Enviri Corporation

Good morning and welcome to the Enviri Corporation third quarter 2023 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Dave Martin for the rest of the conference. Please go ahead.

Thank you, Debbie, and welcome to everyone joining us. I'm Dave Martin of Enviree. With me today is Nick Grasperger, our Chairman and Chief Executive Officer. and Tom Vatikath, our Senior Vice President and Chief Financial Officer. This morning, we will discuss our results for the third quarter of 2023 and our updated outlook. Before our presentation, however, let me mention a few things. First, our earnings release and slide presentation for this call are available on our website. Second, we will make statements today that are considered forward-looking within the meaning of the federal securities laws. These statements are based on our current knowledge and expectations and are subject to certain risks and uncertainties that may cause actual results to differ materially from those forward-looking statements. For a discussion of such risks and uncertainties, see the risk factors section in our most recent 10-K. The company undertakes no obligation to revise or update any forward-looking statements. Lastly, on this call, we will refer to adjusted financial results that are considered non-GAAP for SEC reporting purposes, A reconciliation to GAAP results is included in our earnings release as well as the slide presentation. With that being said, I'll turn the call to Nick. Thank you.

Thank you, Dave, and good morning, everyone. I want to welcome Tom to Enviread. Tom is a seasoned executive who has worked in both public and private companies and has had considerable success. He fits very well into our culture. and I look forward to working with him as we continue our transformation. So, Tom, welcome. Once again, I would like to thank Pete Minin for his dedication to our company and to its shareholders. Pete's contributions across the company over the past nine years are countless, and we wish him well in his retirement. This past quarter was our fifth consecutive quarter of double-digit EBITDA growth against the prior year quarter. And once again, we exceeded expectations. As a result, we are also raising our outlook for the full year. And our focus remains squarely on boosting cash flow, reducing our leverage, and completing the next step in our transformation. Cash flow from our two continuing segments, Harsco Environmental and Clean Earth, will improve by over $100 million this year. And we expect further growth over the next few years. Our challenge has been the cash flow in our rail segment and much higher interest expense due primarily to higher short-term rates. Nonetheless, our leverage will decline by about one turn this year, and we expect leverage to decline by at least another half turn next year before accounting for the impact of the rail divestiture. The largest contributor to our deleveraging has been the margin expansion and cash flow generation at Clean Earth. Clean Earth's EBITDA margin improved to 14% this past quarter, up 150 basis points from a strong third quarter last year, driven by pricing gains, volume growth, favorable mix, and numerous projects aimed at improving operational effectiveness. Cash flow will approximate $100 million in Clean Earth this year, or 11% of revenue and over 80% of EBITDA. These metrics reflect the fact that our assets require relatively modest maintenance capital, and we've been able to pass on the inflation we've incurred in disposal and other costs. We are soon to complete our third full year of the Clean Earth segment that was created by the acquisitions and combination of two businesses. EBITDA has grown from about $80 million at the time of acquisition to over $120 million this year. This growth in our financial focus have driven Clean Earth's strong free cash flow, which is earning us a respectable return on our investment. When considering the recent multiples paid for acquisitions in our industry and the outlook for our business, we are confident that this segment has created and will continue to create tremendous shareholder value. Our efforts to build a much better business from a unique set of assets include installing a new leadership team improve pricing discipline, optimizing logistics, reducing SG&A, and several other operational improvement programs. The implementation of a common IT operating platform next year will be another critical milestone to unlocking the value in the business. Parsco Environmental continues to perform well despite weaker than expected steel production by our customers. Similar to Clean Earth, cash flow will be considerably higher in HE this year due to higher cash earnings and much improved working capital performance. The business has been successful in expanding the scope of current contracts with less capital-intensive services, and the Echo Products business is outperforming expectations. The operating leverage in HE is quite high, and we look forward to the impact of steel production volumes returning to at least normalized levels over the next few years. Turning to our rail segment, we expect to announce a sale transaction late this year or early next year as due diligence is completed. Strong anticipated financial performance by rail in the fourth quarter will support the process, and we continue to work to de-risk specific long-term contracts with European customers. Next, we released our annual ESG report a few weeks ago. The report is critical to Enviree because our mission is to create and deliver environmental solutions. And the report highlights how we measure ourselves and our progress against those metrics. In 2022, we saw record level safety performance from Harsco Environmental, and for the company, a 20% improvement in safety compared to the prior year. In total, we recycled or were able to repurpose 35 billion pounds of waste last year. Clean Earth recycled 90% of the waste taken in, and Harsco Environmental recycled or reused 87% of the slag it processed. I encourage you to review our report at Enviro.com. Looking ahead to 2024, we are optimistic. As noted, we expect to complete the sale of rail in the coming months, And while we won't provide formal 2024 financial guidance until February, it's safe to say that we are targeting continued margin and profit growth in each of our businesses next year.