Harsco Corporation
Q3 2019 Earnings Call Transcript

Published: 29 Oct 2019

[Operator:]

Good morning. My name is Zatania, and I will be your conference facilitator. At this time, I would to welcome everyone to the Harsco Corporation Third 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 the expressed written consent of Harsco Corporation. Your participation indicates your agreement.

[Dave Martin:]

Thank you, Zatania, welcome to everyone joining us this morning. I’m Dave Martin, Vice President of Investor Relations for Harsco. With me today is Nick Grasberger, our Chairman and Chief Executive Officer; and Pete Minan, Harsco’s, Senior Vice President and CFO. This morning, we will discuss our results for the third quarter of 2019 and our outlook for Q4. 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, this call is being recorded and webcast. A replay will be available on our website later today. Third, 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 10-K. The company undertakes no obligation to revise or update any forward-looking statement. 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 our earnings release as well as the slide presentation today. With that being said, I’ll turn the call over to Nick.

[Nick Grasberger:]

Thank you, Dave, and good morning, everyone. Thanks for joining us. This past quarter was yet another quarter that demonstrated our ability to execute across the organization, while taking meaningful steps to reshape our strategic focus and navigate difficult market conditions. Together these actions allowed us to deliver growth across our business even with the challenging market conditions in our Environmental segment. Earlier this year, we communicated our vision to be a global leader of environmental solutions, which we believe will create meaningful value for Harsco and all of our stakeholders. This is an important shift for us for a number of reasons. Harsco has always been an environmental solutions company and it became clear that further investments and focus in this area would allow us to drive higher growth with enhanced margins and reduced cyclicality. Practically speaking, this also provides some insulation from some of the market dynamics we saw for example this quarter in our Environmental segment, as its customers manage through some of their own challenges, which I'll touch on in a moment.

[Pete Minan:]

Thanks, Nick, and good morning, everybody. So let's start with slide five and our consolidated financial summary for the quarter. Harsco's adjusted operating income in the third quarter was $57 million, excluding acquisition amortization expense. This translates to a margin of 13.5% on revenues of $423 million. This income figure compares favorably with adjusted operating earnings of $45 million in the 2018 quarter, which excludes our prior Industrial segment now accounted for as discontinued operations. Also, our Q3 operating results were within the guidance range we previously provided of $56 million to $61 million. We are pleased with this performance, given the external market pressures on our customers in Harsco Environmental, which intensified throughout the quarter. Lower services demand or steel output, commodity prices and foreign exchange negatively impacted our results by a few million dollars in the third quarter versus our expectations at the beginning of the quarter.

[Dave Martin:]

Zatania, are you with us?

[Operator:]

Yes. Your first question comes from the line of Jeff Hammond of KeyBanc Capital Markets.

[Jeff Hammond:]

Hey, good morning, guys.

[Pete Minan:]

Hi, Jeff.

[Jeff Hammond:]

Just want to understand – I'm struggling to get into the 4Q guide a little bit. So just on Environmental, I think you said, it'd be flat to up on op income ex FX. Can you just quantify what the – or what you think the FX profit headwind is going to be?

[Pete Minan:]

Yeah. Hey, Jeff, it's Pete. So on the revenue side for Q4, the FX headwind using the end of quarter rates is going to be about anywhere from $6 million to $9 million and the OI impact would be about $1 million for Q4?

[Jeff Hammond:]

So that puts it what like $4 million for the year?

[Pete Minan:]

The full year FX will be about $5 million in total at the operating income level, $45 million at the top line.

[Jeff Hammond:]

Okay. So just to be clear your op profit is going to be flat to improve ex that $5 million?

[Pete Minan:]

We should be up mid single-digits in Environmental in Q4, Jeff, from the prior year. And that's really a combination of -- despite the FX headwind and the commodity headwind, which is a little bit. We've got some good service mix. We're anticipating some growth in Applied Products. And I think we have some cost improvements that we have undertaken that will offset and generate the mid single-digit growth for Q4.

[Jeff Hammond:]

Okay. And then on Rail, it looks like you're going to -- your 4Q is going to be up 100% to get to the 30% to 35%. So can you just -- I mean, it sounds like mix is going to be favorable. What do you think the EBITDA margin range is to think about for -- on that big growth number?

[Pete Minan:]

Yeah. So firstly, you're absolutely right. That's the kind of growth we're expecting. It's going to be darn near close to 100% year-on-year. EBITDA margin for Rail is going to be somewhere in the neighborhood of 16%, 17% which is about what we've experienced the first half. Actually, it will be a little higher than that Jeff closer to 18%.

[Jeff Hammond:]

Okay. Okay, great. And then just kind of -- Nick, I appreciate the 2020 color. Can you just talk -- within that comment that you think you can grow in Environmental, how should we -- how are you thinking about or how should we think about LST volumes within the context of that? And maybe you can just break out what you think Altek and the net new contracts can add and maybe what you can grow in kind of a flat steel production environment? Thanks.

[Pete Minan:]

Yeah. We're -- Jeff, this is Pete. We don't really have all the details on that yet. Obviously, we're still early days in kind of finalizing our 2020 outlook. But clearly, we remain optimistic even with some expectations that there will be a lot of production growth from our customers in terms of steel production. The Applied Products is going to contribute a good portion of the growth for us. I think we'll continue to the cost reductions that we've expected. And these factors together I think will provide us a good bit of tailwind. Now certainly the new contract wins we won 35 new contracts over the last couple of years. And a lot of those if not a significant portion of those will be fully ramped up by the end of 2020. So we will definitely start to see the impact of that contract win rate in 2020. All those factors together kind of support the growth that Nick alluded to.

[Jeff Hammond:]

Okay. If I could sneak one more in just Rail you sound pretty positive on the outlook certainly over the next three years, maybe just give us a little bit better picture of how you think about the growth into 2020? Thanks.

[Nick Grasberger:]

Yeah. So Jeff, we -- given the record backlog that we have expected at the end of 2019 we're looking at pretty strong double-digit top line growth in Rail next year and it's really across the different segments of the business both products and geographies. So it's really a very strong outlook in Rail.

[Jeff Hammond:]

Okay. Thanks guys.

[Nick Grasberger:]

Thank you.

[Operator:]

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

[Rob Brown:]

Good morning. Just sticking with Rail a little bit, what kind of gives you the optimism there? Is it an overall environment improvement or is it some product gains or what's sort of the driver of the optimism there?

[Nick Grasberger:]

I would say its two things Rob. Certainly the innovations, the launch of new tamper that Pete referenced is getting an awful lot of interest from the Class 1s. We also outside the U.S. in utility vehicles and other vehicles have built a very strong backlog both in Europe and Asia and there's some optimism in South America as well. So, even though the kind of the macro factors within the Rail industry -- freight industry in the U.S. are somewhat mixed. Again we can look to our backlog in innovations. And also in our Protran segment, some of the safety and technology products that we're increasingly selling to municipalities is quite positive.

[Rob Brown:]

Okay, great. Thank you. And then on the business could you remind us again where you're at in terms of getting synergies? And I think you said that was on track but how is that going? And then second how do you see that business growing over the next couple of years and sort of where you are at in thinking through M&A as well?

[Pete Minan:]

Yes. Rob its Pete. I'll answer the first part of the question and certainly Nick can add any additional color commentary. I think with respect to synergies, we had targeted looking for kind of a run rate of $10 million of synergies and we're on pace to get those by the end of 2020. So, I think the integration efforts that we've done to-date with respect to the funnel -- the functional integrations are kind of well on target maybe even slightly ahead of target. Those we feel pretty good about. In terms of the growth factors here it's -- the organic growth rate we saw this year when you carve-out the acquisitions just in Q3, it was about 14% which is certainly not out of the realm of possibility going forward. We don't expect quite that degree of organic growth, but it should be kind of high single-digits maybe even low double-digits. So, I think -- and that will be coming from all three of the lines of business contaminated hazardous and probably even to a larger degree the dredged materials business. So, I think those look pretty good. As far as M&A goes, maybe Nick I'll let you comment on that.

[Nick Grasberger:]

You may recall Rob that some of the commentary around the announcement of the acquisition was the industry itself the Clean Earth participates in remains kind of highly fragmented. And Clean Earth has been somewhat successful making largely smaller acquisitions over the past five or so years. We certainly see that opportunity continuing, but even larger opportunities we believe may well be available. So, I think relative to HE, Harsco Environmental, you'll see us allocating more M&A capital to Clean Earth.

[Rob Brown:]

Okay, good. And then I think you touched on the remaining Environmental -- sorry the remaining Industrial businesses divesting those. How do you see the timing on that? And can you remind us what those are doing in terms of revenue and EBITDA?

[Pete Minan:]

So, full year those businesses -- the remaining businesses as you know the Patterson-Kelley industrial and the IKG business, they're accounted for in our discontinued operations. The full year EBITDA impact of those businesses is lower $20 million. They're both actively being marketed for sale, Rob, and we fully expect that we will have these transactions was done by the end of the year.

[Rob Brown:]

Okay, great. That's all I had. Thank you.

[Operator:]

And you have a question from the line of Jeff Hammond of KeyBanc Capital Markets.

[Jeff Hammond:]

Hey. Just a couple on Clean Earth. So I think you talked about that as being kind of a 7% core growth kind of business. How are you thinking -- as you start to look at 2020, how are you thinking of your growth shaping up relative to that kind of long-term growth rate?

[Nick Grasberger:]

I think the 14% as much as we would like to say that sustainable. I think the more likely organic growth rate for Clean Earth is probably mid- to high single-digits probably high single-digits. And so that would be the expectation for 2020.

[Jeff Hammond:]

Okay. And then how soon would you expect whether it be bolt-on or something bigger to feel comfortable doing some M&A in the Clean Earth space?

[Nick Grasberger:]

I think we feel prepared to continue on the M&A in that segment at this point. As I said, we largely have executed the integration of the business and feel quite good about the underlying processes and the team that we have. So I think we feel prepared to take that next step.

[Jeff Hammond:]

And then Nick you mentioned in the prepared remarks about kind of collaborating with the HE and Clean Earth. Can you just talk about maybe some early observations and where you're seeing opportunities for synergies for collaboration? Thanks.

[Nick Grasberger:]

I think the opportunities are more with Clean Earth supporting Applied Products initiatives within Harsco Environmental. So whether it's other byproducts or waste streams at our customer sites or even with our Reed Minerals business I think we've been quite pleased with the -- some of the solutions that Clean Earth is suggesting on some issues that we've had a difficult time tackling ourselves. So it's mostly on the Applied Products side.

[Jeff Hammond:]

Okay. Perfect. Thanks.

[Operator:]

There are no further questions at this time. Mr. Martin, you may proceed with any closing remarks.

[Dave Martin:]

Yes. Thank you for joining this call. A replay of this call will be available later today through November 12 and replay details are included in the earnings release. Also, please contact me with any follow-up questions. And again, we appreciate your interest in Harsco and have a great day.

[Operator:]

This concludes today's conference call. You may now disconnect.