Q2 2023 Enviri Corporation Earnings Call
Okay.
Good morning, My name is necessary and I will be your conference facilitator at this time I would like to welcome everyone does he Environ Corporation second quarter release conference call.
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I would now like to introduce Dave Martin and Viva Corporation. Mr. Martin You may begin your call.
Thank you Deseret and welcome to everyone. Joining us. This morning with me today is Nick Grasberg, our chairman and Chief Executive Officer, and Pete mining, our senior Vice President and Chief Financial Officer.
Please note that we are doing this call from different locations today. So please bear with us as we transition between speakers and address your questions.
This morning, we will discuss our results for the second quarter and our outlook for the remainder of the year. We'll then take your questions before our presentation. However, 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 meaning of the federal Securities laws. These statements are based on our current knowledge and expectations and are subject to certain risks and uncertainties that may cause actual results to differ materially from those forward looking statements.
For a discussion of such risks and uncertainties. Please 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 were well refer to adjusted financial results that are considered non-GAAP for SEC reporting purposes.
Reconciliation to GAAP results.
As included in our earnings release today as well as the slide presentation with that being said I'll turn the call to Nick Thank you.
Thank you, Dave and good morning, everyone.
We delivered a strong second quarter with revenues and adjusted EBITDA exceeding forecasts across our continuing segments.
First of all environmental and clean Earth.
Revenues were up 8% and adjusted EBITDA increased over 50%.
This better performance is attributable to several pricing and cost initiatives in both divisions.
As long as well as increased operating efficiencies and improvements in some end markets.
As a result after lifting our outlook for the year last quarter. We are once again, raising our full year outlook this quarter.
Additionally, our leverage which was below five times at the end of the first quarter continues to decline as sits at four six times and I believe the figure should decline to four times at year end.
Before adding further commentary on our performance there are a few items of note that I want to discuss.
First we have initiated the process of selling our rail segment and have started reaching out to selected potential strategic buyers.
This is a priority for both the board of directors and management, we expect to sell the business by the end of the year.
As I've mentioned, one of the necessary steps to selling the business is reducing the risk associated with our long term contracts.
We've taken a significant step in that regard by successfully amending the network rail stone blower manufacturing contract the effect of which was a favorable modification of our delivery schedule.
And a reduction in our financial exposure.
I should also note that the underlying business continues to perform ahead of our plan and well ahead of last year.
Okay.
Second we successfully resolved our dispute with stericycle during the quarter regarding price increases.
Both parties are satisfied with the results and I'm pleased that the settlement was amicable.
We have an even stronger relationship with this customer and continue to provide stericycle exceptional service.
Yeah.
Next as you are no doubt aware on June 1st we changed our name to environment, a new name and brand identity reflect the company's transformation over the past few years.
Into a single thesis environmental solutions company.
One that provides services to manage recycle and beneficially reuse waste and byproduct materials across many industries.
As we considered how our business has evolved and our commitment to the environment. It is important to have a name and brand identity that align with that image.
We are energized by this change and look forward to continuing to operate with the same commitment to excellence that has been part of the company's legacy for more than 170 years.
Finally in late June we announced that Rebecca Martinez O'meara was elected to <unk> board of directors.
We're committed to refreshing our board and Rebecca is the third new director in the past 18 months.
During our 30 year career, she worked in executive positions for a series of industrial and manufacturing companies, including Stanley Black <unk> Decker Caterpillar Fiat industrial in AT&T.
In particular, her experience and leadership and business transformations and promoting cultural diversity will be of great value to us.
I will now provide a few comments on each of our segments.
At Harsco, environmental we effectively manage the business in the face of lower steel production.
Particularly in Europe , and Latin America compared to last year at this time.
Strength in India, and Turkey, partially offset this effect and despite the lower volumes the steel mill service business and certain echo products businesses performed better in the quarter.
We continue to expect full year EBITDA in AG to be modestly above last year's figure with higher EBITDA margins and free cash flow generation near $100 million.
We continue to limit growth capital in AG only to opportunities that provide a strong risk adjusted return.
More broadly the competitive position of HCA remains quite strong we continued to renew contracts successfully.
And initiate price increases to offset inflationary pressures.
We look forward to the impact of that our operating leverage will have on earnings and cash flow.
Steel production volume returns to more normalized levels.
At clean Earth. This segment delivered its fourth consecutive quarter of 12% or so EBITDA margins, we expect margins and clean Earth remains strong for the remainder of the year as we continue to progress towards our 15% EBITDA margin target.
It's also important to highlight that clean Earth is a capital light business with cash flow conversion this year expected to be roughly 85% of EBITDA.
Pricing improvement initiatives as well as higher retail and health care volumes support our strong results.
Underlying the financial performance is much improved operational performance as well.
Family service levels safety and labor efficiency.
Overall, there is no doubt that this segment is back on track to deliver on the promise to create shareholder value from the acquisitions made a few years ago to create our clean Earth platform.
Finally, I'd like to discuss our PFS initiatives with.
Within clean Earth, we continue to see P fast remediation work.
There is a significant opportunity.
Is it related litigation continues management budgets increase the body of supporting technical data expands and federal and state regulations are finalized.
Our approach anticipates using a toolbox of technologies to address each customer specific requirements.
That will vary based on a brisk and economics to provide a more sustainable and resource friendly solution than landfills incineration or deep well.
We see some oil and water is the two major market opportunities that align with our national footprint, which includes both fixed space and mobile thermal desorption and oxidation assets.
We're actively working with identified public and private partners to pilot, our existing thermal capabilities and to expand our water treatment technologies.
Coupled with their hazardous waste wastewater treatment facilities.
These new and existing technologies are undergoing internal trials with anticipated testing and evaluation by the D O D to EPA and various state environmental agencies to follow.
We were encouraged by the recently published D O D interim guidance on PFS in which the D. O D highlights that a state permitted destruction technology could be considered rather than a hazardous waste incinerator.
For example, as the memo states state permitted thermal desorption units could be considered.
So in summary, it was another strong quarter for environment, a very good first half of the year in the second half we will focus on the rail divestiture.
Continuing to capitalize on the operational and financial efficiencies at Harsco Environmental management.
And clean Earth, including cost savings and a pricing escalation strategy.
I'll now turn the call over to Pete.
Thanks, Nick and good morning, everyone.
So please turn to slide four.
<unk> second quarter consolidated revenues from continuing operations increased $520 million up 8% compared with the prior year quarter.
The increase was primarily driven by pricing as well as increased demand within both our clean Earth and harsco environmental segments.
Adjusted EBITDA totaled $78 million, which is above our prior guidance range and this represents a 58% improvement from the prior year and a 24% improvement sequentially.
Both of our segments realized stronger than anticipated performance.
Clean Earth's results were better than expected due primarily to the inclusion of the impacts realized from our recent Stericycle agreement.
Clean Earth also benefited from stronger volumes in its retail and its soil dredged businesses as well as lower lower operating costs for containers disposal labor and energy across the business.
For Harsco environmental results were higher than anticipated due to better services demand, despite lower customer production as well as favorable pricing.
Relative to the prior year quarter. The consolidated EBITDA increase was largely driven by clean Earth. As a result of price increases internal efficiency initiatives lower operating costs and higher volumes.
Harsco environmental results also improved modestly against the prior year.
Our adjusted earnings per share was one <unk> for the quarter, which also compares favorably to our may guidance.
Free cash flow for the quarter was a negative $23 million realm.
Relative to the second quarter of 2022, the change reflects the benefit of our accounts receivable securitization transaction in 2022, and the timing of certain payments from Q1.
Also higher cash interest and capital spending impacted free cash flow.
Importantly, operating cash flow performance within Harsco, environmental and clean Earth was positive in.
Our consolidated free cash flow performance for the quarter was consistent with our expectations.
We expect our cash performance to improve for the balance of this year.
Lastly, due to strong operating performance, our net leverage decreased to four six times at quarter end and.
And we are confident that our leverage will decrease to near four times at year end before considering the benefit of asset sales.
Please turn to slide five in our environmental segment.
Segment revenues totaled $290 million up 6%, excluding the impact of foreign exchange translation adjusted.
Adjusted EBITDA reached $53 million for the quarter.
Relative to the prior year quarter Harsco, environmental benefited from higher eco products and services demand as well as higher pricing and cost improvement initiatives.
These positives were partially offset by lower commodity prices and foreign exchange, which negatively impacted results by approximately $5 million in the quarter.
Overall, we're pleased to see that <unk> performed well despite lower steel production at customer locations due largely to operational improvements other services performed and a favorable mix.
Of note steel output at our customer sites decreased approximately 6% year on year and was little changed sequentially.
Regarding our improvement initiatives Q2 results were supported by our cost reduction program, which is on pace to realize the anticipated benefits of $10 million annually.
And our focus on strengthening performance at a small number of sites is driving positive actions with benefits expected to increase as the year progresses.
Next please turn to slide six to discuss clean Earth.
For the quarter revenues totaled $231 million and adjusted EBITDA was $35 million.
Compared to the second quarter of 2022 revenues increased 13%, primarily as a result of price increases and the Stericycle settlement.
Volumes were only modestly higher as strength in retail healthcare and infrastructure was offset by softness in project timing and manufacturing and industrial.
Hazardous materials revenues reached $198 million up 15% year over year, while soil in dredge revenues totaled $33 million for the quarter.
Clean Earth, adjusted EBITDA increased $30 million year on year and cleaner, it's margin reached 15% in the quarter.
In addition to price and volumes the business is benefiting from internal initiatives and lower operating costs.
Positive impact from these internal initiatives is running roughly $3 million per quarter.
With much of the benefit attributable to logistics and labor savings.
Clean Earth is also seeing incremental benefits from lower container depreciation costs.
Now before turning to our outlook, let me comment briefly on the rail business as Nick mentioned, we recently renegotiated our equipment supply contract with network rail.
We have now extended and redefine the delivery schedule for the machines into 2025 and.
And therefore reduced our estimate of the liquid liquidated damages due under the contract.
And so the benefit of our customer we are also dedicated specific additional capacity to manufacture the equipment.
This amendment is a very important milestone for rail as it helps to reduce the financial risk associated to our long term contracts.
Now please turn to slide seven for our revised 2023 outlook.
And note that our detailed segment outlook can be found in the appendix slides.
And virus full year adjusted EBITDA is now expected to be within a range of $270 million to $285 million. This compares to the prior range of $260 million to $275 million with our new midpoint up 21% year on year.
This revised EBITDA guidance translates to an adjusted loss per share of between 9% and 25.
Okay.
Lastly, we now expect that our free cash flow will be between 30% and $50 million for the year.
So let me conclude on slide eight with our third quarter guidance.
Third quarter, adjusted EBITDA is expected to range from $67 million to $74 million.
At the midpoint Harsco environmental EBITDA is expected to increase compared to the prior year quarter due to higher contributions from eco products, new contract additions and internal improvements.
Clean Earth results are anticipated to be similar to the prior year as price higher volumes and operating improvements will be offset by labor and disposal cost inflation and higher incentive compensation.
Sequentially for cleaner if the adjusted earnings comparisons will be impacted by the Stericycle settlement in the just completed quarter.
And lastly, corporate costs are projected to be between $11 million and $12 million for the third quarter.
Thanks, and ill now hand, the call back to the operator for questions and answers.
Thank you we will now begin the question and answer session to 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 the keys.
To withdraw from the question queue. Please press Star then one.
At this time, we will pause momentarily to assemble our roster.
Okay.
Yeah.
Okay.
The first question comes from Larry Solow with CJS Securities.
Your line is open.
Great. Thanks, Good morning, guys.
Hey, Larry.
Hi, good morning.
Hi, just I guess.
Question, just a couple on the rail so I guess the agreement.
You've reached out with network rail.
A major sort of concept major obstacle in terms of contracts that.
Issue you had or are there still other that you kind of feel like you need to resolve.
Yes, it's a good question Larry.
Yes, there are a few others one in particular.
In Germany our.
That said, we are working to resolve kind of as we as we speak.
And in effect.
The waiver marketing the business is the kind of the core.
The business remains very strong good margins.
<unk> is increasing well above last year, a few of these longer term contracts as you know were affected by supply chain challenges that inflation about a year ago.
So we've been working hard both operationally and and.
In terms of our.
Agreements with our customers.
To kind of reduce the risk of the the range of outcomes from those contracts over time, and we've done a lot of that work most notably the network rail contract that Pete and I mentioned.
But there are others as well.
Okay, and I guess, the improved performance is that that's mostly domestic or or.
Other or other international contracts, I guess supplies and all of the supply chain side I imagine it is getting better for you guys. So.
Those contracts actually the work stopped until some of these things were settled in most of the no no no.
<unk>, Okay, yes, we're continuing to fulfill those contracts, but what stronger or is this the standard equipment. The aftermarket business. The contracted services the technology piece those core elements of the business are.
Are doing quite well versus plan and also versus versus last year.
Got it great and then on the <unk>.
Environmental piece just.
Obviously, you continue to perform well.
And a pretty difficult environment.
What lackluster.
Our production volumes.
Can you just speak to sort of some sort of growth opportunities as you look out.
Whether it would be.
New projects, new customers or potentially maybe more importantly, with less capex is expanding services listing customers I think that's sort of been.
Something you guys are sort of driving towards maybe update us on that.
Yeah, well first of all I'd say that.
Capacity utilization in steel mills.
Exempt the first half of 2020 is at its lowest level in about 10 years. So we think there's a good bit of.
A volume.
Uplift potential here in the next couple of years and given our cost structure.
And our operating efficiency.
That's gonna yields pretty.
Pretty high fall through to to EBITDA and cash flow.
Beyond that and we saw that the first half of the year, our non steel production service based services are doing quite well.
And offsetting and mitigating the impact of lower steel.
Production, so I would expect that to continue to ramp over time and of course, there's much less capital associated with with those services.
So that that will yield two will lead to better returns on capital and that is.
As we also noted there are a handful of very attractive growth opportunities that have good returns.
That youll see us executing over the next year or two so I think those.
Those three components are going to lead to a pretty healthy outlook for EBITDA and cash flow growth in <unk>.
Got it and if I could just sneak one more in just on the congrats on the on the settlement with sales cycles could they get that behind you.
Looks like it's.
Beneficial.
Was that the.
Feels like that's the kind of the driver for the beat in the quarter.
The rates for the year.
Yes. It certainly was a component of it I think we are at the midpoint of our range has increased.
By about twice what that settlement value was in the quarter.
Okay, we were.
We're kind of at or a little bit above the high end of our guidance.
On EBITDA, if you exclude the stericycle benefit in Q2, Brian but wouldn't some of that settlement ended carryforward and higher EBITDA going forward. That's why I was kind of adding that the settlement plus.
Next couple of quarters, and twenty-three right, which you'll be getting higher yeah. So part of the settlement was an incremental price increase.
This year and then next year as well so yeah, there's a little bit of a tailwind as well on top of the $6 million.
Amid a midyear price increase.
Got it fair enough. Thanks, Nick I appreciate the color. Thank you.
Our next question comes from Rob Brown with Lake Street Capital markets. Your line is open.
Good morning.
Hey.
Just wanted to follow up on the kind of the price realization comments that you talked about clean Earth, you said that there's a there's a pending price increase I guess have you where are you at in terms of getting your price increases there and how much is left to go could you clarify that thank you.
A question related to stericycle or more more broadly.
More broadly.
Yes.
Yes, so as you know we moved.
Quickly and I think aggressively this time last year.
Two to increase prices to offset the unprecedented inflation that we saw in the clean Earth business.
And then at the beginning of this year.
<unk> instituted are more standard annual price increases across the book.
And selectively.
Throughout this year as as certain inflation components move.
Move ahead of expectations.
We are raising price as well, but for the most part the the benefits that you're seeing.
And price in Q2 were a result of the midyear price increase last year and the price increase again early this year.
But I would anticipate going forward.
Price increases will more likely be an annual event.
Okay. Good. Thank you and then I think you mentioned some kind of mixed kind of end market demand environment, but how is the demand environment looking for clean Earth over the next sort of 12 months and and what markets are you seeing some.
It's a little bit of weakness in.
And housing, but where are you seeing sort of the strength and weakness in clean Earth.
Yeah, so kind of in order of our performance healthcare.
It is probably the best performing segment of our end market.
Solid by retail.
And then.
Industrial no industrial was a little weaker in the quarter, but that was driven by the so called project work.
Of a hand sanitizer project.
The underlying demand in industrial is still healthy.
When you when you strip out the impact of <unk>.
It is somewhat lumpy project work on a quarter to quarter basis.
And the soils business.
The the bookings in that business.
This year are the highest level we've seen since we made the acquisition a few years ago most of that is yet to.
Flow through to to revenue because the projects have yet to begin that the outlook for for soil and dredge is quite good not only in terms of volume.
But the mix in the soils business is.
Is improving.
Yeah.
Okay. Thank you I'll turn it over.
Again, if you have a question. Please press Star then one.
Our next question comes from.
Our next question comes from David Bank.
Kim with BMO capital markets. Your line is open.
Hi, Thanks. This is davis on for Devin Dodge.
You've made a lot of progress on restoring the profitability of clean Earth and I know you've touched on this a bit but I'm. Just wondering if you could expand a little bit on what the drivers are that can push that the underlying EBITDA margin to that 15% goal and then maybe what's a reasonable timeframe for that.
Yeah.
Yes, so first of all I'd say, just the operating leverage that will.
Applied to to volume growth in the business.
Which we expect to be kind of low to mid single digits. So that that would be a component of it.
Secondly, the overhead in the business.
And in my view was still elevated.
Based on.
A series of processes and systems that are just highly inefficient and very labor intensive.
So we would anticipate over the next two years.
Another significant reduction in the overhead structure we've.
We've reduced the overhead a few times since we acquired it.
But there is a.
Other significant.
Reduction that we believe will execute in the next say 18 to 24 months.
Third I would say that.
As we've seen over the past.
Year.
Our ability to.
Improved margin through price and mix.
It is encouraging.
You know at this point.
We have.
<unk> gone beyond to recovering cost inflation with price and margins are now higher.
Because of that on a net basis.
A third.
The from a mix standpoint, or forests, I should say areas.
The the mix.
The margin on the soils business is higher.
And then that on the hazardous waste business at least at this point.
And I think the volume growth potential and soil.
Because of the PFS volume I think is fairly significant so that should lead to higher margins as well so.
And there are of course, a few other items, but I would say that.
To get to 15%.
In the next 18 to 24 months would certainly be.
Our target and I think quite realistic.
Okay, great. Thank you I'll turn it over.
This concludes our question and answer session I would like to turn the conference back to David Michael.
Any closing remarks.
Thank you Deseret and thank you for everyone joining us feel free to call me with any follow up questions and again as always we appreciate your interest in diary and we'll speak to you soon thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
And we are.
Yeah.
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Okay.
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