment on our bonds.
Please note that we also utilized another $25 million under our accounts receivable securitization facility.
As a result, we ended the quarter with a leverage ratio of five times against our bank Covenant of five five times.
As we previously announced we amended our credit agreement and related financial covenants this quarter to provide us additional flexibility if the global economy weakens.
I am pleased with and very grateful for the ongoing support of our banks.
Now please turn to slide seven and our environmental segment.
Segment revenues totaled $265 million and adjusted EBITDA was $51 million for the quarter.
Adjusted EBITDA decreased by $5 million year on year and this change reflects the impact of foreign exchange translation as well as lower volumes, particularly in Europe and lower commodity prices.
It also reflects the impact of fewer asset sales relative to the third quarter of last year.
Next please turn to slide eight to discuss clean Earth.
For the quarter revenues totaled $222 million and adjusted EBITDA was $28 million.
Compared to the third quarter of 2021 revenues increased 11%, including the impact of prices I mentioned earlier.
Hazardous materials revenues reached <unk> reached $183 million up 13% year over year with our growth led by industrial markets followed by retail.
Meanwhile, soil in dredge revenues totaled $40 million, representing an increase of 4% over the prior year quarter.
Adjusted EBITDA for the segment increased $8 million year on year.
And this change reflects the benefits of our price and cost initiatives within our hazardous waste line of business as well as overhead reductions.
These positives were partially offset by cost inflation in our soil in dredge business.
As Nick mentioned and as reflected in the Creek clean Earth results.
Our price and cost actions have been very successful in partially offsetting inflation for the full year.
Impact of price on revenues in the quarter exceeded $20 million year on year and the benefit of these price increases will continue into future periods.
Additionally in August we implemented a cost reduction program, including SG&A and clean Earth. The benefits from these programs are expected to exceed $10 million in 2023.
And we benefited from other cost reduction and operating initiatives that will deliver additional financial benefits going forward.
Let's turn to our 2022 outlook on slide nine.
<unk> full year adjusted EBITDA is now expected to be within a range of $216 million to $223 million.
And detailed segment guidance can be found in the appendix.
Our guidance increase reflects an improved outlook for clean earth, resulting from our price and cost savings initiatives.
Our guidance also incorporates a more cautious outlook in AG due to U S dollar strength as well as lower expected services volumes in Europe and elsewhere as a result of the higher energy and other costs affecting steel production.
Additionally, we now anticipate that free cash flow, excluding rail will be between $90 million to $100 million.
Before moving to our Q4 outlook, let me comment on capital allocation.
Deleveraging continues to be our highest priority coupled with very limited disciplined capital spending now.
As a result, we anticipate reducing our leverage at year end and in subsequent periods.
So let me conclude on slide 10, with our fourth quarter guidance.
Q4, adjusted EBITDA is expected to range from 47 million to $54 million.
We expect clean Earth adjusted earnings to be above prior year results due a higher due to higher contributions from our hazardous waste services business.
Sequentially from Q3, and as is typical in the fourth quarter clean Earth results are anticipated to be negatively impacted by fewer operating days and seasonality leading to lower volumes.
The quarter will also be impacted by the timing of certain expenses, including incentive compensation and professional fees.
Meanwhile, environmental adjusted earnings is expected to be below the prior year quarter.
And here are the primary drivers of foreign exchange translation, Brazilian tax credits and lower volumes, including commodities and eco products.
Lastly, corporate costs should be $9 million to $10 million for the fourth quarter.
Thanks, and I'll now hand, the call back to the operator for Q&A.
Yeah.
We will now begin the question and answer session.
Ask a question you May press Star then one on your telephone keypad. If you are using a speakerphone. Please pick up your handset before pressing victims.
Withdraw your question. Please press Star then two.
We will pause momentarily to assemble our roster.
Our first question comes from Michael Hoffman with Stifel. Please go ahead.
Hey, Yeah, we get called lots of things.
Hi.
So Pete I got to say it out loud do you not like being retired.
[laughter], it's great to be back Michael and Great to talk to you again, you too so I'm on.
Harsco, environmental I'm pivoting right to twenty-three folks on harsco environmental.
Ken twenty-three be basically what the original 22 was.
Yeah, Michael I as you can appreciate.
There are so many uncertainties.
Uncertainties.
No that did affect that business, whether it's gas prices in Europe demand for automobiles currency rates.
The ongoing inflation, it's just difficult to say what I, what I can say.
Is that I feel very good about what we're doing to remove costs from the business, what we're doing to pursue new contracts.
It would not require a lot of capital investments.
And also we have strong contractual protections against inflation on a somewhat lagged basis. So in January we'll be executing those those price escalators in our contracts and getting getting price to cover a good bit. So most of the inflation that we saw.
Which was about $15 million of.
Of inflation in 2022, so I.
All of those collectively will really help the business, whether that's enough to offset.
A recessionary scenario when the steel industry. We just don't know at this point, Okay fair and fair enough had to ask it that way.
One of your competitors did go bankrupt.
I think you all are structured very differently contract structure terms and the like can you talk a little bit about those so people understand.
So you're not.
Looking down the barrel of a similar rifle.
Yeah, well, it's a great question.
In 2008 to 2012, when the company that went bankrupt was taking.
Our business away from our business and mill services.
They were doing so largely on contractual terms that we wouldn't accept and pricing that we wouldn't agree to.
And so here, we are oh, we become much more disciplined on our contractual protections, we have fixed fees or minimum billings in our contracts, we have the ability to recover inflation all kinds of other protections.
That are that have served us well and to put us in a.
Very strong not only financial position, but competitive position.
And so.
We'll see what happens with those contracts.
In the U S that are now under a bankruptcy situation.
But clearly we're having discussions with many of those customers now.
And I think they are beginning to understand the value proposition that we offer.
Relative to the others.
So it's difficult to estimate at this point, but.
But I do believe that.
We will have several million dollars of additional earnings and and Harsco Environmental next year as a result of.
New business.
That stems from that.
That's great and then one last one on <unk> is there any visibility at least in the U S. About money is supposed to be spent from the 2021 legislation that you know added half a billion dollars to infrastructure spending.
I'm, sorry, you were saying in an AG, yeah, well and it would lead to buying steel like there are a lot of this infrastructure that might get done would drive steel activity. As there is there any visibility around any of that bridges I'm thinking more of like bridges repair and maintenance right yeah.
We don't have good visibility to that Youre, absolutely correct in that that should produce.
Produce a bit of a tailwind.
Most analysts now continue to expect.
Steel production in the U S next year to be flat to up a little bit but of course that risk of a recession continues to rise that would affect that so I would assume that those infrastructure opportunities that would lead to demand for steel would be.
It would be contained within those those analysts projections.
Alright, and then switching gears to clean Earth. The good news about <unk>, and then asking going into.
Twenty-three as you did it the old fashion way without much help from our soils uptick.
And yet you've talked about four big projects that should start seeing some dirt move.
Plus what your own efforts.
So.
Yeah, we're double digit something you know 12 to 15 kind of margins is the way to think about 'twenty three or is it or.
You framed it by a percent change, but I'm trying to land, where the margin kind of falls, yeah FERC for all of clean Earth, Yeah, I mean, Michael.
Yeah, I think you're going to have to stay tuned on that.
We provide our official guidance for next year I mean clearly.
The margins you saw in the first half of the year.
We're an aberration.
What we're saying in the second half of the year in Q3 and Q4.
Is much more akin to a to.
What we're going to do and of course, when you consider the annualized benefits of the things that we're doing we clearly should add a few hundred basis points as I noted.
<unk> EBITDA margin.
Right.
Not not yet prepared to kind of put her.
Hard range out there yet.
And then the last one would be on rail what based on three Q, what's the what would the document room, having it about what the EBITDA of that business is now.
The EBITDA in the rail business as a 20 million ish.
For 'twenty two.
Yeah, Okay, yeah, but it gets better in 'twenty three and some of this contract backlog starts to convert yeah, that's short cycle.
Absolutely Okay. Thank you very much.
<unk>.
The next question is from Jeffrey Hammond with Keybanc capital markets. Please go ahead.
Hey, guys. This is much more on for Jeff.
Good morning.
Hey, I guess my first question is kind of you mentioned the competitor going bankrupt.
I was just wondering where where do you see the greatest opportunity for environmental to gain share and have you already started that process and then taking over some of those contracts.
Well, we haven't taken any contracts over yet, but we're in conversations with many customers that are served by that vendor.
To do so to take over contracts I think.
In the short term the greatest opportunity would be here in the U S of course, that's where they filed for bankruptcy.
And so we're hopeful that by the end of this year.
We will have it will be on the threshold of stepping into.
A handful of contracts here in the U S.
Okay, Great that's helpful and I'm, just kind of and clean Earth. It seems like you guys have done a really good job in price this quarter.
Do you have any sense of how sticky that prices kind of going into next year.
Yeah, well first of all I would say that we've also done a very good job at managing and reducing cost.
We have several initiatives that were put in place three or four months ago that are really yielding a lot of benefit to.
For the third quarter and of course going forward.
And so as encouraged as we are about the price increases in virtually every customer has agreed to a price increase.
We're also very very excited about but I'm very happy the way the organization responded.
To myself and others, taking a much more hands on approach to the business.
So, but yes, and I think I think those price increases are sticky.
If you look back historically in this industry.
That's been the case and.
Even though.
Some of our input costs.
Declined a little bit in the third quarter relative to what we thought most of the benefit that we saw and the reason, we really beat our guidance.
Because of cost we felt a little bit short on price versus what we were targeting most of that being stericycle as I mentioned in my remarks.
But yes to answer your question directly I do expect price increases to stick.
Okay, Great and then just maybe last one.
Just on the on the rail divestiture.
Kind of a gating factor kind of getting those international contracts wrapped up and do you have any line of sight into maybe timing around that.
Yeah.
Well.
There are three contracts, primarily there there's not a single gating factor to any of them.
Well the exception of the German contract, where one of the major suppliers.
To us and to many others.
<unk> filed for bankruptcy and we're dealing with that situation.
Yeah, I I firmly believe by the end of this year.
Those contracts, let's say the outcome of those contracts and the risk around those outcomes will be much much better defined.
And.
And look I think we're willing.
For the right deal to maybe retain the degree of that risk perhaps.
So.
But I think that in.
And the next few months.
Those contracts will be a <unk>.
Less risky situation.
Okay, great. Thanks, I'll pass it on.
The next question is from Larry Solow with CJS Securities. Please go ahead.
Great. Thanks for taking the questions and first of all welcome back Peter I guess, it's a welcome back.
Always a pleasure.
Yes.
Absolutely Yeah sure. So first question maybe for Nick just on the steel on the environmental piece of it.
It sounds like you mentioned lots of certainly some levers hopefully two to to pull the next few quarters is obviously, it's a it's.
It's a challenging environment, but.
It sounds like you guys you know you've done a good job in the past so what about just you mentioned new customers and growth opportunities you're being somewhat selective there can you just speak to sort of are there. Obviously you discussed the bankruptcy competitor will hopefully get you. Some some new business, but are there opportunities out there for new business for you.
Even in a sort of.
Where you can grab a bigger piece of a shrinking pie maybe in the short term.
Yeah. There's no question about that I believe I have commented the last few quarters on how we believe that the demand for what we do.
Greater than what we're willing to supply given the the upfront capital Thats required to.
To move into these new new contracts.
So we believe that with.
Spec to these contracts that were looking to step into here in the U S. Over the next few months those will not require much capital from us.
The contracts that we're looking at the growth opportunities that we're looking at elsewhere.
We're very very mindful of our balance.
Balance sheet situation and looking for contracts that.
That certainly don't require as much upfront capital relative to the to.
The cash flow potential so we're being very selective and a lot of it of course has to do with with our balance sheet.
And.
And where we see opportunities elsewhere.
Got it Okay. Just one question on rail it wasn't it wasn't going to bring it up but just on the 20 million EBITDA number.
You referenced for this year.
Again.
If you had your crystal ball and 53 contract, maybe a big if but at least three sort of international contracts are settled in and let's say down down the middle there in some fashion.
And the business sort of normalizes in the domestic side it seems like it's doing better there.
Is this are you know can you still sell this business as you know is it a $30 million EBITDA business in 'twenty three.
A good place to start just trying to you know.
Sort of give us a number there.
Yeah, well I'll go back to the comment I made to Michael about all the uncertainties, but I will say that.
We're not yet in that business, where we typically would be in the middle of a cycle.
That business historically at mid cycle has been in that $30 million to $35 million range of EBITDA.
Whether it will get there in 2023.
Unclear given the economic environment.
Got it Okay, and then just switching gears real fast on clean Earth first of all congrats there I don't know, Nick and I'm not saying, it's all you better he took over that business a few months ago. So perhaps yeah, you had almost a good very good.
Start Rob.
Clearly you beat your expectations, what would you say that there is price increases cost cuts operating efficiencies.
Are they do they just come faster than expected do you think you actually have more potential you're more confident of getting to that.
The 15% margin over the next few years I assume that would have to have dredge in the soil business kicking in as well but.
Does this one quarter. It gives you more confidence or is it just sort of.
Executing great in this quarter after a slower start to the year and in the military.
And you're happy for yourselves, but not necessarily doesn't get you necessarily overall.
Our longer term outlook.
Yeah, I know, we have much higher degree of confidence now and the opportunities that we can execute on that business and we've we've taken a lot of steps to improve execution and focus.
And with the the new leadership team that's in place.
It's just a very different.
Business right now in terms of.
What what we're focused on and our ability to execute so.
And as much as we've done there's much more to do.
Oh, they're on.
The cost side.
Also could you just remind us of I joined the call little bit late so just on the the agreement with Stericycle. The contractual agreement when you took over the business. When you bought the business from them in and I guess, the whole, though I didn't I missed the first couple of minutes I apologize for the hold up there. They are bulking on the price increases or what's sort of the issue. There. Yes. We have I think we have the right in our contract.
To increase prices to cover costs that are in excess of what the annual.
PPI based formula would indicate and clearly the.
The inflation that we've seen and the cost to serve Stericycle bofa transportation or disposal costs any number of things collectively are well well above kind of P. P. I.
So yes, we have the contractual rights and again virtually every other customer has accepted all of that price increase stericycle has not.
Right.
And so you know obviously, our shareholders deserve that and we're fighting for the shareholders. On this you know we're not litigious company, we've ever fought never sued a customer before so you can understand how seriously we take this and how strong our position much must be to take that step.
And just remind me when you acquired the asset from Stericycle. There. There is some type of an agreement right. It's not your normal but not a normal customer right. There is some kind of a pass through there or something.
We service their hospitals and doctors' offices and so forth.
Process that type of waste that they cannot internally themselves and so they're our largest customer $90 million to $100 million a year.
Gotcha, Okay, great I appreciate that color. Thank you thanks for everything.
Thank you.
The next question is from Rob Brown with Lake Street Capital markets. Please go ahead.
Hi, good morning, Thanks for take my call.
Good morning.
On the environmental business you talk you talked about the mitigation efforts to try to deal with the kind of the.
Macro environment could you just give us some color on further color on what those are and maybe historically, what you've done to mitigate a recessionary.
Impairment.
Yeah, Yeah, well one thing Thats unique this time is that in 2022, we like everyone been subject to inflation in our cost to serve our customers in most of our contracts.
Do not allow for.
Intra year price increases generally so in January and early in 2023.
Those price escalators will kick in and enable us to.
Two to offset a good bit of that inflation that we saw in 2022. So that's we've not had in the past.
The opportunity that we have in 2023.
But that that will certainly serve to mitigate the impact of.
A recession on that business and.
And as we always do when we have in the past when when the business begins to turn down we we remove cost and this time will be no different.
And then I think the the other unique.
The fact.
<unk> factor that should enable us to mitigate the impact of these new contracts that we hope to step into here in the U S and perhaps elsewhere.
That are the result of a major competitor filing for bankruptcy.
We don't know yet.
But we'd like to think that the sum of those three activities will enable us to <unk>.
Mitigate a good bit of if not all of the impact of a recession next year on that business.
Okay, Great and then on the clean Earth side.
How much sort of a.
Leighton price increases.
Will we see at 'twenty, three that sort of had been implemented but you haven't really seen yet in the numbers, what's your sense of sort of pricing get back next year.
Yeah, well, we're going through that now clearly we will increase prices again in 2023.
<unk>.
What that amount is relative to what we expect inflation to be we've not not yet quantified that.
Our approach in <unk>.
<unk> thousand 22 was really just a pass on that extraordinary level of inflation to customers not to use it to increase margins.
What the impact of the.
The price increases will be in 2023.
I just don't know yet.
But it certainly should be.
Should help our margins.
Okay. Okay, great. Thank you I'll turn it over.
Again, if you have a question. Please press Star then one.
The next question is from.
<unk>.
Karimi with D.
Davidson.
Please go ahead.
Hey, good morning, gentlemen, and congrats on the strong quarter.
Good morning.
First off here, a little bit more on the clean Earth side of things, but you guys had strong result, there.
To what degree do you see this is more of a normalization of operations and operational efficiencies essentially how should we consider the base margin profile for this business moving forward.
Well, there's no doubt that the actions that we've taken in the third quarter and they will continue to be executed.
As in the base now these are not one time actions.
But I we.
We've said many times in a acknowledged again on <unk>.
In my remarks that there's 15% EBITDA margin target that we have.
We have a very high degree of confidence in achieving over the next few years and.
What we did in this.
Third quarter I think is I think is a good reflection of that.
And it's not as though the well is dry.
On additional actions, we can we can take in and even the <unk>. So for example, when you look at everything we're doing on transportation and logistics.
I think we've just begun to see the benefits of what we're doing in the.
The opportunity there is significant the opportunity in <unk> and how we manage.
The the the mix and care of our containers is significant.
How we.
<unk>.
Disposal costs.
A significant opportunity there are any number of things there is certainly more SG&A to be removed. There are a number of initiatives underway that will will accommodate that.
So the bridge to get to 15%.
I think is becoming much more clear.
But we certainly should be.
And that double digit.
EBITDA margin range in 2023.
Oh, okay. Okay. Thank you for that and I believe on the prior quarters, you guys did mentioned about $30 million in pricing and cost cutting initiatives that were underway and expect it through to the second half.
To what degree are those being completed and what really remains from those initial initiatives.
Yes, there are price increases the price increase component of that $30 million is largely done.
Again, I'll say, one more time with the exception of Stericycle.
The the cost actions, we're actually ahead of where we thought we were going to be.
And so the price cost actions together above that $30 million and that's why we're ahead of our previous guidance for the for the full year.
Yeah.
Okay, and then last one for me, but it does sound like disposal costs.
It seems to be continuing to pressure peers and looking at the industry as a whole. It continues to appear as though pricing increases should continue how are you continuing to protect yourselves from outside inflation pressures.
Yeah, that's absolutely right your comment about ongoing inflation in disposal costs.
Clearly, we're a we're managing that through price passing on that inflation to our to our customers.
But yeah, we expect that to continue as well, but they're also.
Actions that we're taking to reduce the amount of material that we need to send to incineration and hazardous landfills. So that's.
That's part of the the.
Exercise as well, it's not it's not just price. It's further processing different types of processing of the material at our facilities that would allow us to avoid.
And disposal costs.
Okay. Thank you guys for the color.
Thanks, Ed.
The next question is from Devin Dodge with BMO capital markets. Please go ahead.
Hi, good morning.
Yes, good to see the.
Group results had a clean Earth I know, there's been a lot of a lot of work there. So it's good to see that kind of materialized in our results. So congrats for that just a couple of questions. Maybe a clarification question is on free cash flow.
I think it was mentioned I just want to make sure I caught it right was there I think it was $25 million that you guys are essentially added from that AR securitization.
Asian facility and is that in the free cash flow number that you reported.
In Q3.
Yeah. Devin this is Pete yes that $25 billion of additional securitization benefit is included in the net free cash usage for the quarter.
Okay, Okay and then.
It doesn't look like there's much of a recovery there on that working capital usage that we saw in Q3 should we be expecting that to flow back to harsco in 2023 is that reasonable assumption.
Yeah, a good portion of that is going to come turnaround like for example, the clean Earth piece, which is a working capital growth. This associated really with the growth in that in the results that largely will come in Q4.
The AG piece will largely come accommodation of Q4 and in 2023.
Okay got it okay. Thank you.
This concludes our question and answer session I would like to turn the conference back over to Dave Martin for any closing remarks.
Yes, Thank you Debbie and thanks, everyone for joining the call. This morning feel free to contact me with any follow up questions using the contact details at the top of our earnings release today and as always we appreciate your interest in Harsco and have a great day. Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.