Harsco Corporation
Q1 2020 Earnings Call Transcript

Published: 9 May 2020

[Operator:]

Good morning. My name is Charles and I will be your conference facilitator. At this time, I would like to welcome everyone to the Harsco Corporation First Quarter Release Conference Call. 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 distribution of this telephone conference by any other party are permitted without the 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.

[Dave Martin:]

Thank you, Charles. Welcome to everyone joining us and I hope you and your families are healthy and doing well. I'm Dave Martin, VP 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 Chief Financial Officer. In line with social distancing practices as a result of the pandemic, we are doing this call from different locations today, so please bear with us as we transition between speakers and address your questions. This morning, we will discuss our results for the first quarter and various initiatives at the company including the integration of ESOL, Rail's SCOR program, interactions in response to COVID-19. We will then take your questions. Before our presentation, however, let me mention a few items. First, our earnings release as well as the slide presentation for this call are 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, please see our most recent 10-K. The company undertakes no obligation to revise or update any forward-looking statement. Lastly, on this call, we 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. I'll now turn the call over to Nick to begin his prepared remarks.

[Nick Grasberger:]

Thank you, Dave and good morning, everyone. I appreciate you joining us today, especially in such a difficult environment and I want to echo Dave's sentiment that I hope you and your families are safe and healthy and remain that way. COVID-19 has certainly changed the landscape in which Harsco is operating, With continued demand for critical products and services, we recognize that Harsco has an important role to play in supporting essential industries. To that end, we've moved quickly to implement our COVID mitigation plan with three components

[Pete Minan:]

Thanks, Nick and good morning, everyone. To build on Nick's comments, let me again highlight that we are very pleased with the quarterly results. Over the past five years or so, with very few exceptions, we've consistently met or exceeded the guidance provided to you and we are again happy to exceed our expectations this quarter. We've worked hard to capitalize on our strengths and improvement opportunities and these Q1 results demonstrate that our continued focus on execution is paying off. Now please turn to slide five and our consolidated financial summary for the first quarter. Harsco's revenues totaled $399 million and adjusted EBITDA in the first quarter totaled $57 million. This EBITDA figure compares with an adjusted EBITDA figure of $54 million in the prior year quarter on a continuing business basis. It also places our Q1 performance well above the guidance range of $43 million to $48 million that we provided in February. As Nick mentioned, the better-than-anticipated result was driven by equally strong performances in our Clean Earth and Rail businesses. And Harsco Environmental was in line with our expectations. During the quarter, Clean Earth benefited mainly from higher volumes for the processing of both dredge materials and hazardous waste in the New York area. We believe that at least some of this incremental volume may have accelerated from future periods, in part due to the mild weather in the northeast for much of the first quarter. For Rail, our equipment mix was more favorable than expected and we saw some acceleration of aftermarket sales and contracting work. Rail's administrative costs were also lower-than-anticipated in the quarter. Earlier, Nick spoke about our manufacturing improvement or SCOR initiatives in Rail. And I believe this first quarter performance illustrates the steady progress we are making at Rail and is a welcome positive development after a difficult end to 2019. Harsco Environmental results were consistent with our guidance despite the fact that services demand slowed considerably late in March.

[Operator:]

We have a question on the line from Jeff Hammond. Your line is open.

[Jeff Hammond:]

Hey, good morning gentlemen.

[Nick Grasberger:]

Hey, Jeff.

[Jeff Hammond:]

So I want to get back get into the April trends a little bit more, some good color certainly on Clean Earth. But can you talk about what you saw in LST volumes in April for your sites? And maybe an expectation for LST volumes based on that for 2Q? And then just in Rail, kind of where you're seeing potential risk for slowdown or deferrals given such a good backlog there?

[Nick Grasberger:]

Yes. First of all, in terms of HE, the LST decline in April was probably around 20%, maybe a little bit more. As I indicated, I think Pete did as well, we expect that to improve or that decline to lessen over the balance of the quarter. I don't have a solid estimate of what that might be for Q2, but we do believe that it will improve from what we've seen in the month of April. On Rail, to date, we really haven't seen any significant impact on the business. We're anticipating that some of the shorter-cycle opportunities may be impacted. But again, we've not seen that yet. So I mentioned that we've had no order cancellations on any equipment. Some of the aftermarket business could be impacted. But again, through four months, we're very happy with the way the business has performed and with the – and where the market is. We have seen and you've probably seen the Class ones have all reduced CapEx estimates for the balance of the year, which affects our business, probably not to the extent that we fear they would. So that's also perhaps a little more positive than we have been thinking.

[Jeff Hammond:]

Okay, great. And then Rail definitely much better profitability, I think, than you were kind of guiding to and maybe some of the SCOR initiatives are tracking better. But if you can just give us a sense of how much of that upside was timing? And what we should think of in terms of margin rates on a sequential basis as you make more progress on these SCOR initiatives?

[Nick Grasberger:]

Got it. Yes. Well, I think there was a bit of timing late in Q1 that helped us a bit, but certainly not nearly to the extent of the beat versus expectations in the Rail business. I think that if you look throughout the year, we would expect margins to improve sequentially each quarter and probably be in that 12% to 14% EBITDA margins, 12% to 14% range for the full year, absent the significant falloff due to the pandemic.

[Jeff Hammond:]

Okay. Perfect. And then just last one. Just any early observations on ESOL in terms of where you're seeing the most substantial near-term opportunities for profitability improvement? And then just on the kind of longer term, how the pandemic and some of these short-term impacts impact your ability to kind of really get going on some of those structural improvements?

[Nick Grasberger:]

Yes. Well, I'll take the second question first. And I think we feel highly confident and very encouraged by the execution of the integration and all of the process improvements and discipline that's been installed in the business in a very short period of time. So I really do not see any impact of the pandemic on our ability to achieve our financial and operational targets that we've set for the business. So I think, I stated earlier that we've not relaxed our very strong view that EBITDA and margins will at least double in that business in the next few years. So I've really been very happy with how that's been executed despite the fact that we're all working remotely. We are right on plan in terms of all of our integration-related activities. In the shorter term, there's been a real mix in the business. Some retailers have volumes that are much higher, as you might expect, some are much lower. On the industrial side, it's the same. Some of our customers that produce personal and the household hygiene products, the waste that we're processing for them is way up. Others, such as retail paint are way down. So I it's a real mix. But I think in the short term and I think we've commented on this before, Jeff, that the lack of process discipline in ESOL, frankly, was a bit stunning to us. And but these are kind of basic processes in the industry that we're highly confident that we can fix relatively quickly and we're doing that as we speak. So I would say this overall, while volumes are down in the short-term in ESOL, as I mentioned, I do think that the second quarter will also be the low point for ESOL and Clean Earth and the ongoing benefits of the integration will be realized on a full year basis.

[Operator:]

We have a question from Larry Solow. Your line is open.

[Larry Solow:]

Great, thank you, good morning guys could hear your voices. I hope you and your families are healthy, hanging in there. Just a couple of sort of longer-term questions because, obviously, I think the we can beat the pandemic over the head and it's kind of hard to figure out exactly what's going to happen during it. But how do you guys feel on the environmental side as you come out of this as we come out of this and it may be we may be marred in it for quite some time even on the economic impacts of it? Will customers be looking to you to maybe you can add customers as you actually provide a savings benefit and drive maybe more outsourcing or outside of the U.S. and maybe I know we're in sort of a mature stage in terms of outsourcing in the U.S., but not in terms of the amount of services you guys provide, so maybe an expansion on services in the U.S. How do you sort of view that longer term opportunity?

[Nick Grasberger:]

Yes. Well, that's right. You just stated the value proposition that we offer our customers all over the world. I do believe very strongly that coming out of the pandemic, we will see a flood of opportunities for us to grow, in part because we'll be in a better competitive position. But also because that value proposition continues to strengthen, mostly around environmental and cost benefits that we can provide. So I think we will be much more focused on securing the very best of those opportunities. We're not going to as I mentioned, we need to really focus on debt reduction for the next several quarters. So my view is we will likely be passing on investing in many of those more capital-intensive growth opportunities. But I really believe, as I said, with the foundation that we've built, the leadership team, all the investments we've made in innovation and Applied Products that our competitive position will just continue to strengthen and that, that value proposition will be more compelling to customers than it has been in the past.

[Larry Solow:]

Okay. Great. And then just on the Rail side. How about similarly hopefully, in the short term, obviously, we're all focused on operational improvements. How about does the long-term if we're in sort of a multiyear, not depression, but we'll drop a lot the next whatever couple of quarters and then hopefully improve off that. But if we're again moderate in sort of a sluggish economy, is there potential chances that some of these multiyear Rail initiatives from your customers get pushed out due to funding or any obviously, maybe a hard question to answer today, but any thoughts on that?

[Nick Grasberger:]

Yes. Yes, I think that unlikely, the large projects are really funded by the state-owned or government-owned railroads. And these are critical infrastructure projects for them where the rail industry in those countries is more critical perhaps than we view Rail sometimes in the U.S. So I think that it's unlikely. These were projects when an awful lot of time has been put in by us and the customer. And I'd be shocked if they pulled back their commitment to completing those projects.

[Larry Solow:]

Okay. Great. And then just last question on Clean Earth, just a couple here. I assume that they come into the year with a pretty big backlog on the hazardous waste side, right? So even if you get some declines operationally from your customers, just probably covering a couple of other waste companies, you should have sort of somewhat of a buffer that you could obviously chew through over the next couple of quarters. But is that a good way to assess that? And how about on the dredging side? Are there still opportunities and maybe in the near term?

[Nick Grasberger:]

Yes. Yes. It's less of a backlog issue in Clean Earth and ESOL than it is just a steadily recurring stream that's produced by the customers and we are their solution provider, right? So I think in that sense, there's a very large backlog, but it's not backlog like you might think of in the Rail business, for example. But that, again, speaks to the rather steady nature of the Environmental Solutions business overall in the U.S. And it's quite unusual to see a 15% to 20% decline in volume in a month in this business and that's probably unprecedented. So that's why, in part, we really believe that April is at the bottom and that we're going to and we've already seen signs, as I mentioned, of those volumes picking back up. On the Rail side, again, I think the very large order backlog that we have, I think, really underpins a floor of good earnings in that business.

[Operator:]

We have a question from Rob Brown. Your line is open.

[Rob Brown:]

Good morning. Hi. I know you said that you feel good about the initial ESOL progress, but what sort of your thoughts on getting the margins there back to or up to the Clean Earth level? Do you still see that as a goal? Do you see that as possible now that you've sort of gotten in there and kind of view on it?

[Nick Grasberger:]

Yes. Well, it certainly is a goal. And just to restate, the Clean Earth margins are about 3 times. These are EBITDA margins, what they are in ESOL. So to get the targeted return on the acquisition, we really only need to kind of double the ESOL margins. But again, we believe over time, there's no good reason why we can't get the ESOL margins up into that 20% range where the Clean Earth margins are. And so we're talking about doubling margins, but our internal targets and expectations are beyond that.

[Rob Brown:]

Okay. Okay, great. Still a lot of discussion about the Environmental business. But as things sort of stabilize and improve there, how what's sort of the time line between your customers getting back running and volumes sort of recovering before you start to see revenue flow is sort of one-to-one? Or is there a delayed impact for you there?

[Nick Grasberger:]

No, it's pretty much one-to-one. Once their production picks up and their utilization rates pick up, we see the immediate benefit through the volumes that we process.

[Operator:]

We have a question from Chris Howe. Your line is open.

[Chris Howe:]

I had a few questions left here. Just following up on some of the great comments that you had earlier. As far as on a segment level basis, as far as exposure to COVID-19 and less exposure to COVID-19, you went through some of the puts and takes within the ESOL business that we're seeing. As it relates to the other segments, Clean Earth, how should we think about parts of the business that perhaps have a little bit more exposure in this quarter ending June? And as I look at your comments for ESOL, is it safe to assume that your goals of doubling the EBITDA margin in the next few years here or so is a relatively conservative target and given what we're going through right now?

[Nick Grasberger:]

Yes. Yes, I will agree with that. I think that doubling of margins is a bit conservative. I think we'll do better than that. And certainly, what we've seen over the past month would validate that. Back to the first part of your question, Chris, actually the so-called M&I, the manufacturing and industrial volumes relative to, say, retail and medical and contaminated soil would be the most effective because they're drawn from industrial production. And of course, we've all seen those rates decline precipitously. So we have some customers that have simply shut their manufacturing and the volumes have gone to zero. We've had others that are producing products that are in very high demand right now and their volumes are up. So it really varies. But overall, the industrial portion of the business would be the weakest. Medical probably the least affected, probably up even a little bit versus expectations, as you might imagine. Retail is a mixed bag, right? You've got some of the large retailers, Amazon, for example, where volume is up substantially, right? Whereas you can think of cosmetics and sporting goods and other retailers where their volume is way down. So it's just a mix. But overall, the industrial volumes would be the most exposed to COVID. And but as I mentioned, I think Pete did as well, we are seeing some of those industrial customers beginning to reopen and that's one thing that gives us confidence in saying that we believe that the month of April may be the bottom.

[Chris Howe:]

That's great and very helpful. And I wanted to shift the focus to the Rail segment. You mentioned you saw some acceleration in aftermarket in the quarter. You saw some impacts as it relates to capital equipment. As we focus on the profitability of the segment and what that looks like out of this recovery, has there been any change to the runway that you see or the potential that you see for this business? And should we expect on a full year basis that aftermarket still continues on its growth trend and its contribution to profitability in the segment?

[Nick Grasberger:]

Yes, I think that's absolutely right. Again, the aftermarket is the shorter-cycle business. It's difficult to project at this point what the impact might be on aftermarket. I think we're more positive on equipment in this market given that it's in backlog and it's very much needed by the customers. But coming out of this and I've said it before, I am just very optimistic about our Rail business. If you look at the innovations that we've introduced and the uptake on those innovations, if you consider new segments of the business and technology, for example, the global footprint in Rail has expanded dramatically. And we've won contracts for bidding on contracts that we never even would have been aware of a few years ago. And the Harsco Rail brand has never been stronger all around the world. So yes, we had a very challenging Q4. It was a significant miss for us, but it was production related. It was not demand related. And we are well on our way towards resolving those challenges and getting back on track to this business being a significant growth component for our company.

[Chris Howe:]

That's great. And lastly, just following up on those comments, you mentioned how it's progressing well in Q1 in regard to the South Carolina facility. If we look at that moving slightly ahead of plan, in combination with some of the receivable issues that impacted timing in Q4, what type of contribution to the positive free cash flow expectation could that potentially be?

[Nick Grasberger:]

Yes, Pete, I'll let you comment on that.

[Pete Minan:]

Yes, thanks. We're already starting to see some significant improvements in working capital. Yes, we knew they were coming because we had some issues at the end of fourth quarter. But there's been some positive developments, not only in terms of receivables and collections, but also in terms of the way we manage our payables as well as advances. So across all of the businesses, I think the working capital improvements that we're going to see benefit us north of $60 million this year. And I think Rail is going to be a very, very significant part of that growth.

[Operator:]

Thank you again for joining us today. This concludes today’s conference call. You may all disconnect. Have a great day.