This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk08: Good morning. My name is Chad, and I will be your conference facilitator. At this time, I would like to welcome everyone to the Harsco Corporation second 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 star then two on your telephone keypad. Also, this telephone conference presentation and accompanying webcast made on behalf of Harsco Corporation are subject to copyright by Harsco Corporation and all rights are reserved. No 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, you may begin your call.
spk00: Thank you, Chad, and welcome to everyone joining us this morning. I'm Dave Martin from Harsco. With me today is Nick Grasberger, our chairman and chief executive officer, and in Chumanaga, Harsco's senior vice president and chief financial officer. This morning, we will discuss our results for the second quarter and our outlook for the year. We'll then take your questions. Before our presentation, 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 meanings 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 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 the earnings release as well as the slide presentation. With that said, I'll turn the call to Nick.
spk05: Thank you, Dave, and good morning, everyone, and thanks for joining us today. As you have seen, our adjusted Q2 results were consistent with the preliminary results we released a few weeks ago. The second quarter was a challenging quarter for us, especially in our Clean Earth segment. Inflation and energy transportation and disposal costs in Clean Earth continue to accelerate beyond what we anticipated in our January and April price increases. Our July price increase was by far the largest and broadest increase ever implemented at Clean Earth. This was implemented successfully through coordination with our customers, despite significant contractual limitations. Coupled with certain cost reduction actions, the impact on second half EBITDA should be 30 to 35 million, roughly doubling the EBITDA margin compared to the first half of the year. Over the past four quarters, the cumulative gap between inflation and price was at negative 25 million or so with Clean Earth, or about three points of EBITDA margin. We are committed to eliminating this gap moving forward through pricing and cost reduction actions. I've been running Clean Earth with the support of the corporate team over the past three months. The opportunity to leverage our asset base and our value proposition to customers is clear. Our targeted EBITDA margin of 15% remains achievable, and I'm excited to lead this business as it realizes its potential. Before I discuss Harsco Environmental, I'll provide an update on the sale of our rail segment. The sales process for rail is ongoing, and we remain in discussions with certain strategic parties. However, a change in economic conditions, including in the M&A market, and business complexities with Rails European contracts have slowed the divestiture process. Overall, as we've said before, Harsco Rail is a unique business with a very positive long-term fundamental outlook. The company remains committed to selling the business on a disciplined basis, thereby creating value for shareholders. Further updates will be provided as appropriate. Turning to Harsco Environmental, the segment performed well during the quarter, and revenues increased over the prior quarter due to increased demand. And Schuman will discuss the impact of foreign currency and inflation. Overall, the fundamental business is strong. We did see some pockets of weakness in steel volumes in Europe, which were offset by higher volumes in India and China. We've implemented price increases in most regions, and we expect HEE to fully offset the impact of inflation through its annual price escalation mechanism early in 2023. In summary, each-demand in each of our businesses remains healthy. Our businesses operate, more or less, under long-term contracts that were negotiated at a time when inflation was nonexistent and our supply chains were strong. The labor market was also supportive of our needs. Times have certainly changed, and we are adapting to this new reality. But fundamentally, our end markets, our competitive positions, and our value propositions are well aligned to create shareholder value going forward. I'll now turn the call over to Anshuman.
spk01: Anshuman Anshuman Thanks, Nick, and good morning, everyone. Please turn to slide four. Ours was second quarter revenues from continuing offerings increased 3% compared with the prior year quarter to $481 million, including a 4% headwind from FX translation. This increase resulted from higher mill services and eco-product demand and price in environment, while Clean Earth's growth was mainly attributable to price. Adjusted EBITDA totaled $49 million, which is consistent with our July update. As we noted at that time, this result was below our May guidance, mainly due to unprecedented inflation impacts in clean earth. The cost of third-party transportation, diesel, containers, and disposal were all much higher than anticipated. These factors contributed to CE's EBITDA being approximately $12 million below our May outlook. Meanwhile, environmental was at the low end of our May guidance due to the strengthening of the U.S. dollar. This foreign exchange impact was approximately 3 million in the quarter. CarScore's gap loss per share from continuing operations in Q2 was $1.34, while adjusted earnings per share was 1 cent. In the quarter, our unusual items included the non-cash goodwill impairment of 105 million, and the total impact of the unusual items was $1.27 per share after tax. Lastly, our free cash flow for the quarter was $131 million, including the impact of our accounts receivable securitization, which was completed in June. We see this transaction as a prudent financing decision to lower our interest costs and leverage ratio. We ended the quarter with a leverage ratio of just under five times, against a covenant of 5.5 times and liquidity of more than $130 million. Please turn to slide five and our environmental segment. Segment revenues totaled $278 million, and adjusted EBITDA was $53 million. Revenues increased 2 percent on higher services and equal products volume, partially offset by exchange rate translation impacts of approximately $20 million. Meanwhile, adjusted EBITDA decreased by $5 million year-on-year. This change reflects the impact of FX translation and higher operating costs, mainly within eco-products. It also includes impact of fewer asset sales relative to the second quarter of last year. Let me also comment on the diversity of our customer base in HE and the related benefits given the energy and gas supply situation in Europe. First, we have limited exposure to certain countries that are most reliant on Russian gas, such as Germany. Secondly, any disruptions to date have been offset by higher volumes in other countries or regions. And we'd expect this dynamic to continue and the overall impact to HE to remain limited as long as demand remains intact within Europe and elsewhere. Please turn to slide six to discuss Clean Earth. For the quarter, revenues totaled 204 million and adjusted EBITDA was 5 million. Compared to the second quarter of 2021, revenues increased 4%, including the impact of price, while adjusted EBITDA decreased 14 million year-on-year. This change reflects inflation in the cost items I mentioned earlier, net of price. As Nick mentioned, we've taken additional and aggressive actions to price and cost reductions to offset inflation. Price is the larger driver. Our customer discussions are going well, and a large part of these price increases are now effective. These efforts will boost margins in the second half, and we expect to recoup the inflation impacts by early 2023. Now, let's turn to our 2022 outlook on slide seven. Consistent with our update in July, ARSCO's adjusted EBITDA is now expected to be within a range of 210 to 220 million. Additionally, we now anticipate that free cash flow, excluding rail, will be between 115 to 125 million, which reflects the benefit of our AR securitization. You can find our full year segment guidance within the appendix of the slide deck. Let me conclude on slide eight with our third quarter guidance. Q3 adjusted EBITDA is expected to range from 54 million to 59 million. We expect environmental adjusted earnings to be modestly below prior year results as effects and inflationary impacts will be partially offset by higher volumes and new contracts. Clean Earths will see good sequential improvement, but its adjusted EBITDA is anticipated to be below the prior year due to inflation pressures net of price. Lastly, corporate costs should be approximately $10 million for the third quarter. Thanks. and I will now hand the call back to the operator for Q&A.
spk08: Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two.
spk07: At this time, we will pause momentarily to assemble our roster.
spk08: And the first question will be from Michael Hoffman from Stifel. Please go ahead.
spk09: Hi, Nick. I'm Jim and David. Thank you for taking the questions. I appreciate the candor too. So lots of CEOs will duck and weave around bad news. You just stood up and took it. On the rail side, do you still believe you'll get a transaction announced in 22?
spk05: You know, I do. I think that's more likely than not. As we indicated, though, there are ongoing discussions in the, I would say, apart from the weakness in the M&A market, the largest factor in the timeline at the moment is kind of assessing the remaining risk on a few of our large European contracts. You know, our view of that risk is somewhat different than the view of those interested in the business. So we're working through a number of those issues now. Third issue would be if you look at the expected EBITDA in the second half of this year for rail, it's a good bit higher than it was in the first half. Now, much of that is in backlog. We've talked earlier in the year about the pretty significant recovery in the North American market for our equipment. And so we took a lot of orders in early in the year. Those should be shipped in the latter half of the year. But in this economic environment, I think there's some concern among the buyer group as to whether or not we can realize that higher EBITDA in the second half. So those are... the issues that we're kind of navigating with buyers now. But to be clear, the level of interest in the business remains very, very high.
spk09: Okay, that's helpful. We would take the observation that you don't have a demand issue, there's a cost issue. So that's an easy sort of yes kind of response. But can we dig a little into... Specifically in Clean Earth, the quality of the revenues that you're seeing, what's your view of that? And then in light of we're now officially in a recession, despite the government wanting to redefine it, what's your view of the sustainability of the trend on the demand side? We get what you're doing on the cost side. I'd just like to understand what your view is about the demand side.
spk05: Yeah. Well, if in quality of revenue you refer to kind of margin by customer, of course, that's heavily impacted now by price. And so we believe that the margins will return in the second half to where they were by and large across our three segments, that being industrial waste, retail waste, and healthcare waste. We've not yet seen, Michael, any indications that the volume or demand will soften based on the overall economic situation. So we remain, I would say, fairly optimistic on our ability to grow volumes. in each of those three segments uh in the coming quarters we have seen some softness in health care retail and industrial have been fine in the case of industrial actually i would say somewhat strong so we're working with our our partner you know stair cycle uh to better understand um what we can and should do to bring some of the healthcare volumes back. But to answer your question, overall, we're not really seeing any signs that the volume will soften due to the economy.
spk09: Okay. And my view of quality also is the recurring nature of revenues as opposed to discretionary. So you feel pretty good about there's pretty good consistent recurring aspect of these volumes.
spk05: Yeah, certainly on the hazardous waste side. As you know, in our soil business, a healthy amount of their volume is, in fact, recurring. But I'd say a third or so is based on projects that generally do not recur. And so, yeah.
spk09: And then that health care piece, just to dig just a little bit, I mean, Visitations were down. It looks like elective surgeries are slow. Basically, the health care system is overloaded with demand and not enough people. That peers from our perspective. Is that consistent from your perspective?
spk05: Yeah, it is.
spk09: Okay. On the securitization, I get the move to help shore up anybody's concerns about the balance sheet. Just so we're clear, this is a one-time, you get the benefit of it, and then next year, I'm back to an operating-driven cash flow story. So we should be modeling it down year over year in 2023. Is that correct?
spk01: Michael, the total facility is $150 million. We drew down $120 in June. So there's another $30 million left, and that's an ongoing facility. So there won't be a reduction in the amount that we will securitize. It makes economic sense to do it. And so there'll be a continuation of the securitization going forward at the current levels or slightly higher even.
spk09: Okay. So let's say just for sake of argument, you pulled all 150. So I'm going into next year with a 150 base plus whatever you do operationally. So whatever incremental improvements in cash generation from the two segments, that's the way to think about it?
spk01: That's correct. The $150 is pulled forward, and then it's a continuation of ongoing operating cash flow that would drive our free cash flow next year.
spk09: Okay. And what did you do with the cash? Did you pay down debt?
spk01: We did.
spk09: Okay. Okay. That was what I had for now. Thank you.
spk05: Thanks, Michael.
spk09: Thanks, Michael.
spk08: And the next question is from Larry Solo from CJS Securities. Please go ahead.
spk06: Greg, good morning. Thanks for taking the questions. Maybe just sticking with the clean earth theme. And Nick, you mentioned you're kind of taking over the business. I know that I think David Stanton left. I think it was right after your call. So I don't know if you actually publicly commented on that before this. But maybe you could just sort of look back. I know when you came into this company, you did a lot with the environmental business, turned that around a lot. Maybe you can sort of, from a high level, I know they're somewhat different businesses, but sort of compare and contrast some of the issues at Clean Earth and, you know, what you did environmental and how maybe you can, you know, bring some of that experience over to the Clean Earth side?
spk05: Well, clearly, the predominant issue now is inflation, right? And, you know, over the past couple of years, I think we have received a healthy degree of benefit from combining, our legacy Clean Earth business and the ESOL business that we acquired from Stericycle. And we saw margins increase, you know, two or three points as a result of that. But, of course, that is all being masked by inflation now, and this July price increase will, in large part, remedy that situation. But I would say, again, In general, the opportunities in Clean Earth evolve around process change and execution. There are a number of, I'll say, best practices that we have in Clean Earth in certain facilities and regions that aren't replicated elsewhere. There are significant cost reduction opportunities available to us when we implement the price and change that the process changes and the associated IT tools to accommodate those. In logistics, more efficient routing, insourcing certain lanes that we outsource today at two or three times the cost. So there are just a number of things that we're doing now that, to be honest, have been underway, but the execution has been a bit lacking. So we are driving that execution and that discipline and the process change very hard, just as we did in the case of Horseshoe Environmental years ago.
spk06: Gotcha. I appreciate the call. Just a couple of specifics on the cleaners and the Q2 results. You mentioned I think revenue was up 4%. I would think it would have been up more. I guess you weren't getting much price yet, which kind of takes me back to it seems like the misses quarter qualitatively is very explainable, but it's not like prices started to rise. I know they really accelerated over the last couple of months, but I think if I take, you know, to go back to Q1 call, you spoke about sort of putting in a lot of price increases during the second quarter. Is there just somewhat of a lag even in the second quarter? I know you're sort of doubling up on that or maybe not quite doubling down, but putting a lot more price increases in the back half. But it seems to me like it was a little bit slow to come when we kind of saw fuel and other things rising for the last 12 months, you know, even with the acceleration lately.
spk05: Well, the price increase that was effective April 1st was really in advance of that significant acceleration in inflation, both in terms of transportation costs and diesel fuel and disposal costs and those types of things. So, yeah, I mean, that price increase clearly was not sufficient to to cover that. We had underestimated what the inflation would be in Q2. Right. Okay.
spk06: That's fair enough. Just switching gears real quickly on the environmental piece, just to clarify. So the $20 million impact was a revenue impact. The revenue X currency, under the currency impact, would have actually been 9% plus, right? And that's because, and that kind of pretty strong growth is Some of that, I imagine, it's a lot of these contracts are sort of cost plus. So as costs are rising, you actually get some payback on that. Is that right?
spk01: Yeah. So revenue growth would have been stronger without the currency impacts. We have growth in our mill services revenue. We have growth in our eco products revenue. And also we benefited from Price increases. We have annual escalations built into our contracts, and in a lot of contracts, diesel is a pass-through. So as the price of diesel went up, we got some benefit of that also.
spk06: Right. And that $3 million number you referenced, that's the EBITDA impact, right, from currency, I guess, right?
spk01: That's correct. $3 million to our expectations for the quarter and $4 million year-on-year, roughly.
spk06: Got it. Okay, great. Thanks. Also, I appreciate the call. Thanks, guys.
spk05: Thank you. But for the full year, the impact of FX on HE EBITDA is?
spk01: Nine to 10. Nine to 10, yeah.
spk05: And then the price inflation gap in HE that would be analogous to the 25 million in Clean Earth is about 10 on a full year basis.
spk08: Thank you. And the next question will be from Rob Brown from Lake Street Capital Markets. Please go ahead.
spk02: Good morning. I just wanted to clarify the MCE pricing increases that you've had. Are the new contracts sort of more, or do they have more protections in there for inflation, or are these sort of repriced annually, and then if inflation changes, you've got some risk on the margins, or how much risk now is in those contracts compared to what you've had?
spk05: Yeah, well, that's certainly been a significant challenge for us that I believe we've now overcome. And that challenge was many or I'll say most of the contracts did not allow for price increases of the magnitude that were required to offset inflation. So we've been working very closely with our customers, helping them understand the inflation that we've been subject to. And it's actually been a challenge a good process and that there's not a single case to date where a customer has refused the price increase or chosen to take their business elsewhere. So the realization on what we were targeting is actually quite high. But it took a bit of time because, again, in many cases, the contracts did not allow for price increases of that of that size, which, of course, those contracts will be changed in the future, right, to accommodate this type of inflationary environment perhaps recurring at some point.
spk02: Okay. Okay. Good to hear. And then in the soils business, you touched on it a little bit, but how is the demand environment in that segment? Are you seeing kind of project activity? I think this is the seasonal period where you see a lot of activity, but how is the soils business demand right now?
spk05: Yeah, demand on the hazardous side is fairly steady, I would say, and we have a number of bids outstanding now to for new business and hazardous waste with the number of large retailers and the trends there for us have been have been positive. You may refer to on the in our soils and dredge business, we do expect the second half of this year to be a good bit stronger than the first half because many of these projects that we've been tracking are being released and so we're processing a lot of that material as we speak.
spk07: Okay, thank you. I'll turn it over.
spk08: The next question will be from Devin Dodge from BMO Capital Markets. Please go ahead.
spk03: Yeah, thanks. Good morning. Just maybe to start off with, can you help us to understand that of that, you know, more than $30 million of profit improvement that you've targeted, you know, how much is price and how much is cost improvement, and then how much, you know, incremental pricing actions remain to be taken, you know, given some of the contract restrictions that you've talked about?
spk05: Yeah, so of that $30 million, say, 25 or so is price. The remaining five is cost. And that five, of course, is larger on an annualized basis. So, we'll get the benefit of the annualized effect in 2023. So, think of the cost as more kind of 10 to 15 million on an annualized basis.
spk03: Okay, thanks for that. And maybe just in the CE division, can you give us an update on the consolidation of driver check-in systems? And just trying to get a sense if this initiative was positive or negative to the margin pressures that you saw in Q2.
spk05: Well, it's certainly been positive. In fact, I was on a truck last week looking at the the new software and how it operates and how it leads to efficiency. And so it's probably difficult to quantify exactly what the benefit is. There's certainly a compliance or a risk mitigation component to the value of it also. But at this point, it's largely rolled out in every one of our trucks.
spk03: Okay. Okay. And then just one last one here. I look, I think we recognize it's still, you know, pretty early here, probably more focused on the second half of this year. But are you able to frame, you know, what that, you know, clean earth financial performance could be like in 2023, or at least, you know, identify kind of the moving buckets or targets that you think you can achieve?
spk05: Yeah, well, I think when you consider the annualized effect of what we're doing with respect to price and cost and look at where the run rate will be coming out of the year into 2023, you know, clearly we expect at this point for the EBITDA and Clean Earth in 2023 to be substantially higher than this year.
spk07: Okay, thanks. I'll turn it over. And the next question will be from Jeff Hammond from KeyBank.
spk08: Please go ahead.
spk10: Hey, good morning, guys. Hey, Jeff. Just two on Clean Earth. One, I guess, just update us on kind of project activity and visibility and soil dredge. You know, it still seems like it's running negative. You know, just visibility for that turning the corner. And then just on this $30 million savings, just wondering, like, is this all incremental savings? Or was some of this kind of contemplated, you know, pre the pre-announcement, et cetera?
spk05: Well, the $30 million is all incremental. The price increase kind of began in terms of our planning and coordination of it kind of middle of Q2. Again, an effective July 1st. The cost reduction, you know, you know, I would say is developed over the last several weeks, and it will be executed within a few weeks.
spk07: And soil dredge?
spk05: Yeah, so on soil and dredge, a couple of the major projects you would be aware of on the East Coast have recently started, and so they're providing a significant lift to to volume in the second half. One of the challenges that we're having in that business, though, is also the shortage of trucks to bring in inbound material. And so that is, and that's, of course, implicit in our guidance here for the second half. But that's something that we don't have a lot of control over. We're working very hard to to find ways to get that material into our facilities to process, but it's been a challenge.
spk10: Okay. And then I know, Nick, you talked about, you know, execution can be better, but just, you know, if we can level set kind of your view of kind of the clean earth business around, you know, competitive dynamics, cyclicality, pricing power, and just, you know, structurally how you're thinking about the business.
spk05: Yeah, I think we've learned recently that in terms of pricing power, we're in a very strong competitive position. And again, we have a very valuable set of federally permitted hazardous waste processing facilities that only one other can match. So when you're looking at some of these major retailers or major industrial companies that have a nationwide footprint, That's a great value to them. So our pricing leverage, I think, is quite high. I'll say competitively, you may recall that in our business model, we do not own disposal assets. We do not own incinerators. We do not own hazardous landfills. And that, of course, is part of our value proposition to customers is over time, you know, we work to reduce the amount of material that needs to flow to disposal. In this environment, though, with there being extreme capacity limitations on incineration, and therefore much higher prices, and also in some cases, simply having to forego revenue because we cannot gain access to incineration, that's affecting the business. It's never been an issue in this business before. There's always been plenty of capacity. And with the volume of material that we have, we've been able to use that to leverage price or cost to us. So it's a very unique environment, and there's a lot of capacity coming online over the next couple years, but it's continuing in the short term for sure. I think in terms of the overhead structure, there's still an awful lot of opportunity and work to be done to bring the overhead structure down to where it can be. And, you know, the first step of that we're taking here in the next few weeks, but there will be second and third phases of that.
spk10: Okay. And then if we kind of exclude the securitization, is the lower free cash flow just a function of kind of the lower profitability or is there anything else in there?
spk01: That's correct. It's lower profitability. If you remember, our Clean Earth segment converts between 70% and 80% of its EBITDA into free cash flow. So as their EBITDA outlook came down, it had a corresponding knock-on effect on cash that we're trying to minimize.
spk10: Okay. Thanks so much, guys. Thank you. Thanks.
spk08: And again, if you have a question, please press star, then 1. The next question is from Zane Karimi from DA Davidson. Please go ahead.
spk04: Hey, good morning, gentlemen. Hi, Zane. Hey, Zane. So hearing that the second half should have improved dynamics, particularly for the soil and dredging business, can you speak to the differences in contract structures between that and the hazardous waste contracts? And while margins are historically stronger in that soil and dredge business, to what degree are those contracts being updated as well?
spk05: Yeah, well, they're all in the process of being updated. In the soil and dredge business, there's a mixed component there in terms of the type of material that we process. And at the moment, that's having a larger impact on margins than that inflation.
spk04: Okay. Thank you for that. And then just one nitpicking thing here. Can you speak to the difference in the gap operating income provided today compared to that updated about two weeks ago? I think there was about a $2 million difference.
spk01: Yeah, that was mainly in Goodwill. If you go back to our pre-release, we estimated Goodwill impact to be approximately $100 million. As we finalized our Goodwill impairment model, went through our internal controls and testing, The final goodwill impairment was $105 million.
spk04: Okay. Okay. Great. Thank you very much. Thank you. Thanks, Dave.
spk08: Ladies and gentlemen, this concludes our question and answer session. I would like to turn the conference back over to Dave Martin for any closing remarks.
spk00: Thank you, Chad, and thank you for everyone that joined us this morning. Please feel free to contact me with any follow-up questions. And as always, we appreciate your interest in Harsco and look forward to speaking with you soon. Take care.
spk08: Thank you, sir. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Disclaimer