Q3 2023 Enviri Corp Earnings Call
Good morning, and welcome to the environmental operation.
Third quarter 2023 earnings conference call.
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I would now like to turn the conference over to Dave Martin.
For the rest of the conference. Please go ahead.
Thank you Debbie and welcome to everyone joining us I'm, Dave Martin of in Bahrain are with me today is Nick Grasberg are our chairman and Chief Executive Officer, and Tom <unk>, Our senior Vice President and Chief Financial Officer.
This morning, we will discuss our results for the third quarter of 'twenty twenty-three interrupt dated outlook.
Before I presentation. However, let me mention a few things.
First our 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.
See the risk factors section in our most recent 10-K the company undertakes no obligation to revise or update any forward looking statement.
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 our earnings release 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.
I want to welcome Tom to invite retirement is a seasoned executive who has worked in both public and private companies in.
That has had considerable success now he fits very well into our culture and I look forward to working with him as we continue our transformation so Tom welcome.
Once again I would like to thank Pete mining for his dedication to our company and to its shareholders.
Peach contributions across the company over the past nine years are countless.
And we wish him well in his retirement.
This past quarter was our fifth consecutive quarter of double digit EBITDA growth against the prior year quarter.
And once again, we exceeded expectations.
As a result, we are also raising our outlook for the full year and our focus remains squarely on boosting cash flow rich.
Reducing our leverage and completing the next step in our transformation.
Cash flow from our two continuing segments harsco, environmental and clean Earth will improve by over $100 million this year.
And we expect further growth over the next few years.
Our challenge has been the cash flow in our rail segment and much higher interest expense due primarily to higher short term rates.
Nonetheless, our leverage will decline by about one turn this year and we expect leverage to decline by at least another half turn next year.
Before accounting for the impact of the rail divestiture.
The largest contributor toward deleveraging has been the margin expansion and cash flow generation at clean Earth.
Clean Earth's EBITA margin improved to 14% this past quarter.
I'm wondering 150 basis points from a strong third quarter last year.
Driven by pricing gains volume growth favorable mix and numerous projects aimed at improving operational effectiveness.
Cash flow will approximate $100 million in clean Earth. This year.
Or 11% of revenue and over 80% of EBITDA.
These metrics reflect the fact that our assets require relatively modest maintenance capital and we've been able to pass on the inflation, we have incurred in disposal and other costs.
We are soon to complete our third full year of the clean Earth segment that was created by the acquisitions in combination of two businesses.
EBITDA has grown from about $80 million at the time of acquisition to over 120 million this year.
This growth in our financial focus have driven clean Earth's strong free cash flow, which is earning us a respectable return on our investment.
Yeah.
When considering the recent multiples paid for acquisitions in our industry and the outlook for our business. We are confident that this segment has created and will continue to create tremendous shareholder value.
Our efforts to build a much better business from unique set of assets include installing a new leadership team improved pricing discipline optimizing logistics, reducing SG&A.
And several other operational improvement programs.
The implementation of a common operating platform next year will be another critical milestone to unlocking the value in the business.
First go environmental continues to perform well despite weaker than expected steel production by our customers.
Similar to clean Earth cash flow will be considerably higher in a tree this year due to higher cash earnings and much improved working capital performance.
The business has been successful in expanding the scope of current contracts with less capital intensive services and the echo products business is outperforming expectations.
The operating leverage in AG is quite high and we look forward to the impact of steel production volumes returning to normalized levels over the next few years.
Turning to our rail segment, we expect to announce the sale transaction late this year or early next year as due diligence is completed.
Strong anticipated financial performance by rail in the fourth quarter will support the process.
And we continue to work to Derisk specific long term contracts with European customers.
Next we released our annual ESG report a few weeks ago. The report is critical to environment, because our mission is to create and deliver environmental solutions.
And the report highlights how we measure ourselves and our progress against those metrics.
2022 we saw a record level of safety performance from Harsco, environmental and for the company, a 20% improvement in safety compared to the prior year.
In total we recycled we're able to repurpose 35 billion pounds of waste last year clean Earth recycled 90% of the waste taken in and harsco, environmental recycled or reused 80%, 87% of the slag it processed.
I encourage you to review our report at and virus Dot Com.
Looking ahead to 2024, we are optimistic as.
As noted we expect to complete the sale of rail in the coming months.
And while we won't provide formal 2024 financial guidance until February.
Safe to say that we are targeting continued margin and profit growth in each of our businesses next year.
Yeah.
I'll now turn the call over to Tom.
Thanks, Nick and good morning, everyone.
Let me start by saying I'm thrilled to be part of then Byron team.
I'm excited by the company's mission and purpose and I'm looking forward to helping in Bari complete its transformation into a pure play environmental solutions company.
I've enjoyed getting to know and working with the team over the past few weeks I have a lot to learn about the business and I'm looking forward to getting up to speed.
And virus strategy is well defined and its value creation opportunities are unchanged, reducing leverage and strengthening free cash flow generation remains Paramount and our key priorities for me as CFO.
I loved the operational side too and look forward to working with our businesses to boost margins and drive growth.
Now, let me turn to our results for the quarter and our outlook for Q4. Please.
Please turn to slide four.
And virus third quarter revenues from continuing operations increased to $525 million up 8% compared with the prior year quarter.
The increase was driven by both pricing and volume growth in clean Earth and harsco environmental.
Adjusted EBITDA totaled $79 million. This result represents a 12% improvement from the prior year and is above our prior guidance range.
The stronger than anticipated results were driven mostly by volumes and business mix as well as strong operating cost performance and cleanup.
Lower corporate spending also helped.
Relative to the prior year quarter each of our operating segments contributed to the growth, which I'll discuss in the next couple of slides.
Adjusted earnings per share was five cents for the quarter.
Special items in the quarter totaled eight cents and largely consisted of a receivables provision for an AG contract in Oman, where our customer halted production and the mill is reportedly post sale.
Free cash flow for the quarter was $10 million.
Excluding the E R securitization benefit in the prior year quarter, the increase in free cash flow year on year was $66 million.
This improvement was driven by working capital as well as lower capital spending and higher cash earnings.
As Nick alluded to year to date, our continuing businesses a G and peanuts have together generated free cash flow of $125 million a significant improvement from the $16 million generated over the same period last year, driven by earnings growth and cash from working capital.
<unk>.
This improvement in the business was partially offset by an increase in interest payments of nearly $25 million and other smaller items, resulting in underlying free cash flow improving by over $70 million for the total company during the same period last year.
Lastly, our net leverage decreased to four five times at quarter end and should continue to trend towards four times at year end.
Please turn to slide five and environmental segments.
Segment revenues totaled $286 million up 8% compared with the prior year quarter.
Adjusted EBITDA reached $54 million for the quarter.
Relative to the prior year quarter H E benefited from higher Echo products and service volumes, including from new sites as well as higher pricing and cost improvement initiatives.
These positives were partially offset by higher SG&A due mainly to increased incentive compensation.
<unk> EBITDA margin approached 19% in the quarter.
Overall AG results are quite positive in our view, particularly given that steel production at our customer locations will modestly lower against the prior year quarter and mill utilization rates remain low.
In total other services performed operational improvements and price are offsetting these headwinds.
Next please turn to slide six to discuss cleanup.
While the quarter's revenues totaled $239 million and adjusted EBITDA was $34 million.
Compared to the second quarter of 2022 revenues increased 7%.
Price contributed just over one half of this change with underlying volume growth led by industrial and health care markets.
As it is materials revenues reached $195 million wild soil dredged revenues totaled $44 million for the quarter. These.
These figures represent increases of 7% and 10% respectively.
Yeah.
Our quarterly revenues and soil dredged were the highest since the first quarter of 2020, reflecting the benefits of infrastructure spending major construction projects in our relevant markets and our strong market position. We continue to see strong growth in soil dredged related bookings, which have now increased more than 80.
60% year to date.
Clean nodes adjusted EBITDA increased 20% year on year and cleanup margin reached 14% in the quarter.
In addition to price and volumes the business benefited from favorable mix and internal cost efficiency initiatives compared with the comparable 2022 quarter.
Now please turn to slide seven for our revised 2023 outlook and let me just highlight two points on this slide.
First and virus full year adjusted EBITDA is now expected to be within a range of $282 million to $289 million.
New midpoint is up 24% year on year.
Second we now expect that our free cash flow will be between 25 and $35 million for the year.
The change in our free cash flow midpoint is attributable to higher interest and our updated view on working capital performance in H E.
As we've discussed in the past H E customers in China have been slow to pay we made good progress with certain China customers in the third quarter, but there is still more work to do here.
As a result, some anticipated receipts have been pushed into next year.
Let me conclude on slide eight with our fourth quarter guidance Q4, adjusted EBITDA is expected to range from $62 million to $69 million.
Harsco environmental EBITDA is expected to increase significantly boosted Q4, 2022 high volumes price and cost improvements will contribute to the growth.
Clean Earth EBITDA is expected to be comparable to the prior year quarter.
Here higher price and improvements are expected to be offset by higher incentive compensation and operating expenses as well as professional fees sequentially.
Sequentially results for both segments anticipated to be lower due to seasonality and less favorable business mix.
And lastly, corporate costs are projected to be approximately $10 million in Q4, with an increase versus the prior year driven by incentive compensation higher professional fees and.
And other various items thanks.
Thanks, and I will now hand, the call back to the operator for Q&A.
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.
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Okay.
Our first question comes from Rob Brown with Lake Street Capital markets. Please go ahead.
Hi, good morning.
Good morning, Rob.
Clean Earth had very good margin improvement.
<unk> made good progress just wanted to get an update on your thinking on how much further you can take that and and what is sort of the pieces next year that you could do to get more margin improvement.
Mhm.
Well as we've highlighted for a few years now the the the target EBITDA margin within clean Earth. Since the time of this acquisition really has been 15% and as we've noted margins were 14% here.
In the third quarter and we.
We have some favorable mix driving that the the soils business let's.
Let's say I agree.
Grew a bit.
Higher than the the hazardous waste business in.
The margin differential there is four or five points. So that's certainly helping and the backlog is quite strong. So we would anticipate.
That that benefit continuing into enter into next year.
And many of these opt.
Operational efficiency oriented projects will continue into next year as well in <unk>.
We've learned that or our pricing discipline and opportunity in this business is somewhat.
Better than it has been in the previous few years so.
I think it will clearly provide a bit.
More guidance on what the expected EBITDA margin is for clean Earth next year in February, but we're very pleased with the with the trends in this this 14% is.
The new high watermark and are consistent with our plan from the beginning.
Okay, Great and then switching to the environmental business, you talked a little bit of our eco product growth could you elaborate on how that's.
Kind of going in and what what is that in terms of percent of mix and what do you see that yeah that can do in terms of there are several components to that we have a few businesses within.
AG that are somewhat unrelated to mill services.
All Tech acquisition that we made a few years ago and.
The Reed minerals business.
Also part of part.
Part of AG, those two businesses, which are part of our eco products portfolio in particular are doing well.
Year over year.
The echo products business, that's let's say contained within the.
The steel mill service business is flat to slightly up year over year.
Really adversely affected by lower nickel prices and.
And volume of of onwards sales of nickel nickel scrap.
But overall our co products is having a a very good year.
And it's it's 15% to 20% of our business.
Okay. Thank you I'll turn it over.
The next question is from Larry Solow with CGS Securities.
Please go ahead.
Great. Thanks, good morning.
Welcome Tom.
First question just on environmental I guess, Nick you mentioned steel.
Steel production has been.
Weak this year.
Taken your production over the last few years has actually been at or below sort of your customer productions in below sort of industry averages but.
You still managed to grow revenue, 9% this quarter.
Could you speak to sort of.
Some of the sources of revenue growth and a part of it at some quite catch up.
Help us kind of parse out the differences there.
Yeah. So as we as we do every year, we have some new contracts new sites that are coming online.
In the second half of the year and that certainly boosting revenue in Q4.
Price as well continues to be.
A benefit for us year over year as we have.
Have compensated for inflation with price increases throughout throughout this year.
And then the just picking up on the Echo products theme again, a few of those businesses in Q4 are growing so so even though.
Steel production is down on a.
Continuing site basis.
I guess the other factor that in.
As I mentioned earlier was that.
We've also been successful on existing sites.
Adding new services to the to the scope of the contracts and those.
Those services are clearly leverage the infrastructure that we have on the sides. They tend to be less capital intensive and so very accretive to our returns on capital on these sites.
And so that's helping as well.
Alright, okay great.
Great and then switching gears just to clean Earth, which obviously has been a.
On a wonderful turnaround the last several quarters.
Well.
You know a lot of downward not.
Not so much improvement on our soil side I know, that's a smaller part of the business, but obviously.
You mentioned at least until the drug doing I guess, the Wetzel was up bookings were up 80% can you can you help us.
Without breaking it out specifically.
Percent rosin bookings.
Eventually goes to sales.
What that means relative to the profile of the clean Earth and how much that can move the needle from a high level.
Give me specifics, but yeah yeah.
So so the soils dredge business is 15 or so percent of.
Clean Earth revenues.
You may recall from previous discussions that we've been waiting for some time for some of these infrastructure projects to begin.
And for that volume to flow into our facilities and over the past few quarters. It has.
We've seen.
Record levels of of of increase in backlog that will extend of course into into 2024 as well.
So it's not one or two projects that are really driving this it's a pretty broad based.
The improvement in and projects starting.
And as I noted the.
The mix is favorable because the margins on this business tend.
<unk> tend to be four or five points higher than that in the hazardous waste segment of clean Earth.
And even within the soils business, there's a mix component.
That is running favorable now.
So Larry this is Dave just to clarify one point you mentioned, 60% growth in bookings that is mostly tied to.
Dry soil as you you labeled them as opposed to.
What I mean.
There'll be more okay, not the dredging side, okay just to clarify.
Yeah, Okay, no I appreciate that and just on the on the hazardous side on the collection side I know you guys. There was some bottlenecks.
In terms of getting some of the stuff through it to the incinerators or are they.
I think some of that goes to cement kilns, well not mistaken what kind of is that bottleneck and.
Moving forward or I know, that's actually hurting you guys a little bit clear right. So yeah. It's a good question Larry because certainly it has been a challenge for us but that.
Recently is a much less of a challenge so I would say we're really not.
Forgoing any revenue because of lack of disposal capacity.
Okay, and then lastly on the rail business.
It sounds like things are outside of the higher interest rates, which are the.
On a macro issue obviously.
It feels like things are progressing and it sounded like comfort you'll have a sale within the next one to two quarters.
In terms of the Derisking of the long term contracts I know you updated us last quarter I think there were two kind of outstanding kind of issues or two separate customers.
Felt like one was moving forward any update there.
Just in general.
Yeah. So we are you may recall I think we noted in the second quarter, we had successfully renegotiated amended.
The contract with one large European customer.
And we're in the process of doing the same with a another.
And.
But we do have a number of these long term contracts that the there are complex the supply chains are complex the diligence on those contracts takes time.
But yes, the process is certainly moving forward.
Okay, great. Thanks, I appreciate it.
The next question is from odd each restaurant with Stifel. Please go ahead.
Hi, Good morning, Thank you for taking my questions.
Good morning, just following up on the rail.
Is that the run rate EBITDA back to pre Covid levels now or are we looking at that getting back there for Q 'twenty three because you I think you mentioned you do expect a great performance from real.
And then also just.
Maybe could you talk about what is holding up the final agreement at this point you know.
Potential buyers that are in place.
It was more about.
But that would be great. Thanks.
Sure Yeah, So I would say that the that the core business outside of the long term contracts is approaching.
Where it was pre COVID-19, but it's not quite there if you look at the fourth quarter.
This will be the strongest fourth quarter, we've had in our rail business in the core business in some time and clearly back to pre COVID-19 levels and the view for next year is.
Is is quite.
A healthy and we see a lot of that in backlog today. It's.
So we feel quite good about about the core.
I noted.
Just a minute ago these long term contracts.
In Europe.
Our large they're complex the supply chains are very complex.
You can imagine during COVID-19 the disruptions to that supply chain you can also imagine the impact of inflation.
On those contracts over the past couple of years so.
The process of.
Renegotiating.
On our side and on the buyer side conducting diligence and understanding the risks on these contracts.
Takes time.
Longer than we'd like but it is what it is and so.
Don't think there's a question of.
Or if.
We will get to a deal.
Late this year early next year, but it's simply a matter of when.
Okay.
And again as I mentioned I think be the fourth quarter.
Which we expect to be strong.
We'll help the process.
Alright, thank you.
Just switching gear.
It's sort of still related to real but I think you talked about leverage you expect it to come down a further half a turn.
In FY.
For 24, so potentially exits FY 'twenty four it four times for real tail.
Are you, assuming any sort of pay down of debt and that and how much further can leverage come down after the sale.
That have more churn so.
Exiting FY 'twenty 435 times leverage.
Yeah, I think certainly excluding the impact of the rail divestiture, we should be well below four times by the end of by the end of next year.
And we do expect the rail.
Transaction to be Delevering.
De levering event.
So I won't give a specific number now will have much better view in February when we have our next call, but that one half turn plus of incremental deleveraging next year.
Plus the impact of the Delevering impact of rail divestiture.
We will certainly put us well below four times.
Great and just last one for me.
So you didn't raise the EBITDA guide for $10 million.
Thank you.
Or I'm, sorry, free cash flow was lower by $10 million, but then you raised the EBITDA by 8 million. So, let's see what accounts for that sort of a lower free cash flow in a race for an EBITDA, yes, it's really it's really a function of receivables in China. We came into this year with I'll call. It a 50 million.
Dollar.
Challenge.
We're kind of $35 million.
Through that and we have 15, that's being pushed into Q1.
And so again this is not a situation where there's a.
A question of whether it's collectible it just.
A matter of win and there are a few.
Contract.
Contractual matters that need to be resolved.
And they will.
And I.
I see there's 15 million or so that we had assumed that we would collect in the fourth quarter will be a we will see that in Q1.
Thanks, a lot.
Okay.
Again, if you have a question. Please press Star then one.
The next question comes from Davis, Bainton with BMO capital markets. Please go ahead.
Hi, Good morning. This is David on for Devin Dodge It yes.
Yes, good morning.
So in the previous issue you'd mentioned some loss revenues from a lack of staffing and clean Earth, but this seems to have improved tight in 2023, Oh, our labor conditions, continuing to accelerate there and maybe what's your current outlook and the clean Earth labor conditions.
Yes, I think youre, referring as many other companies did to the the shortage there other acute shortage of truck drivers.
That we had in clean Earth last year.
That was one of many challenges, we had coupled with inflation and logistics costs and diesel prices and so forth, but yes that was a challenge for us last year.
I won't say that we're fully staffed to the level that we'd we'd like with respect to drivers, but we are in a much much.
Better position than we were in.
In previous quarters, So I really don't believe that we're losing much in terms of revenue or profit.
Based on the labor situation.
Okay. Thank you and then just switching over to Harsco environmental.
So you had you've already talked a bit about the weaker than expected steel production by customers in that segment.
But maybe could you. Please just expand a bit about what your steel mill customers are saying in terms of near term production levels and how much visibility do you happen to that business.
Yeah, well first of all let me just comment on the on the mix within within H E Certs.
Certainly some geographies are growing quite nicely, India. We were the only mill service provider in India, India, and India is growing quite quite well, we've seen reasonable growth in China. This year, we've seen good growth in Turkey.
It's really the Americas and in Western Europe that have kind of held us back Fortunately are the margin differential is.
It is is weighted to the higher margins are weighted towards the developing markets that are doing relatively better than Europe, Europe and the U S.
In terms of visibility.
We of course follow.
Many different forecast for steel production, we listen to our customers as well.
We thought coming into the second half of the year.
We this year, we would see a bit of an uptick and it just hasn't happened.
And so we thought we'd be plus 1% 2%.
In the second half of this year versus second half of 2022 and in fact, its been down with it.
Most forecasts that we see in most of our customers as we discuss 2024 do you expect.
Volume growth.
If you look at steel mill capacity utilization at least at the mills that we support.
If you take out the first half of 2020 'twenty.
It's kind of at a 10 year low.
And so we certainly expect that to improve our customers do economists do.
And so we do anticipate growth in 2024.
Okay. Thank you I'll turn it over.
This concludes our question and answer session.
I would now like to turn the conference back over to Dave Martin for any closing remarks.
Thank you Debbie and thank you too.
Everyone that joined this call. Please feel free to contact me with any follow up questions and as always we appreciate your interest in Bahrain and look forward to speaking with you soon thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.