Harsco Corporation

Good morning, my name is Jay and I'll be your conference facilitator. At this time, I would like to welcome everyone to the Harsco Corporation first quarter release conference call. All lines have been placed in mute to prevent 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 then the number one on your telephone keypad. If you would like to withdraw a 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 redistribution 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 Bonin of Harsco Corporation. Mr. Mornin, you may begin your call.

Thank you, Jay, and welcome to everyone joining us this morning. I'm Dave Martin of Harsco. With me today is Dave Rasberger, our Chairman and Chief Executive Officer, and Nshuma Agha, Harsco's Senior Vice President and CFO. This morning, we will discuss our results for the first quarter of 22 and our outlook. We'll then take your questions. Before our presentation, however, let me mention a few items. First, Our earnings release as well as a 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 that may cause actual results to differ from these forward-looking statements. For a discussion of such risks, 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 may refer to adjusted financial results that are considered non-GAAP for SEC reporting purposes. A reconciliation to GAAP results is included in the earnings release as well as the slide presentation. With that said, I'll turn the call to Nick.

Good morning, everyone, and thanks for joining us today. Before I discuss our results, let me speak to the ongoing crisis in Ukraine. The global steel market is in the process of rebalancing as a result of the Russia-Ukraine conflict, and we anticipate limited impacts to our Harsco environmental segment over time given the diversity of our portfolio. Furthermore, Harsco has no direct exposure within either country, and any related disruptions at customer sites were short-lived and minimal in the quarter. Turning to our results, HSCO consolidated revenue was up 1% versus the first quarter of 2021, and adjusted EBITDA totaled $49 million. These adjusted results are consistent with our guidance. Much of the quarter, however, was characterized by unprecedented inflation in commodities and other input costs, as well as tightness in our supply chains and labor markets, particularly in the U.S. We expect these factors to remain a concern and are working aggressively to mitigate the impact on our businesses. That being said, underlying demand within most of our key markets remains firm, including the steel industry and in most of the markets served by Clean Earth. We also remain confident in the outlook of our rail business as the industry continues to recover from COVID-related impacts. For example, we have sold more tampers, the core of our product line, in the first 100 days of this year than we did all of last year. Now let me comment on each of our two core businesses. Horseshoe Environmental had a strong quarter despite these conditions as a result of strong execution. Looking forward, our steel industry outlook is largely unchanged, as is our expectation for HE for the full year. Any impacts from the conflict in Ukraine are expected to be muted longer term for our environmental business, given the diversity of our customer portfolio and of our exposures. HE results are projected to strengthen in the coming quarters, reflecting better seasonal volumes and additional benefits from our growth investments. These investments include eco products, where our steel fault business recently introduced its first carbon negative asphalt product. Steel Fault is a compelling growth story within HE, which illustrates our innovation mindset and positions us as a strategic environmental partner to the steel industry. The outlook for our all-tech business, which we acquired a few years ago, is also beginning to improve. We expect to sign at least three contracts this year to either sell directly or to build all-you-sell plants for customers that need a better environmental solution to process waste from the aluminum manufacturing process. Looking at Clean Earth, in the first quarter, again, we were impacted by incremental cost inflation, particularly for fuel and price increases for steel containers. These effects were more pronounced late in the quarter, and additionally, volumes continued to be affected by the ongoing shortage of drivers. as well as weakness within certain retail customers where pandemic-related benefits have waned. The onboarding of drivers has, however, improved significantly over the past few weeks. While these items will continue to weigh on Clean Earth in the second quarter, we've begun addressing these challenges proactively. Recently, we initiated a series of price increases and surcharges to offset significant increases in the cost of fuel, third-party transportation costs, and containers. By and large, the responses from our customers have been favorable. There are also some bright spots within Clean Earth. Our full-circle service is increasingly supporting sustainability goals for our customers, and we continue to pursue avenues to expand some of our unique capabilities. In addition, the outlook for our soil and dredge business is quite promising with numerous large projects in the pipeline for later this year and into 2023. Overall, for Clean Earth, we anticipate margins will recover in the second half of the year, and our longer-term view on margins and growth potential remain unchanged. Turning to sustainability, our strategic direction and environmental focus is quite clear. Harsco is uniquely positioned as the leading provider of recycling and reuse solutions within the industrial waste market. Customers are increasingly searching for more environmentally friendly solutions for their waste streams, consistent with their value proposition. We continue to drive initiatives internally to improve our carbon footprint across our logistics and processing plant operations. Since 2019, our carbon intensity has declined 13.5%, putting us on track to deliver our 15% reduction goal by 2025. There is much more for us to do here, and we'll have additional details to disclose regarding our sustainability achievements and goals within our next sustainability report to be published later this year. Next, let me comment on rail and our efforts to reduce our financial leverage. We're committed to a sustainable leverage ratio of under three times, as we've discussed in the past. A rail transaction is an important step for HSCO in this regard. Fundamentals within the rail maintenance and weigh market have clearly improved in recent months, particularly in North America, where we've experienced a notable pickup in order activity. The increase in our backlog during the quarter supports our return to a more normalized level of EBITDA in the business for this year, which is about $40 million. The process to divest rail is continuing to progress as anticipated. There has been tremendous interest in this unique and valuable asset, for more than 70 parties globally. We are now narrowing the list of potential buyers and expect to continue with a more detailed due diligence process with this smaller group within the next few weeks. Our expectations remain unchanged for the sale of the rail business in the second quarter with the closing of the transaction shortly thereafter. I would like to conclude by acknowledging Harsco's 12,000 employees for their ongoing dedication to the company and commitment to satisfy our customers in a safe and compliant manner.