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spk01: Good morning. My name is Valerie, and I will be your conference facilitator. At this time, I would like to welcome everyone to the HOSCO Corporation fourth quarter release conference call. All lines have been placed on mute to avoid any background noise. After the speaker's remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star and the number one on your telephone keypad. If you would like to withdraw your question, please press the pound key. Also, this telephone conference presentation and accompanying webcast made on behalf of Harsco Corporation are subject to copyright by Harsco Corporation and all rights are reserved. No recordings or redistributions of this telephone conference by any other party are permitted without the express written consent of Harsco Corporation. Your participation indicates your agreement. I would now like to introduce Dave Martin of Harsco Corporation. Mr. Martin, please begin your call.
spk03: Thank you, Valerie, and welcome to everyone joining us this morning. I'm Dave Martin, VP of Investor Relations for Harsco. With me today is Nick Rasberger, our Chairman and Chief Executive Officer in Enshumanaga, Harsco's Senior Vice President and CFO. This morning, we will discuss our results for the fourth quarter of 2021 and our outlook for 2022. Before our presentation, however, let me mention a few items. First, the quarterly earnings release as well as the slide presentation for this call are available on our website. Second, we will make statements today that are considered forward-looking. These statements are based on our current knowledge and expectations and are subject to certain risks and uncertainties that may cause actual results to differ from those forward-looking statements. For a discussion of such risks and uncertainties, see the risk factors section in our most recent 10-K and 10-Q. The company undertakes no obligation to revise or update any forward-looking statement. Lastly on this call, we may refer to adjusted financial results that are considered non-GAAP. A reconciliation to GAAP results is included in our earnings release as well as the slide presentation. With that said, I'll turn the call to Nick.
spk05: Good morning, everyone. Thanks for joining us, especially in light of the events unfolding in Ukraine and the impact on the financial markets. I would like to begin by expressing my appreciation to our employees for their remarkable efforts and contributions during 2021. Our team overcame the personal and professional challenges of the pandemic, including illness, remote work, staffing shortages, and changing health and safety protocols. Our leadership team takes great pride in the values and the culture of our company, perhaps never more so than over the past year. Our 2021 financial results reflect those efforts. Harsco's continuing operations, that is our environmental and clean earth segments plus corporate, produced 20% growth in both revenue and adjusted EBITDA, and adjusted EPS increased by two and a half times. Demand in most of our environmental businesses improved following the COVID impact in 2020, although the effects of inflation, supply chain bottlenecks, and labor shortages dampened our results to some degree, particularly in the second half of the year. Our rail business, which is now reported as discontinued operations, faced continuing demand weakness for its maintenance of way products and services, which impacted its financial results. Inflation and supply chain constraints also had an adverse effect on our rail business, especially on our long-term contracts with major European rail customers. However, we believe many of the challenges faced in 2021 in rail were timing related, while the underlying business remains fundamentally strong. As evidence, we are now seeing clear signs of strengthening demand in our core North American market, proven in part by the passage of the infrastructure bill. I'm sure we'll provide more detail on the results for the quarter and the year, so let me shift to a discussion about our strategic outlook for 2022. As many of you may recall, a few years ago, we declared our ambition to become a single thesis environmental solutions company, a company with improved growth prospects, a better cash flow profile, and one providing services and products that meet an acute societal need. In this context, our top strategic objective this year is to divest our rail business, thereby taking another significant step in achieving our ambition along with yielding a healthier balance sheet. Our remaining two platforms, Harsco Environmental and Clean Earth, are each market leaders with compelling economic and environmental value propositions and meaningful growth prospects. Throughout the cycle, Each segment should generate cash flow in excess of 10% of revenue after funding capital needs related to maintenance or contract renewals. As previously stated, Harsco Rail is not aligned with our long-term strategy to focus on and drive growth in businesses that provide environmental solutions to a broad mix of end markets. However, rail is a unique business with a global reach and significant growth opportunities. I noted earlier the market dynamics in the rail business have started to improve, and as a result, we expect 2022 EBITDA and cash flow to reach more normalized levels based on the recovering demand and a cost reduction program executed last quarter. In line with the plan we laid out on our last earnings call, we are on track to launch a formal sale process in the coming weeks, and we expect a very competitive process. Our 2022 outlook for continuing operations reflects ongoing growth in both revenue and EBITDA and a significant increase in cash flow, particularly in Harsco Environmental. In terms of revenue, demand drivers will remain strong and will be somewhat mitigated by the effects of a stronger U.S. dollar and the exits from a few major contracts. Pricing gains are expected to offset inflationary pressures. Earnings and margin growth will be robust and clean earth as we realize the full year effects of integration benefits and higher prices in addition to strong underlying demand. Earnings growth will be more muted and harshly environmental owing to currency, commodity prices, and tax benefits received last year. Free cash flow will increase by about 50 million, due primarily to lower capital spending and working capital in Harsco Environmental, and higher cash earnings in both segments. Our guidance also assumes the impacts of a tight labor market and supply chain disruptions will persist through the first half of the year. Before I turn the call over to Anshuman, I'd like to spend a minute on our environmental, social, and governance initiatives. We continue to make significant progress on our ESG journey and on integrating ESG into our strategic planning processes at Harsco. You can see some of our ESG highlights from 2021 on slide four. Clean Earth and Harsco Environmental improved their safety records in 2021, helping us achieve our company-wide goal of a total recordable incident rate below one. Our business brought a record number of new environmental solutions to market, in fact, 30 percent more than in 2020. We also successfully implemented the first year of our new annual incentive plan modifier that links executive pay to a number of strategic objectives and ESG targets. We continue to see positive responses from our investors and ESG ratings groups. including most recently a 20 percent improvement in our ESG rating from Sustainalytics. So, in summary, we delivered a solid year. We're making meaningful progress on the execution of our strategic roadmap, and our outlook for this year provides us with confidence in our ability to drive shareholder value creation. I'll now turn the call over to Anshuman.
spk02: Anshuman Anshuman Thanks, Nick, and good morning, everyone. Please turn to slide five. Our score Q4 revenue from continuing operations increased 7% compared with the prior year quarter to 462 million and adjusted EBITDA totaled 58 million. This adjusted EBITDA is consistent with our Q4 guidance. Relative to our expectations, results were impacted by business mix and FX movements in environmental. Clean Earth was impacted by continuing labor challenges particularly for drivers or technicians, and inflation. We offset these items with lower spending, including at corporate. Compared with the prior year quarter, our adjusted results were similar. Improved results at Clean Earth and lower corporate spending were offset by the change in environmental EBITDA as expected. Arsco's adjusted earnings per share from continuing operations for the fourth quarter was 22 cents. This figure compares favorably to adjusted EPS of $0.09 in the prior year quarter, as well as the guidance we provided at the beginning of the quarter. Our tax rate in Q4 benefited from an adjustment to our deferred tax valuation allowance in Brazil. Lastly, our free cash flow for the quarter was a deficit of $8 million, which was modestly below our guidance. Our cash flow variance is mainly attributable to Clean Earth, where an Oracle implementation in the fourth quarter weighed on its cash performance. Please turn to slide six for our environmental segment. Segment revenues totaled $268 million, and adjusted EBITDA was $49 million. Revenues increased 9 percent on higher volumes and commodity prices. Meanwhile, adjusted EBITDA decreased by $3 million year on year. This change reflects a less favorable mix of services and higher operating costs, including within ecoproducts, as well as site exits and negative FX translation impacts. Next, please turn to slide seven to discuss our Clean Earth segment. For the quarter, revenues totaled 194 million and adjusted EBITDA was 16 million. Compared to the fourth quarter of 2020, revenues increased 5% with soil dredge services as well as industrial and health care customers within hazardous materials contributing to the growth. Both volume and some price contributed to the higher revenues with our soil dredge volumes reaching the highest level since the beginning of the pandemic. Meanwhile, Segment EBITDA increased to just over 16 million in Q4 of this year. The increase relative to the fourth quarter of 2020 reflects the positive revenue trends offset partially by inflation and a less favorable business mix. Now please turn to slide eight. For the full year, revenues from continuing operations increased to 1.8 billion and adjusted EBITDA increased to 252 million. Our EBITDA margins were stable during the year at just under 14%. While there were a number of moving pieces for Harsco during the year, the overall results for continuing operations were consistent with our guidance provided at the beginning of 2021. Strong execution as well as cost management offset the impacts of inflation and supply chain pressures during the year. Meanwhile, free cash flow without rail was essentially zero, during the year, with the change versus 2020 attributable to the 30-plus million increase in capital spending in 2021. Much of this capex was deferred from 2020. Before I turn to the outlook, let me comment on a few items, including leverage, pension, and rail. First, on pension, our funded status for year-end improved by 140 million from year-end 2020 to our underfunded position of 93 million. Secondly, we ended the year with net leverage of 4.6 times and net debt of $1.3 billion. As you are aware, reducing our debt is a key financial priority, and we plan to use our 2022 cash flow and the proceeds from selling rail to lower leverage. And thirdly, on slide 9, rail, as you are aware, is now reported under discontinued operations and we are optimistic on our ability to complete a transaction this year. During the fourth quarter, we recorded two special items in rail, which totaled 36 million. The first item was approximately 2 million for a cost-out program that will deliver 8 million of annualized savings. The second was a $33 million charge for estimated future costs to complete fixed-price contracts with three European customers. These contract adjustments relate primarily to inflation and supply chain challenges that have materially increased the anticipated costs and delayed our progress on these projects. We are required to record these losses upfront. Rails adjusted EBITDA in 2021 totaled approximately 21 million, and we expect its performance to improve meaningfully in 2022. Our current expectation is that rail EBITDA will be much closer to its normalized EBITDA of approximately 40 million. Now let's turn to our 2022 outlook, starting with slide 10. Here you'll find our segment guidance. Both segments are expected to realize growth in adjusted earnings in 2022 after seeing strong growth in 2021. For Hasco Environmental, revenues are expected to grow at a low single-digit rate. The FX headwind is roughly 200 basis points using year-end 2021 rates. EBITDA margins for Environmental are expected to be similar to 2021 levels. The business drivers for HE in the year will be higher customer output and related service volumes and increased eco-product volumes partially offset by FX and exits. For clean earth, revenues are anticipated to grow low to mid-single digits, with most of this growth from hazardous materials line of business. Also, we expect CE EBITDA margins to increase approximately 100 to 200 basis points. Beyond higher revenues, EBITDA drivers for clean earth include the impact of price increases to offset inflation and a cost-out program with the goal of lowering SG&A. Lastly, corporate costs are expected to be between $40 and $42 million versus corporate costs of $34 million in 2021. The change in corporate costs can be attributed to compensation, including incentive compensation, as well as IT spending, insurance, travel, and other smaller items. Turning to slide 11, which is our consolidated 2022 outlook. Our adjusted EBITDA is expected to increase to within a range of 255 to 275 million. This EBITDA guidance translates to adjusted earnings per share of 50 cents to 66 cents. This EPS range contemplates net interest expense of 61 to 63 million and an assumed effective tax rate of 37 to 38% versus the 24% rate in 2021 when we benefited from the Brazil tax allowance adjustment. Lastly, we are targeting free cash flow of 30 to 50 million, excluding rail. This forecast anticipates net capital spending will be within a range of 125 to 130 million, which is lower than a net capex of 141 million in 2021. Improving our free cash flow is a critical priority for HOSCO, along with lowering our leverage. The increase in cash flow for 2022 is a step in the right direction, and we are targeting better performance in the coming years. Let me conclude on slide 12 with our first quarter guidance. Q1 adjusted EBITDA is expected to range from $47 million to $52 million. Environmental adjusted earnings are expected to be lower due to exits, business mix, and FX impacts. And I would remind you that our Q1 2021 results benefited from a Brazil sales and use tax credit of 2 million, which will not be repeated in 2022. Clean Earth adjusted EBITDA is anticipated to decline modestly on lower volumes from retail and industrial markets due to driver shortages as well as less favorable soil-dredge mix. In addition, corporate costs should be modestly above the comparable figure in Q1 2021. Thanks, and I will now hand the call back to the operator for Q&A.
spk01: Thank you, sir. At this time, as a reminder, please press star 1 on your telephone keypad for questions at this time. To withdraw your question, please press the pound key. And the first question will come from the line of Michael Hoffman of Seafolk.
spk08: Good morning on Sherman, Nick and Dave. Thank you for taking the call and questions. So Nick, I got to ask the strategic question cause might as well get it off the table early. Um, with us ecology potentially being traded away. Um, what, why does the market, should the market not look at that as a missed opportunity for Harsco?
spk05: Well, uh, The focus strategically for Clean Earth is going to be much more on repurposing and recycling waste than on putting it in the ground, to be frank. And more than anything, U.S. Ecology is a hazardous landfill business. And that does not interest us strategically. So I think it's really that simple. As we look at... acquisition opportunities going forward, we think the landscape is quite full of those opportunities for us, more in line with our strategic ambition for Clean Earth. So we don't at all view it as a missed opportunity. It was not a fit for us.
spk08: Okay, fair enough. I think we just need to get that off the table. And then... I'm a street analyst. There's several of us on this phone call. We clearly didn't model 22 right. So what didn't we get right, given where your guidance is? What are we missing so we do this better? Because you don't need the headline that says you're missing guidance. Are you missing consensus? Yeah.
spk05: Well, I think I'll start with Harsco and environmental. And I do want to acknowledge that If you look at the cash flow performance of HE and the EBITDA minus capex margins, which I would argue are the largest drivers of value in that business, those are all trending quite well, higher than the EBITDA increase year over year. So as we think about value creation drivers in HE from a financial standpoint, we think much more about cash flow and EBITDA minus capex margins. And so we're quite pleased with the three to four point increase that we expect year over year in 2022 versus 2021. In terms of revenue and EBITDA, there are a number of factors that are holding the growth back. One is currency, and unfortunately we're seeing today an even stronger dollar in reaction to the invasion of Ukraine. We'll see where that settles out. But, of course, that is adverse to our business from a translation perspective. Secondly, with the very high energy prices in Europe right now, in some geographies three and four times what they had been, Some of our customers are cutting back on production. And of course, we're leveraged to volume. And so as they cut back production, that affects our revenue and profit. It's difficult to say at this point where that's going. But we've modeled that in as an adverse impact throughout 2022. I'll also say that With respect to revenue, there was a large contract in the UK, one of our largest in the world, where the site was purchased from its UK owner by a Chinese steel company whose model is to insource what we do. And so that happened. And the impact in 2021 was somewhat muted because we had a gain on the sale of the assets as we exited. But that lost revenue and profit is certainly affecting the business in 2022. So those are, I'll say, the drivers of revenue and EBITDA performance in AG, perhaps being a bit less than what the market expected. I will say that I'm very happy with how our team is executing on the things that we can control. Those factors that I just mentioned are largely outside of our control. We're doing everything we can from a cost standpoint to mitigate the impact of those. And in fact, we have a number of new contracts that will come online later in the year. So, the trends that we're seeing in the first quarter in HE year over year will certainly reverse later in the year as some of these major contracts come online. So, as we look at the revenue growth in HE, on kind of a like-for-like basis year over year, we're up 4% or 5%, which is, I think, roughly in line with what you would expect given where the steel market is at the end. We've also modeled in some slightly lower commodity prices, which, of course, are proving very difficult to predict, but many of those commodity prices that affect our Our margins are at historic highs or near historic highs, so we've been a little more conservative in our assumptions on commodity costs. So turning to clean earth, I'll start by saying that I have no doubt that we are building a better business every single day in clean earth. I think you know, Michael and others, that the environmental solutions business that we bought from Stericycle was a very poorly run business. We're extracting benefits of that integration every day. In fact, the targeted benefits on a net basis in 2021 were in line with our plan, and there were a lot of kind of offsetting items there. But I think we're very happy with the integration benefits. We did not anticipate, hopefully coming out of the worst impacts of the pandemic, that we'd have this tightness in the labor market. And there's also a lag in our ability to cover and price the inflation that we saw. So I think that impact in the second half of the year in Clean Earth was upwards of $10 million on a net basis to earnings. As I mentioned, we do expect in 2022 for those inflationary pressures to be offset by price. But we're taking, perhaps, I'd like to think, a very conservative or cautious view on our ability to get back to full staffing levels. You know, we're down 15 to 20 percent in the truck drivers that we need to collect and therefore allow us to process the waste in our facilities. So that is clearly hurting us. It's something that we're focused on every single day. And we're making a number of changes in how we hire and onboard truck drivers to remedy this situation. But it affects, again, both revenue and profit. So one could accuse us of being a bit overly cautious. But that's the stance that we're taking in our guidance. But again, I would point our investors to the progress we're making in cash flow and the balance sheet and in EBITDA minus CapEx margins, which in a capital intensive business like ours, those I think are the fundamental drivers.
spk08: So one last tease out then on Clean Earth. If you could get the labor, what would the difference be in your guidance on Clean Earth?
spk02: Yeah, just when you, if we could have, say, 10% more drivers, we would have been above consensus that existed for us for Clean Earth. We would have been a few million higher in EBITDA.
spk08: Okay, that's very helpful. I think that helps the street understand the leverage of that. Thank you for taking the questions.
spk05: Thank you, Michael.
spk01: Thank you. And the next question will come from the line of Larry Solo of SJS Securities.
spk07: Great, thanks. PJS. I'm following up on Michael's questions there on Clean Earth. So is it basically just – you're not able to meet demand. Is demand above, I guess, obviously what you're able to serve? So it's really just a labor shortage. But I'm really just a little surprised on the revenue guidance. I would actually think with inflation, you're getting pricing. So it sounds like your volume growth or the lack thereof in 22 is minimal. And is that really just, are you basically saying it's a shortage, not able to meet demand, or is it demand issue as well?
spk05: Yeah, no, it's not an underlying demand issue. We simply are not able to serve and process the demand that we're seeing in the business because of the shortage. Now, another dynamic early in the year and affects the first quarter, therefore, is some of our account churn. So on the retail side in particular, you know, it's quite common where You win new accounts, and you also lose accounts. And if you look at the impact of that churn, that is adverse to us in the first quarter in particular, and then it becomes to switch to a positive later in the year. So if you're just considering the first quarter revenue, that's another factor that's affecting our guidance. Right.
spk07: What about, I know you had a little bit of, there was some holdup, you had some waste, you had an inability, you couldn't pass on the process. So it was being, you know, it was being held in your facility and basically impacting other stuff and moving in. Has that log jam begun to clear up or, you know, is that still also in play?
spk05: Yeah, good question. No, it has begun to clear up, but it's not yet where we'd like it to be, where let's say the incineration capacity was earlier last year. So no, we're not back to more normalized levels. You may know there's a lot of incineration capacity coming online in the next year or two. So we think this is all going to flip around. but for now it continues to be a bit of a challenge. I mean, it's not, not as material as it was to our business and in quarters three and four, but it's still a effect.
spk07: And the, and the issues, if it's more on the hazards in terms of labor and stuff, more on the hazardous side, how about the soil side? What's the outlook there? Is that also impacted by, you know, labor shortages and is there a return to growth there? That's another thing that I've thought that would be growing this year a little bit more. And, So I'm kind of surprised to see the overall top line, you know, low singles.
spk05: Yeah, yeah. No, the labor shortage is affecting that, the soils or the contaminated material segment as well in more of an indirect way. Many of these large non-res projects have been delayed because of labor shortages. You know, we receive most of our contaminated material through third party logistics, not our own, but of course they're facing the same challenges that we are. So the underlying demand, unlike on the hazardous side, in contaminated continues to be relatively weak, certainly not back to pre-pandemic levels. And that is to remind you that the highest margin business we have within our cleaner segment is the processing of those contaminated materials. Right.
spk07: Okay. And then my last question is just on the rail business. So it sounds like you're still pretty optimistic you'll have a sale completed this year, if not by mid-year. That's, I think, what I heard, right?
spk05: Yeah, no, that's right, Larry. Again, we're frustrated, disappointed with the demand situation in the second half of the year in 21 relative to what we expected. But I noted that there are some clear signs of that improving. And, you know, we have, you know, 15, 20 different potential buyers that continue to express very strong interest that will be part of our process. So we expect it to be quite competitive and therefore give us the ability to move the process along at a relatively fast pace.
spk07: And you're not concerned that, you know, the last few quarters have kind of been disappointing in terms of, you know, I get it. It's a longer-term business. The backlog is very strong. And, you know, certainly the long-term picture looks very good. But if I'm a buyer, am I concerned that the last few quarters have been disappointing and, you know, maybe not step in right today? Or maybe... want to get a little bit less, pay a little bit less because of that. Yeah.
spk05: Well, it's certainly a data point that they will look at. But again, I think we have pretty good visibility to demand returning. And we certainly can, as we kind of normalize what happened in the second half of the year for the demand increases that we're seeing, we think, as Unshuman noted, that we'll be able to successfully position the business as one with EBITDA around 40 million. If you look over, let's say the last five years taking 2020 out for obvious reasons, the business has averaged EBITDA of 35 to 40 million. And again, we're not relying simply on strengthening demand to get to that 40 million. We took out seven and a half, eight million of cost in the fourth quarter that will get mostly a full-year benefit of and is in the run rate for the business. So I think between the benefits of the cost reduction and clear signs of higher demand. And again, the infrastructure bill allocated $66 billion to the market that we serve just in the U.S., right? Right. And a lot of that's to passenger rail. Passenger rail has been by far the weakest part of our business, and we have some of the highest margins in passenger rail. And so we need that to come back, and the infrastructure bill aimed at passenger rail will be a big, big help to the business. Got it.
spk07: Okay, great. Thank you very much. I appreciate it.
spk01: Thank you, sir. And the next question will come from the line of Jeffrey Hammond. of key bank cap markets?
spk00: Hey, guys. This is Mitchell Moore. I'm for Jeff. So I was just curious if you guys could maybe just give a bit of detail on how the rail performed in the quarter, maybe relative to your internal expectations, and maybe talk about the signs of early momentum in the first quarter here so far. Thanks.
spk05: Yeah. Yeah. So the weakness in the rail business is mostly on the equipment side. And of course, that's a fairly lumpy business. And at any given point, we're looking at 25 to 50 different opportunities to sell Harsco Rail equipment. And of course, we assign probabilities to the success of those within a given quarter. And that's an inexact science at best. And so as we came into the second half of the year, you know, our judgment was that that most of those orders would in fact be placed. Many of them aren't. It's not an issue of having lost the orders. I can't think of a single equipment sale that we've been tracking that has gone elsewhere, to be honest. Things just continue to get pushed out. A lot of it was related to customers in the US waiting for clarity on the infrastructure uh bill which of course now now we have um and so i i i can't really uh i don't think overstate the the importance of the passage of that bill and the effect it'll have on our business uh here in north america and in asia as well you know we we to global business we're tracking a number of opportunities in asia uh that largely because of covid uh continued to get pushed out So they're still on the radar. We still think the orders will be placed. It's a question more of when, not if.
spk00: Okay, thank you. That's helpful. And then I was wondering if you could talk about maybe just the implied cadence through the year on the top and bottom lines. Seems like you're expecting a pretty big pickup kind of in the back half of the year. Is that from... infrastructure spending or is that kind of a combination of labor and supply headwinds falling off? Thank you.
spk02: Just I assume you're talking about continuing operations now. So from a continuing operations perspective, keep in mind there's seasonality in the business with Q1 usually being the weakest quarter of the four for both ARSCO environmental and for clean earth. Q2 and Q3 are usually our strongest quarters, so there's just natural seasonality in the business. The second thing is, as Nick mentioned, as we go forward, we'll look at a few changes to onboarding and bringing on new drivers. So we have assumptions of that shortage improving during the course of the year, which will definitely help us. So that definitely improves the business. And we also talked about some cost out and efficiency that also would start kicking in later part of the year. So for 2022, we expect the second half to be weighted slightly higher from a seasonality perspective than the previous year.
spk00: Okay, great. I'll pass it along. Thanks.
spk05: Thank you.
spk01: Thank you. And the next question will come from the line of Rob Brown of Lake Street Capital Markets.
spk04: Good morning.
spk05: Hey, good morning.
spk04: Kind of getting back to the clean earth business, I know there's some moving pieces right now, but what's sort of the growth rate in that business that you see over the next sort of five years? I think your guidance was in the high single digits, but in the past you've said sort of low to mid single digits growth in that business. But what should that business see in terms of revenue growth right over over a few year period here, and has that changed from your prior thinking?
spk05: Yeah, I think over a cycle you would expect volume growth to be kind of GDP plus a few points. Pricing, of course, we think should always at least cover inflation. So, you know, you tell me what the inflation number is and I can increase revenue by that amount at least. But I think volume growth, again, over a cycle is probably GDP plus a few points. And as we think of our business and our model of increasingly focused on recycling and repurposing, and we hear that often from many of our big customers, that that's what they're looking for, as opposed to burning it or burying it. We think over time that's going to enable us to do a bit better than the market, to be honest. So what that translates into in terms of incremental volume is difficult to say. We just finished our long-range planning process for Clean Earth, and we really believe, based on all of those factors I just mentioned and our ability to leverage clean a relatively high cost base that will be declining over time as some of our IT investments enable us to become more efficient on the labor side. We think we'll double EBITDA in the business over the next three years. And so that's roughly getting close to a billion dollar business with 150 million of EBITDA. That's what we're targeting. And that's organic. And so if you look at those revenue components that I mentioned, plus leveraging and reducing that cost base, that's how you get there.
spk04: Okay, great. Thank you. That's a great target. And then on the, I know it's maybe a little early, but the acquisition activity in that market, you sort of alluded to a couple strategic points. directions you want to go and have a pretty good landscape there to do it. What's sort of your thinking about acquisitions when your balance sheet can support them and how does that add to what you're thinking?
spk05: Yeah, it's a good question. Certainly, Rob, we're not focused on acquisitions this year, right? We're all aware of our balance sheet. There's on a relative basis more value to be created by what we're doing organically in the business to increase revenue and profit than what acquisitions would do to create value. So that's really the focus. The focus is to execute that plan that I just referenced to double EBITDA and take this to a billion dollar business organically. But absolutely, over time, our ambition is to increase the platform through acquisition. I think it more likely will be bolt-on type acquisitions as opposed to anything of real size, at least as we look across the landscape today. And we think that that's where we can create the most value.
spk04: Okay, great. Thank you. I'll turn it over. Thank you.
spk01: Thank you. And again, ladies and gentlemen, to ask questions, please press star one now. And the next question will come from the line of Chris Howell of Barrington Research.
spk06: Good morning, everyone. Hi, Chris. Hi. With the formality of the sale process of rail already underway and the You know, over the next few weeks, we'll make some progress on that as we head towards mid-year. You already asked the question about how the business has been faring versus your internal expectations. So I wanted to follow up on that and ask about the rail backlog. And can you talk about the evolution of the rail backlog over the next six to 12 months? Indirectly, what I'm getting at is, although it'll be challenged from quarter to quarter and maybe volatile, Perhaps the outlook is unchanged from a demand perspective. Can you talk just more about the mix of the backlog and your level of confidence in that as you head towards the sale?
spk05: Well, we certainly expect the backlog to increase throughout the sale process period. In particular, on the technology side, which is an aftermarket side, which are a bit more oriented to passenger rail in the U.S. Those are very high margin products. I also think on the equipment side, kind of the heart of the range for Harsco, the grinders and the tampers here in North America and also in Asia, I think we'll see a nice pickup in the backlog there. But I think the mix should be a richer mix than typical, given the focus of the infrastructure bill on passenger rail and the products that we have that are sold into that market.
spk06: Okay. That's helpful. And the infrastructure bill here in the U.S. is of benefits to the rail segment. What about outside the U.S.? Can you talk about other programs or funding-like programs that may benefit the rail segment?
spk05: Well, I think the European market has remained fairly strong. We're all disappointed in ultimately the profit that we will earn on these large contracts, but the fact is we'll have over 100 new high-tech machines installed throughout Europe with the who's who in the rail industry in Europe, Deutsche Bahn and the Swiss National Railway and Network Rail in the UK. And so those markets have stayed strong, and the aftermarket potential in our business on those 100-plus machines is significant. And that'll certainly play into the valuation of our business. In Asia... not aware of any stimulus or infrastructure-like programs that have been introduced. Again, the challenge for all of us that serve the Asia rail market has been those projects have just been delayed. So we really don't need a stimulus-type package or program in Asia. We just need that log jam to break and then to get back to a more normalized level of order flow.
spk06: Thank you. That's helpful. And just one last question here for me and then I'll hop off the queue. Applied products. Can you just give us an update on applied products and kind of what your outlook is within the strategic outlook you provided?
spk05: Yeah.
spk06: Yeah.
spk05: Yeah, well, that's a good question. Thanks for asking about applied products. And by the way, we now call them echo products, no longer applied products. So, you know, we have a few million of revenues in our echo product area. Volume trends have been quite good in echo products. The challenge has been in a few of them inflation on the input costs. So we have a business called Steel Fault that we're expanding. that takes steel slag and effectively energy and bitumen and other things and makes a road-based material. That is a very environmentally friendly process and product, but with energy prices and bitumen prices being where they are, the margins have suffered. Now, again, volumes have been good and we're actually going to bring online in 2022, two new steel fault plants, and we're actually hoping to move forward on the first in the U.S. So a lot to be excited about from a volume standpoint. We just need to recover in price. And again, there's a bit of a lag there, the challenges that we faced on the input side.
spk06: Great. Thank you. Yep.
spk01: And again, that is star one, four questions at this time. And we do have a follow-up from the line of Michael Hoffman of CFO.
spk08: Nick, clearly the questions around rail are everybody's trying to figure out, can you get paid well enough to deliver the balance sheet? So help us understand what the bankers are doing in the document room. So when these 20 sellers look, the implied EBITDA number is going to be big enough between aftermarket DC discounting back the aftermarket potential, the size of the backlog and the run rate, because we all know these assets have sold basically something around 10 times the last three or four of them. So if we're starting at 10 times, how do we get everybody comfortable? The buyers are going to see a number that gets you delivered.
spk05: Yeah. Yeah. Well, first of all, our expectation would be a little beyond 10 times. If you look at maintenance of way assets in particular, historically, So, and again, there have been other businesses that have traded, but not nearly the profile of ours, right? The breadth of our business, the geographic reach of our business, our new product pipeline, our installed base, as I mentioned, in Europe and elsewhere, it's a very unique asset. And those that want to build a platform and maintenance of way, and there are a handful of strategics that very much want to do that, this is a very, very scarce asset. So that's why I think there's – we have data points around the performance of the business over the past 6, 9, 12 months, but the strategic value of this business also needs to and will be very, very much a consideration for the value that we receive. But we've been putting a lot of effort into preparing for a very robust process. So we've commissioned a very detailed market study on the maintenance-of-way sector as an example, which will help speed up the process. And I think it's fair to say that there are a number of interested buyers that probably need to better understand the maintenance-of-way space. So, you know, there'll be some educational along the way. Um, but we're really setting up our process in terms of, uh, what we're doing in advance to prepare for it. Uh, and, and also with the, the, the, the outreach that we've received for it to be highly competitive and for us to have a good bit of leverage throughout the process to, to keep it on track.
spk08: Okay. That's terrific. I think that helps bring clarity to that. And then back to Clean Earth. So thank you for saying the $1 billion and the $150 million in three years. There might be some pushback in that original Clean Earth had higher margins. Obviously, ESOL virtually had none. But the expectation is ESOL might get to mid-teens on its own. So the blended theoretically should be better than 15%. What's different? today versus when this all started and the first deal on clean earth in 2019?
spk05: Well, I think it's fundamentally around the contaminated materials business and us assuming a relatively lower growth rate in that business than on the hazardous side. And we also We believe that one of the real strategic choices that we've made around digitizing the business and therefore improving the transparency, the data flow, the analytics, improving the customer experience, all of those things we're going to be investing in pretty consistently over the next two or three years. We think that'll help the top line, but certainly those investments over the next few years as we as we implement them will have a bit of a dampening effect on margins. But that's a strategic choice that we've made. We've already received an awful lot of positive feedback from our customer base, not only in what we've done in that arena, but the commitment that we're making to it going forward. So that's a real strategic differentiator that we're investing in in the business.
spk08: Just to be clear for everybody, digitizing is connecting the customer with real-time data, KPIs that need to meet not only unsustainability issues, but also trailings and all that. That's what you're getting to.
spk05: Yeah, absolutely. And even in our trucks, let's say. So being more efficient and in our routing and the data flow and usage of it to our drivers and others in the field. So it's both an efficiency goal as well as a kind of a customer intimacy satisfaction type objective.
spk08: Okay. The last question for me, given your emphasis and I appreciate the point you're making, recycle repurpose. But as you and I are both aware, there's a certain amount of the waste is prescriptively directed to have to go. So when you think about the $10 billion that has waste and the $14 billion that's industrial services, of which I think about five are applicable to customers and markets you want to tackle. So we're playing with sort of $15 billion is the addressable market inside the $10 billion. What's your piece of that that you can convince the customer you have the option to do an A or a B as opposed to it has to go to an incinerator or it has to go into a fuels processing operation or something of that nature? Help everybody understand that addressable market given how you want to position this.
spk05: Yeah. Michael, I don't have that estimate offhand. I certainly can get back to you, but the fact is You know, we hear every day from customers that are, I'll say, kind of defaulting to landfilling and incinerating that they would love another option. And so, yes, there will always be, I would think, always is a strong term, but some types of waste that will be required to be disposed of in landfills and incinerators. But we believe there's a real trend towards recycle and repurpose. And so we think there's, on a relative basis, volume growth and share, if you will, of the hazardous waste market for us to win over time following that approach. But you're right, it's never going to go away. It's never going to go away.
spk08: No, no. There's a certain amount of it that prescriptively has to go because the regulation says you've got to do this with it. But there's a certain amount.
spk05: There's a lot of it that goes there today that doesn't have to go there if there's a better answer. And that's what we're focused on, that better answer.
spk08: Okay. That's what I was trying to get at.
spk05: All right. Thank you.
spk01: And at this time, there are no further questions in the queue. I will now turn the call over to Mr. Martin for follow-up comments.
spk03: Thanks, Valerie, and thank you for everyone that joined us this morning. Please feel free to contact me with any follow-up questions. And again, we appreciate your interest in Harsco, and have a great day. Take care.
spk01: Thank you for your participation in today's conference call. You may now disconnect.
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