Harsco Corporation
Q2 2019 Earnings Call Transcript

Published: 31 Jul 2019

[Operator:]

Good morning. My name is Nora, and I will be your conference facilitator. At this time, I would 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 speakers’ remarks, there will be a question-and-answer period. 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. Harsco Corporation will be recording this teleconference. No other recordings or redistributions of this telephone conference by any other party are permitted without expressed written consent of Harsco Corporation. Your participation indicates your agreement.

[Dave Martin:]

Thank you, Nora, and welcome to everyone joining us this morning. I’m Dave Martin of Harsco. With me today is Nick Grasberger, our Chairman and Chief Executive Officer; and Pete Minan, our Senior Vice President and Chief Financial Officer. This morning, we will discuss our results for the second quarter and our outlook for the remainder of the year. We’ll then take your questions. Before our presentation, however, let me mention a few items. First, Nick, Pete and I are in two different locations today so please bear with us for any communication challenges. Second, our quarterly earnings release as well as the slide presentation for this call are available on our website. Third, this call is being recorded and webcast. A replay will be available on our website later today. Fourth, we will make statements 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 these forward-looking statements, for a discussion of such risk factors and uncertainties to the Risk Factors section in our most recent filings. The company undertakes no obligation to revise or update any forward-looking statement. Fifth, 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 today as well as the slide presentation. Lastly, as a reminder, we are now reporting the Industrial segment as Discontinued Operations, so all GAAP financial information is presented accordingly. . Our full year guidance, however, is presented differently and should align with most of your models. This guidance reflects two quarters for the Industrial segment and includes Clean Earth for the second half of the year. Now, I’ll turn the call over to Nick to begin his remarks.

[Nick Grasberger:]

Good morning and thanks for joining us. This past quarter was the most impactful quarter from a strategic standpoint in many years as we signed and closed a pair of transactions that represent a significant step towards transforming Harsco into a single thesis company focused on environmental solutions. We also rebranded our Metals & Minerals segment during the quarter as Harsco Environmental to reflect the true nature of the business and the focus of our investments and value proposition moving forward.

[Pete Minan:]

Thanks, Nick, and good morning everybody. First, let me apologize in advance, as you can appreciate, with all the transactions we completed this quarter, our reporting may seem a little bit more complicated than normal. First, I’ll reiterate a few points that Dave and Nick highlighted. Our reported financial statements now account for our entire Industrial segment as Discontinued Operations starting with the second quarter. For GAAP reporting, all prior periods will be recast in this presentation. For my remarks this morning, I’ll try to be clear. And wherever necessary, I will reconcile our reported results to the prior guidance for May of this year, which, of course, didn’t contemplate this accounting change. I’ll also do the same with the 2019 guidance, which now essentially disregards our remaining Industrial businesses, IKG and Patterson-Kelley, for the second half of the year but includes the actual results of the segment for the first half. So let’s start with Slide 3 and our consolidated financial summary for the quarter. Harsco’s GAAP operating income in the second quarter was $18 million, while adjusted earnings were $33 million. If you include the Harsco Industrial segment to be consistent with our May guidance, adjusted operating income was $53 million in the quarter, and this figure compares with $52 million in the prior year quarter and placed our results within our prior guidance range. Both Rail and Industrial had a very strong quarters and showed meaning full year-on-year improvement. Our results were at the low end of our guidance range due primarily to Harsco Environmental where customer steel output slowed and commodity prices weakened relative to our expectations as the quarter progressed. Also, new sites ramped up more slowly than anticipated, and we experienced some operating challenges, including higher maintenance costs at a couple of our sites during the quarter.

[Operator:]

We have your first question comes from the line of Jeff Hammond of KeyBanc.

[Jeff Hammond:]

Can you hear me?

[Nick Grasberger:]

Yes, Hi Jeff.

[Pete Minan:]

Hi, Jeff.

[Jeff Hammond:]

Okay. Hey, just a couple of housekeeping items. First, on Environmental. Can you give us what the revenue impact was on FX and how much Altek contributed? I think you had at least the stub where it’s kind of M&A revenue.

[Nick Grasberger:]

Pete, you want to take that?

[Pete Minan:]

Yes. So the FX impact was about $10 million negative, Jeff, for revenue and about $1 million on OI. And Altek was just about – let’s try for the quarter numbers for Altek. They were – for the quarter, Dave, do you have the quarter in? It’s going to be about $25 million to $30 million for the full year, and the impact for this quarter was roughly proportional, Jeff.

[Jeff Hammond:]

Okay. Okay. And then just you explained the Applied Products. That seems to be maybe where you had the most severe mix. Is that lower – just simply lower nickel prices? Or is there more to it than that? What are you seeing perspectively into the second half in terms of that business stabilizing?

[Nick Grasberger:]

Yes. So with respect Applied Products, the shortfall was almost entirely due to price. There was a very modest reduction of volume relative to expectations but really think about it in terms of price. In the second half of the year, we’ve seen at least in the past few weeks some strengthening of nickel prices and steel scrap prices. So we do expect there to be some recovery in Applied Products in the second half.

[Jeff Hammond:]

Okay. And then you mentioned the slower ramp of new contracts. So it looks like Altek you are seeing some pushouts but also some of the new steel contracts are ramping slower. What’s driving that?

[Nick Grasberger:]

I think it’s mostly the environments. If you look at steel prices year-to-date, say, in North America and elsewhere, they’re softer than I think people expected. So that tends to lead to prolonged, let’s say, negotiations on contracts.

[Jeff Hammond:]

Okay. That’s fair. Just shifting over to Rail. So you mentioned the profitability dynamic in 3Q, which I understand. Can you talk about like revenue cadence 3Q, 4Q? I mean it looks like year-to-date, you’re up 18%. You’re guiding 30% to 35%. Just want to understand how back-end loaded around the 4Q the Rail is.

[Nick Grasberger:]

Go ahead Pete.

[Pete Minan:]

Yes. It is going to be fourth quarter loaded predominately for revenue, Jeff. So we’ll be up a good bit of revenue in Q3 but even more substantially in Q4, and that’s really just a question of mostly mix. And as you recall, last year, we had exceptionally large third quarter. That exceptional quarter in 2017 was in the fourth quarter, and it will be again in 2019. This is what we experience in terms of the typical seasonality. But still for the full year, we’ll be targeting 30% to 35% year-on-year increase.

[Jeff Hammond:]

Okay. And then just finally, on Clean Earth. It sounds like it’s performing a little bit better than you had thought early on. Just talk about 2Q performance, what’s particularly going better and then if you just give us a better sense of seasonality for the business as we kind of model it quarter-to-quarter. Thanks.

[Nick Grasberger:]

Do you want to take that Pete?

[Pete Minan:]

Yes. Sure. So we can’t say a whole lot about the second quarter results for Clean Earth. As you know, they’re still at that time owned by a public company, which hasn’t reported yet, but I will tell you that the results have been better than our previous expectations as we discussed during the May announcement. The business is second half weighted, so we expect the second half to be better than the first half. And for the reasons I mentioned during my prepared remarks, the year-on-year increase is going to be substantial as well. So it’s doing slightly better than what we anticipated back in May.

[Jeff Hammond:]

But the second half weighted, that’s normal seasonality or that’s acquisitions and other things coming in.

[Pete Minan:]

It’s – well, in terms of this particular year, it’s a combination of both. But discounting the acquisitions, the business itself tends to be back-end, more weighted toward the second half than the first half.

[Jeff Hammond:]

Okay. Congrats guys on all the moving pieces. I like the moves.

[Nick Grasberger:]

Thank you, Jeff.

[Operator:]

Your next question comes from the line of Rob Brown of Lake Street Capital.

[Rob Brown:]

Good morning.

[Nick Grasberger:]

Good morning.

[Rob Brown:]

On the Clean Earth business, just wanted to understand the visibility there. As it steps up into the back half, do you have visibility that, that continues into 2020? Or what degree is the visibility that you have? And then how do you see that growth playing out?

[Nick Grasberger:]

Yes. I think we are quite optimistic as we finish out 2019 and go into 2020, the degree of project work in dredge has stepped up. The acquisitions that were made last year, performing quite well. And there’s new hazardous materials that the Clean Earth is in a very strong position to process that they have not in the past. So in terms of pricing and volume and the ramp of acquisitions, I think all that goes quite well into 2020.

[Rob Brown:]

Okay. Good. Then shifting to the IKG and Patterson-Kelley sale, what’s sort of the run rate in the EBITDA of those businesses? And what’s sort of your view on timing of the sale?

[Nick Grasberger:]

Yes. The EBITDA on those businesses is in the low-20s, and we would expect those transactions to close late this year, perhaps early in 2020.

[Rob Brown:]

Okay. Okay. Good. And then maybe a little bit back to Altek. You had a customer fallout and a couple of moving pieces there. But how do you see that business at this point? Do you see that kind of coming back? Or do you see that as really running at a lower rate? And how do you sort of view that playing out into 2020?

[Nick Grasberger:]

To be clear, Rob, we’ve not had any customers turn down the technology. It’s just a question of – since it is quite new technology, I’m speaking of AluSalt, and quite differentiated from the legacy solution that these discussions are simply taking longer than we had initially expected, understanding that it was always difficult to predict the offtake of the technology kind of quarter-to-quarter. But the many, many discussions they were having, they’re all quite positives. And I think I’ll just add that initially we did not expect to really begin so soon discussing the technology with the potential Chinese customers. And that, to our surprise, has ramped up significantly. So I think we’re now viewing China as a very attractive market in the near term relative to the initial expectation. So I would say, overall, that the degree of enthusiasm and optimism for the Altek business is as high, if not higher, than it was when we bought the business, both the core of Altek as well as the AluSalt, the new technology for the aluminium industry.

[Robert Duncan Brown:]

Okay, great. And then last question on the balance sheet. You have kind of a good leverage ratio. You can generate some cash. What’s sort of your uses of cash and is buyback still part of the thinking here?

[Nick Grasberger:]

Yes, I think so. Just again, in order of priority, capital allocation, we look first to new growth contracts in Environmental. They are traditionally 20-plus percent return on capital, and we think our allocation methodology there is quite good. And so that would be the first use of, let’s say, capital beyond maintenance capital spending. Technically, we talked about adding on to the Clean Earth platform through acquisition. We’re very intent on doing that. The Clean Earth team has proven quite adaptive creating value from acquisitions in the past, and we would expect to continue that and I would say even larger acquisitions in that space than what Clean Earth has executed in the past. There are some opportunities for technology-related bolt-on acquisitions in both Environmental and in Rail, and then I think I’d turn to share repurchase and debt reductions. So the program we have in place, the repurchase program, has been – we’ve been somewhat quiet this year, I think understandably, given the transactions that we’ve been very focused on. But we certainly do expect over time to return capital to shareholders through that program.

[Robert Duncan Brown:]

All right. Thank you. I’ll turn over.

[Nick Grasberger:]

Thank you.

[Operator:]

You have a follow-up question from the line of Jeff Hammond of KeyBanc.

[Jeff Hammond:]

Hi, guys. Just a few follow-ups here. One, can you give us – it looks like you had contract exits as a negative. Can you just give us the net contract wins versus exits this quarter?

[Pete Minan:]

Yes. I can answer that, Nick. The net effect on revenue for the quarter was essentially nil. So the revenue gain and revenue losses was offset roughly $10 million each way. The effect on operating income is just a slight negative, about $1 million. For the full-year, we expect that trend to kind of continue, Jeff. The net change in revenue is going to be essentially nil, but we expect to see a positive increase in operating income. It’s ranging from like $3 million to $5 million for the full-year from the trend.

[Jeff Hammond:]

Okay. And then can you give us amortization by segment for 2Q and on a full year basis as we kind of start to model this on an EBITDA or cash EPS basis.

[Pete Minan:]

Yes. We can get that to you right off the call, if it’s okay, Jeff. We’re going to break it to you. We’ll give that to you by division and by funding.

[Jeff Hammond:]

Okay, great. And then just – I want to look out to 2020 a little bit, and I know that’s early. But you made some comments Nick, on Clean Earth, so I think we covered that. Just kind of give us your – what you’re seeing from a quoting pipeline activity for Rail out to 2020. And then just with I think some announcements on new contracts in steel, some of the slower ramp, how should we be thinking about net contract wins into 2020 and kind of growth for that business? Thanks.

[Nick Grasberger:]

Well. Jeff, we certainly expect pretty solid revenue and profit growth in both segments in 2020. Clearly in Environmental, we would expect a net positive impact of contract wins versus exits, and that number could be – probably should be larger than it has been in the past given the pipeline that we’re looking at now. Rail also has a very positive outlook both in its core markets as well as outside the U.S. We’ve talked before about the SBB contract. I think we fully expect that successful technology to be leveraged in other markets. And so as you know, we typically execute our long-range planning process in the fall, and we can likely give you more color on 2020 in two or three months.

[Jeff Hammond:]

Okay, great. And then just last one. I mean Clean Earth, Dave, clearly from your slide decks, they’ve been pretty acquisitive and I think the management team is staying on. How quickly do you think that team can flex your balance sheet and actually do deals in the pipeline? Or do you need some time to digest? Thanks.

[Dave Martin:]

That’s a good question. And I fully believe that the team is ready to execute additional transactions. The integration activities are mostly oriented towards the administrative functions. And there’s actually a quite large pipeline of businesses that we think would be attractive bolt-ons to Clean Earth that either are available or we expect to be available in the coming months. So I think you will in the next six to 12 months certainly see further activity from us in terms of acquisitions on the Clean Earth platform.

[Jeff Hammond:]

Okay. Thanks a lot, guys.

[Dave Martin:]

Okay. Thank you.

[Operator:]

I would now like to turn the call back to Mr. Martin.

[Dave Martin:]

Thank you, Nora, and thank you, everyone, for joining this call. A replay will be available later today through August 14, and the replay details are included in our earnings release. Also, please contact me with any follow-up questions. Again, we appreciate your interest in Harsco and look forward to speaking with you in the future. Have a great day.

[Operator:]

This concludes today’s conference call. You may now all disconnect.