Enviri Corporation

My name is MJ and I will be the conference facilitator. At this time, I would like to welcome everyone to the Enviro Corporation fourth quarter release conference call. All lines have been placed on mute to avoid any background noise. After the speakers 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, you may then press star and then the number two on your telephone keypad. Also, this telephone conference presentation and accompanying webcast made on behalf of Enviro Corporation are subject to copyright by Enviro 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 Enviro Corporation. Your participation indicates your agreement. I would now like to introduce Dave Martin of Enviro Corporation. Mr. Martin, you may begin your call.

Thank you, MJ, and welcome to everyone joining us this morning. I'm Dave Martin of Enviro. With me today is Nick Grassberger, our chairman and chief executive officer and Tom Vadeketh, our senior vice president and chief financial officer. This morning, we will discuss our results for the fourth quarter of 2023 and our outlook for 2024. 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'll make statements today that are considered forward-looking within the meaning of 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 these statements. For a discussion of such risk 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 the 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 a slide presentation. With that being said, I'll turn the call to Nick.

Thank you, Dave, and good morning, everyone.

The fourth quarter was another strong quarter for Enviro with both Harsco Environmental and Clean Earth, delivering double-digit revenue in EBITDA growth versus Q4 of 2022, capping a very strong 2023. The rail business, excluding the impact of a few large European contracts, delivered its best quarter in many years. Tom will step through the details of the quarter in a few minutes. So we're pleased with the continued solid performance of our core businesses. That being said, we believe our share price has not kept pace with the improving fundamentals of our businesses over the past 18 months. To support the point, I'd like to share a few of the highlights of last year. Number one, revenue and EBITDA both increased at double-digit rates for the full year of 2023. EBITDA margins were up 200 basis points. Cash flow from our two core segments increased $125 million. Financial leverage declined more than one turn to around four turns. Operationally, Clean Earth, the Clean Earth team did a very nice job executing price increases, achieving record service levels, reducing the risk and cost of accessing disposal capacity, and increasing our capabilities and engagement in PFAS-related matters, amongst many other accomplishments. At Horosco Environmental, we continue to expand our footprint with new contracts and faster-growing markets with better financial profiles, and also to invest in innovation projects focused on extracting environmental benefits from steel slug. HE also achieved its financial plan for the year despite much lower than expected steel production, demonstrating strong execution. In terms of leadership, we upgraded our senior management team with Tom Vadeketh and with Jeff Beswick, the president of Clean Earth, while also continuing to refresh our board of directors with two new appointments. The year was not without some challenges. While there was outside interest in the purchase of our rail division, delays in reaching an agreement on new commercial terms on a single large loss-making European contract has pushed out the divestiture and negatively impacted our cash flow. Additionally, we were affected by the increase in short-term interest rates. Turning to the outlook for the year, we expect our end markets to be supportive of further growth and improvement in our financial profile. We anticipate steel production at the mills we support, will increase low single digits, while still remaining below mid-cycle levels. We also expect that domestic retail and industrial and healthcare markets served by Clean Earth to increase at low single digit rates. Clean Earth will be somewhat challenged by difficult comparisons to high margin project work that we saw last year. Nonetheless, the ongoing efficiency programs in both HE and CE should yield an overall increase in EBITDA of near 10% at the high end of our guidance. Cash flow and margin should also improve. So overall, we're very happy with the developments in the Clean Earth platform over the past 18 months. And we've largely achieved our margin and cash flow expectations when we acquired these businesses. We were even more excited today about the value creation potential of the business, and we will be sharing updated margin and growth targets for Clean Earth later this year. Clean Earth's value proposition and its pricing leverage within the market are clear. And with specialty waste assets trading at all time high valuations, we believe the market value of Clean Earth is considerably more than our initial investment. We're also pleased with the stability of the Harsco Environmental Platform. The volatility of our earnings and cash flow have lessened significantly and the business's good cyclical upside as well as a strong competitive position. Our lengthy pipeline of growth opportunities allows us to focus on those with the best risk adjusted returns. And finally, the emerging technologies and echo products can change the game in terms of both economics and environmental benefits. Concerning rail, I'm encouraged by the performance of the business. The team has made significant operational improvements with a strong finish to the year in Q4. Excluding the impact of the EU contracts, profit and cash flow generation were up nicely year over year and will be again in 2024. The team has worked hard to stabilize the large European contracts, and we expect to complete our agreement with a major customer, a new commercial partner. the new financial terms later this year. So efforts to divest the business are continuing and we're focused on remaining financially disciplined while executing an acceptable transaction for shareholders. So to be sure, the board and the management team are squarely focused on creating value both across and within our portfolio of businesses while pursuing our strategic ambition of investing in environmental solutions. We look forward to sharing such developments with investors throughout the year. Now I'll turn the call over to Tom.

Thanks, Nick, and good morning, everyone. Let me start by saying that my first full quarter with Enviry was rewarding and refreshing. I've learned a great deal more about our businesses and our people, as well as the tremendous opportunity in front of us. I've been impressed with the quality and engagement of Enviry's employees, and I'm excited about where the company is headed. The Enviry team delivered a strong finish in the fourth quarter to a strong year, with revenue for the full year 2023 growing 10%, adjusted EBITDA growing 28%, a significant improvement in cash generation, and an improvement in our covenant net leverage from 5.3 times on January 1st last year to 4.1 times at the end of the year. Now let me comment on our fourth quarter performance, starting on slide four. Enviry's fourth quarter revenues from continuing operations increased to $529 million, up 13% compared with the prior year quarter. The increase was driven by both pricing and higher demand for our environmental services in both Clean Earth and Harsco Environmental. Adjusted EBITDA totaled $73 million. This result represents a 21% improvement from the prior year and is above our prior guidance range. The stronger than anticipated results were driven mostly by volumes and a more favorable business mix, with again, both Harsco Environmental and Clean Earth contributing. Relative to the prior year quarter, each operating segment contributed to the growth in adjusted EBITDA, which I'll discuss shortly. This was partially offset by higher corporate spending, which was mainly driven by higher incentive compensation spending in 2023, and other smaller items that occurred in 2022 that did not repeat, such as some FX-related hedging gains. Our adjusted loss per share was seven cents for the quarter. Pre-cash flow for the quarter was $25 million versus $3 million in the prior year quarter. This improvement was driven by a reduction in working capital and higher cash earnings. Our days' sales outstanding improved by 8%, or six days, from the end of 2022 to the end of 2023, with both HE and CE showing strong improvement, and the finance and operating teams within our businesses doing a great job to drive this improvement. Lastly, our net leverage decreased to 4.1 times, from 4.5 times at the end of Q3. Please turn to slide five and our environmental segment. Segment revenues totaled $292 million, up 14% compared with the prior year quarter. Adjusted EBITDA for the quarter reached $56 million, representing an increase of over 30%. Relative to the prior year quarter, HE benefited from higher services and equal products volumes, including from new sites, as well as higher pricing. As a result, HE's EBITDA margin exceeded 19%, which was its highest quarterly margin for the year. Turning to Clean Earth on slide six, for the quarter, revenues totaled $237 million, and Adjusted EBITDA reached $29 million. Compared to the fourth quarter of 2022, revenues increased 12%, and revenues decreased only modestly from the record levels we saw in the third quarter of 2023. Year on year, price contributed about one third of the increase, with underlying volume growth led by industrial markets, which included the impact of project-related work, followed by retail. As of this material's revenues reached $189 million, while soil dredge revenues totaled $48 million for the quarter. These figures represent increases of 11% and 14% respectively. Clean Earth's Adjusted EBITDA increased 17% year on year. In addition to price and volumes, the business benefited from efficiency initiatives, and these positive items were partially offset by higher incentive compensation, restructuring costs, and some internal investments of spending. Now please turn to slide seven. For the full year, revenues from continuing operations increased to almost $2.1 billion, an increase of 10% year over year. And Adjusted EBITDA totalled $293 million, an increase of 28% over 2022. Additionally, Enviro's underlying free cash flow performance was positive. HE and Clean Earth together generated free cash flow of approximately $185 million in 2023, an improvement of over $125 million compared with the prior year due to higher earnings and working capital performance. This increase was partially offset by higher interest costs at corporate. We reduced our covenant net leverage ratio by over one turn during the year, from 5.3 times to 4.1 times. Without a doubt, 2023 was a very strong year for Enviro. Our strong market positions and value proposition enabled us to drive increases in volume as well as price. Our operating teams executed well and realized meaningful benefits from various growth and improvement initiatives. Clean Earth, for example, reached an all-time high for on-time customer service while recycling and reusing 10 billion pounds of waste. Asco Environmental won more than 20 service contract renewals and secured five new growth contracts during the year, illustrating its continuing premier position in the market. We expect these positive trends to continue in 2024. We're also very pleased with the performance of our rail business and the team. Rail performed strongly in Q4, with revenues of more than 30% -on-year. It generated fourth quarter free cash flow, and its quarterly adjusted earnings were the highest in two plus years. As Nick mentioned, the rail team has done a great job this last year to drive operational improvements of the base business while working towards stabilizing our large ETO contracts and agreeing to a go-forward plan with our customers. We recorded charges of $40 million in Q4, reflecting forward losses on these contracts, where we now have significantly improved visibility. Importantly, we think we're at or near an inflection point for rail. Its earnings and cash flow are projected to strengthen further in 2024, and its cash flow is set to improve further beyond 2024 as these large contracts mature. Now let me turn to our 2024 outlook on slide eight. Arsco's full-year adjusted EBITDA is expected to be within a range of $300 to $320 million, up 6% -on-year at the midpoint. This represents continued momentum in the business after a very strong 2023, with EBITDA growing strong double digits over a two-year period. This EBITDA range translates to adjusted earnings per share guidance of between breakeven and a loss of 25 cents. Lastly, we're planning for capital spending of between 130 and $140 million, which is comparable to 2023, and we're targeting free cash flow of $20 to $40 million. For 2024, we're expecting an underlying improvement in operating cash flows within HE and CE, with HE and CE expected to see an increase of up to $30 million -on-year. The impact will be partially offset by a slight increase in cash interest and higher incentive payouts linked to 2023 performance. Also note that this free cash flow outlook, again, excludes rail. It also excludes finance leases. We have entered into finance lease obligations of approximately $50 million, mostly for Clean Earth, that will commence in 2024 and are expected to carry into 2025. These leases for Clean Earth relates to the refreshment of its vehicle fleet, which occurs once per decade, roughly. As a result of EBITDA growth and free cash flow, our leverage ratio is anticipated to decline further during 2024. Now let's turn to our segment guidance in slide nine. Both segments are expected to realize growth in adjusted earnings in 2024. For Harscores Environmental, revenue is expected to grow at a low single-digit rate, and HE's profitability is expected to be slightly above 2023 levels at the guidance midpoint. Growth in HE revenue and EBITDA will be driven by higher customer steel production, new contracts, site improvement initiatives, and pricing. The outlook for better steel production is principally driven by Europe, India, and the Middle East. For Clean Earth, revenues are also anticipated to grow low single digits, while CE's EBITDA will grow at a higher rate with its margins expected to improve 50 to 100 basis points for the full year. Beyond higher revenues, EBITDA drivers for Clean Earth, again, include various efficiency initiatives with anticipated growth benefits of over $10 million for the year. Lastly, corporate costs are expected to be comparable with 2023 levels. Let me conclude on slide 10 with our first quarter guidance. Q1 adjusted EBITDA is expected to range from $63 million to $70 million. Outscore environmental EBITDA is anticipated to increase slightly versus Q1 2023. Higher volumes, price, and improvements will contribute to the growth. Clean Earth EBITDA is also expected to be modestly above the prior year quarter. Here, higher price and improvements are expected to offset a less favorable business mix. Compared with Q4, this outlook contemplates seasonal weakness in each of our business segments. And lastly, I'd note that Q1 is traditionally a week free cash flow period, given seasonal business performance and cash flows. This will be the case again in 2024. We expect to consume cash in Q1, given the seasonality, as well as the timing of interest and incentive compensation payments. Thanks, and I'll now hand the call back to the operator for Q&A.

Thank you very much. We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw from the question queue, please press star then two. At this time, we will pause momentarily to assemble our roster. Today's first question comes from Rob Brown with Lake Street Capital Markets. Please go ahead.

Good morning. First questions on the Clean Earth growth expectations. I just wanted to get a sense of how much price is left to realize and how the volume mix is shaking up for

2024. Well, we,

in the last

couple years, have been quite pleased with the pricing leverage within Clean Earth. I think this year, typically, raised prices in January and been down to about $1.5 and we're very pleased again with the acceptance of that, I'll say relative to our inflation. So I think we continue to expect to see some margin left over time from pricing. In terms of volume in Clean Earth, the industrial segment is probably the strongest in terms of its outlook, three or 4%. I think something less than that in retail and in healthcare. We did have a number of large, one-off, high margin projects in Clean Earth last year that you never quite know if they're going to repeat. So perhaps we're a bit conservative here in how we think about the volume in 2024. But I will say that the pipeline of those projects remains very strong. We're just

never

quite sure when they're going to start.

Okay, got

it. And what's sort of the long-term growth rate in Clean Earth that you see at this point? Is it, even with those projects, is it in that kind of low to mid single digit growth rate in Clean Earth or do you see that kind of coming up? Yeah, I

think about it as kind of a GDP plus growth business. So think of GDP plus a few points of growth over a cycle. And of course, we would expect

the

volume in the business to be somewhat less volatile than GDP overall throughout a cycle.

Great, okay, thank you. I'll turn it over.

Thank

you. The next question comes from Michael Hoffman with Stiefel. Please go ahead.

Hi, good morning, Nick, Tom. Thanks for your questions. Hey, Michael. Hey.

To the, you've all been very good about calling out the project activity. Could you just remind us so we get the, because we're all starting doing quarterly numbers, the cadence of when we should think about that? And so we get that quarterly cadence, right? I realize that's a little bit of a housekeeping question, but I think we all ought to pay attention to that.

Yeah, good morning, Michael. It's Tom Vadeket. I can take that. So we guided you to the growth rates over the quarter and I'd expect basically about the same pattern and phasing by quarter. So each, broadly speaking, each quarter for each of the businesses should be, should have the same kind of growth rate. So, you know, in a nutshell, similar phasing to last year.

Okay. And that, but just to remember, the project work was heavy in the first half. That's where we, we've got to overcome that in the first half, is that correct? In clean earth?

Yeah, actually, I would say in the soils business, the project work was better in the second half of the year.

You know,

in the first half of the year, we have a somewhat challenge comparison in the, because of the settlement with a large customer as you may remember.

Yep. Okay. That's what I wanted to draw out. And then free cash flow at the segment level, you know, that's an impressive number going up 30 million year over year on, 185 million. How do we get, what has to happen in the business model to convert at the whole company level where the conversion of your EVTA starts to look more like the peers, which is in the 30 to 40% of EVTA instead of we're landing somewhere in the low double digits.

Yeah. Great question. First of all, clean earth is in that conversion range of 75 to 80%. So I think that compares very favorably to its peers who are more capital intensive. In HE, that conversion figure is closer to 50%. Now, you know, over time, and there's a big push this year to transition some of our contracts to more of an asset light model where we're only really investing in the so-called critical assets on the site that truly add value and less so in the assets used for logistics. So over time, as that value proposition is better adopted, I think we'll see the HE cash conversion certainly improve. And then of course, the last piece of that is interest expense, right? We're highly levered. We have a lot of interest expense. And so as rates come down and as we de-lever, that will certainly help the cash conversion on a consolidated basis.

Okay. To that end, you're trying to sell a business to help do that. At one point, you alluded to that nefarious European customer that if you couldn't get a resolution a timely manner, you'd pull it out and then just sell the business away. What's changed in the strategy to...

Yeah, I think we feel that we really need to negotiate new commercial terms with this one customer. If we were to divest the business and retain the risk on that contract without the ability to execute it, I'm just not sure that would be wise for us to do. So again, the base business is very strong, standard equipment, aftermarket, our services business is very strong, but we just don't believe we can get the right value risk profile for the business until we complete this negotiation. It's still of course, a strategic imperative to divest it, but it needs to make sense for shareholders.

I

guess it also remind everyone that the rail business is less than 10% of our EBITDA on a consolidated basis. So again, it's something we want to do, but even if we were to decide to retain it, given that the outlook for the business is good and we might become more comfortable executing the next year or two of these contracts as opposed to effectively outsourcing it, still retaining the risk, that may well be the right thing to do for shareholders. We're just not at that point yet to make that call.

Yeah, I mean, it's the deleveraging aspect, not the EBITDA, I think the market's focused on this point. Two things on PFAS and then Superfunds. So in your outlook, have you assumed that a more conservative view about PFAS given that the current administration's being very slow about issuing final rules? And then on the flip side, they've just issued an announcement of 25 sites to get Superfund cleanup funding, and I'm curious about how you see Clean Earth's role in some of that activity, because a lot of it's predominantly in your sweet spot geographically.

Right, right. Well, first of all on PFAS, we do not have any kind of financial impact of PFAS remediation in our 2024 guidance. We're feeling very good about how we're positioned, both in terms of technology and the partnerships that we've developed. And you may recall recently an announcement with the DOD on a project to prove out some remediation concepts with the Navy and the Air Force. So we feel very good about how we're positioned when those volumes begin to flow. In terms of the Superfund sites, I think that, I knew it just came out a few days ago. As you know, Michael, we have facilities all over the country are really strong footprint, both in soil and in hazardous waste. So we certainly would expect to participate. And there's Superfund volumes as they begin to flow.

Okay, thank you very much.

Thank you.

Thank you. The next question comes from Larry Solo with CJS Securities. Please go ahead.

Great, thank you and good morning. Good morning. Quick follow up on the, good morning. A follow up just quickly on the rail. You said, I just wanted to clarify, just in terms of run rate EBITDA or just kind of some number to look at, is it around 20 to 25 million? You said less than times that EBITDA. Maybe excluding the charges, is there any way to kind of look at what that sort of run rate EBITDA is today or the 24 outlook? Yeah, no,

it's closer to 30 this year in our outlook, the EBITDA. But on a quality of earnings basis, it's higher because of a few add backs. So we're looking at 35 to 40 in terms of the Q of E, EBITDA figure for rail this year. Gotcha,

okay. And then I guess environmental services, a really nice quarter. Normally seasonally a little bit slower, your margins are actually picked up too. So really good to see that. I'm just curious, it sounds like there's a lot of positives going into 24. You mentioned you're expecting volumes from CO2 pick up. You called out a few new contracts. I don't know if your net contract business is new or is a positive, but it sounds like it is. And some favorable pricing. So it just sounds like that's also a good guy. So just trying to figure out what are some of the offsets kind of to mute your expectations for growth in 24 in environmental. Right,

so the core of the global mill services business is really improving

nicely

year over year, both in terms of volume and EBITDA and cashflow. The Echo products business, which is, as you know, in part exposed to certain commodity prices. We expect to be weaker because of those commodity prices. And we also have a business within HE called Reed Minerals that is transitioning from coal slag to steel slag as its base product for roofing materials and abrasive materials. And in that transition, the EBITDA will decline year over year. So Echo products overall is probably down about 10 million of EBITDA. Again, mostly because of price, but also in this one business. Got

it, and then just switching to cleaner, a couple there. Just on the mix, it just sounds like a little bit of a downturn in mix. Is that more on the hazardous side? I guess it sounds like those projects related. You're not referring to the, or is that also on the soil side? In terms of timing a project, I guess that would be on the soil side or not necessarily.

Just

trying to clarify that.

Yeah, so again, the margins on the soil business are about a point or two higher than that on the hazardous side. We saw very strong growth in the soil's volume, particularly the second half of the year.

And so there

is a bit of a mix down overall in Clean Earth because of that dynamic this year. We also had some very high margin hazardous projects that again, they may well repeat the pipeline is good. We just don't have clear visibility to when. There may be a bit of conservatism there.

Got you, I know your bookings were up pretty strongly after you had signed those last quarter on the soil. For the whole year, right?

They were, they were.

And the outlook is

good.

Gotcha, and then just last question. Any commentary about the positive effects perhaps just on the intent, the contract for Veolia and then generation? I guess that won't really kick in till 2025. But so I guess there's still kind of a backlog for you guys this year, a little bit of supply chain issue until you get some of this stuff moved out faster some other way. Thanks.

Yeah, and I think we and Veolia feel really very positive about the agreement that we've reached and the benefits are helping us now, even though their large incinerator is not opening until 2025, as part of the agreement with Veolia, we have access to their other incinerators as well. And so the benefits of that contract in terms of capacity access as well as price are benefiting us as we speak.

Got it, I appreciate that clarification. Great, thanks, thanks for all the calling.

Thank you. And again, if you have a question, you may press star then one. The next question comes from Davis Bainton with BMO Capital Markets, please go ahead.

Hi, good morning, this is Davis on for Devondodge. Good morning. Hi,

so just wondering

regarding that European rail contract. So did I hear correctly when you said that the agreement is likely not gonna be reached until the back half of the year? Is there any incremental commentary you can give on the timing of that?

Yeah, no, we're certainly in discussions with them now. We've passed a few milestones recently that should enable us to accelerate those discussions, but I'll just be very honest, dealing with a large bureaucratic European state-owned rail company can be a bit frustrating in terms of the pace which things move. So it's difficult to predict.

Yeah, appreciate the color there. And then just maybe one more quickly for me, just on the accounts receivable securitization, significant decrease in that compared to the previous quarter in the last year, I'm just wondering if there's any color that you could give there,

please. Well, so we, it's don't gotta get the, we have the facility, obviously the facility went

into force in 2022 and that's when there was that, effectively a one-time benefit, I think of about 140, 145. We had an additional 5 million or so this year and so the size of the facility today is about 150 million and we expected to stay at that kind of level going forward. So there shouldn't be an additional cashflow benefit from that going forward.

Okay, perfect, thank you, I'll turn it over.

Thank

you, this

concludes our question and answer session. I would like to turn the conference back over to Dave Martin for any closing remarks.

Thank you, MJ, and thank you for all that joined the call today. Please feel free to reach out to me with any questions and as always, we appreciate your interest in the company and look forward to speaking soon, take care.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Thank you, let's . . . . . . . . . . .

. . . . . .

. . .

. . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . .

.

. . .

.

.

.

.

.

.

. . . . . .

. .

. .

.

.

.

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

.

. . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . .

. . . . . . . . . .

.

. . . . . . . . . . . . . . . . . . . .

. .

. . .