Harsco Corporation

Good morning. My name is Debbie and I will be your conference facilitator. At this time, I would like to welcome everyone to the HRSCO Corporation third 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 2 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 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.

Thank you, Debbie, 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, and Pete Munin, Harsco's Senior Vice President and CFO. This morning, we will discuss our results for the third quarter as well as our outlook. We'll then take your questions. Before our presentation, however, let me mention a few items. First, our 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 within the meaning of the federal securities laws. These statements are based on our current knowledge and expectations and are subject to certain risk and uncertainties that may cause actual results to differ from these 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 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 as well as the slide presentation. With that said, I'll now turn it over to Nick.

Thank you, Dave, and good morning, everyone. Thanks for joining us today. The third quarter was above our expectations, as adjusted EBITDA improved both year-over-year and sequentially. These results reflect our leading position in the environmental waste markets and strong execution in our Clean Earth segment as implementation of new operational initiatives began to deliver results. In fact, Clean Earth recorded its best quarter under Harsco ownership, and EBITDA margins improved significantly. Harsco Environmental was challenged by softening industry fundamentals, although its competitive position has never been stronger. And we see opportunity to gain further market share in the coming quarters following the bankruptcy of a major competitor. Looking ahead to the fourth quarter, which is seasonally our slowest quarter, we expect these trends in both segments to continue and have accordingly raised our full-year profit guidance. Pete will provide further details on our financial results and projections in a few minutes, but before he does that, I'd like to take a moment to discuss our corporate strategy and the actions we're taking to position Harsco for value creation both in the near and long term. We remain committed to our ongoing efforts to reshape our portfolio and focus exclusively on providing environmental solutions to a broad range of end markets. Our progress has not always come in a straight line. However, this leadership team has become accustomed to moving decisively to address macroeconomic challenges and to fix businesses where we have discovered underlying problems. A good example of this is our mill services business within Harsco Environmental. A few years ago, the business was saddled with a large number of underperforming contracts, poor returns on capital, and was lacking process discipline. As a result, we were losing market share and our margins declined. We refocused the business, reduced costs, and improved our capital allocation process and discipline. and the business is now a much more solid business with a deep and talented leadership team and a strong position relative to our competition. The challenges we face today in mill services are largely external, and we expect the effects of the recent downturn in the steel industry to be at least partially mitigated in 2023 by price increases, cost reduction, and new business. A similar process is underway within our Clean Earth segment which was augmented through the acquisition of ESOL in February of 2020, just prior to the COVID outbreak, and is now dealing with the impacts of inflation, the shortage of disposal capacity, and a tight labor market. We believe in the value Clean Earth delivers to Harsco and to our customers, and we're implementing a revised plan to help it achieve its potential. We've refocused the business on executing operational initiatives related to pricing, disposal costs, transportation efficiency, and reduction in headcount. We've also made several leadership changes in Clean Earth over the past several months, and we've streamlined the organization and have become much more aligned and decisive. Our third quarter results reflect these changes, and I believe that business is better positioned to strengthen margins and become less volatile in the future as a result of these changes. In the second half of this year, EBITDA and EBITDA margins at Clean Earth should be nearly three times those of the first half of the year. Price increases to offset inflation have been a large contributor, as have numerous cost reduction programs. For the year, the inflation impact net of price will be about $10 million in Clean Earth, but we anticipate this gap to reverse and to become a positive contributor to our margins next year. Our success in executing price increases demonstrates the value of our asset base and the value proposition of our reuse and recycling services. Our customers have been extremely supportive of our price increases, with the notable exception of Stericycle, despite the fact that our contract with them provides us broad ability to recover increases in costs. So after several discussions with Stericycle, and providing evidence of the extraordinary inflation in transportation and disposal costs, we have filed a lawsuit against Stericycle in Delaware court. We will nonetheless continue to provide Stericycle outstanding service under our contract, and this dispute does not give Stericycle the ability to terminate or alter our contract. Looking ahead to next year, I fully expect Clean Earth to deliver significant growth in revenue EBITDA and margins. Specifically, revenue should increase high single digits, and EBITDA margins should be a few hundred basis points higher than this year. Much of this will be driven by the already executed price increases in our continued cost reduction actions related to transportation, disposal, containers, and SG&A. In addition, we are seeing positive momentum with new business due to our much improved customer service levels and upgraded IT interfaces with our customers. Overall, our line of sight to the targeted 15% EBITDA margin over the next 15 years or the next few years is clearer today than it was in the past. Importantly, I should note that this 15% target does not include the potential benefits of processing PFAS contaminated soils in response to the EPA's recently announced proposals, nor does it reflect the benefits of growth in other targeted markets, such as lab pack, hospitality, and healthcare. Turning now to Harsco Environmental. The record high energy prices in Europe and the weakening demand for steel has led to a significant reduction in steel production at many of the European sites that we support. Pockets of weakness also exist elsewhere, including in North America. Inflation and the strong U.S. dollar are further pressuring results. We expect these headwinds to be mitigated in 2023 by cost reduction actions we are putting in place and the impact of annual price escalators next year, which together we believe may lead to EBITDA cash flow and margin growth, even in a mild recessionary environment. Our value proposition in Harsco Environmental linked to high service levels, innovation, and safety is allowing us to be selective in choosing the most attractive growth opportunities. For Harsco, sustainability is not only embedded in the services that we provide to our customers, but it's critical to how we manage the business and we view the mission of our company. Highlighting the internal progress we are making, we recently published our annual ESG report. We continue to see improvement in our safety performance, especially in Harsco Environmental and in rail. And we are very focused on reducing our incident rate in Clean Earth to match the industry leading levels in our other businesses. Harsco Environmental and Clean Earth together launched 38 new environmental solutions last year, a 30% increase compared to the prior year. And we are on track to reduce our carbon emissions by 15% in 2025 from a 2019 baseline. And finally, as always, we're committed to continuing to engage with shareholders and other stakeholders on ESG matters. Our financial priorities remain unchanged, with a primary focus on reducing our financial leverage to around three times through divesting the rail business, improving earnings, and boosting cash flow. Progress towards this goal has been affected by supply chain and inflationary pressures in our rail business. and higher working capital levels in Harsco Environmental's China business. Nevertheless, we fully expect the cash flow and balance sheet profile of Harsco to improve over the next few years, driven by EBITDA to cash flow conversion and clean earth, modest capital spending, improved working capital in Harsco Environmental, lower cash interest as leverage falls, and declining pension costs. I'd like to address the sale of the rail business directly just for a moment. The core rail business, which we have operated for decades, is an excellent, well-respected business throughout the world and is an ideal platform upon which a buyer could build or use to complement an existing platform. As we have disclosed and discussed in prior periods, we have a few large, mainly European contracts, which are more complex in nature and as a result of a variety of issues have been delayed. For example, we have seen supplier issues resulting in extraordinary inflation and delivery delays, in turn resulting in these contracts being unprofitable in the short term and delaying the associated cash flow. We've been actively working with the customers and with our suppliers to find ways to address the operational and contractual issues. The good news is that with the passage of time and the actions that we've taken, the future financial and operational risks associated with these contracts have been greatly reduced. We expect buyers to be able to look past these isolated issues and recognize that, with governments poised to invest heavily into public transportation infrastructure, that Horusco Real remains a very attractive asset. I'll now turn the call over to Pete. PETE FESTERSEN.