Harsco Corporation
Q4 2020 Earnings Call Transcript

Published: 26 Feb 2021

[Operator:]

Good morning. My name is Shelby and I'll be your conference facilitator. At this time, I would like to welcome everyone to the Harsco 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 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. No recordings or redistributions of this telephone conference by any other party are permitted with the expressed written consent of Harsco Corporation. Your participation indicates your agreement.

[Dave Martin:]

Thank you, Shelby. 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; as well as Pete Minan, Harsco's Senior Vice President and Chief Financial Officer. This morning, we will discuss our results for the fourth quarter of 2020 and our outlook for 2021. We'll then take your questions. Before our presentation, however, let me mention a few items. First our quarterly earnings release as well as a 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 that 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 and 10-Q. The company undertakes no obligation to revise or update any forward-looking statements. 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 a slide presentation. Now, I'll turn the call to Nick to begin his prepared remarks.

[Nick Grasberger:]

Good morning, everyone, and thanks for joining us today. Our fourth quarter results reflected the continued positive trends in our largest businesses. Harsco Environmental and the hazardous waste portion of our Clean Earth segment. Overall, Harsco delivered both sequential and year-over-year growth in Q4 and EBITDA was consistent with our expectations. With that said, we are very happy to have 2020 in our wake. Harsco, like many other companies, faced challenges in 2020 that required us to shift our focus, essentially overnight, to keeping our employees safe, our businesses resilient and our liquidity position strong. At the same time, we closed the largest acquisition in Harsco's history in terms of revenue, ESOL. Beyond its scale, ESOL required a complicated carve-out from its parent company, was in need of basic process discipline and was underperforming its market. Additionally, in 2020, we made a step change in our ESG journey, as evidenced by significant ratings upgrades, external recognition and improved metrics in nearly all areas. It is clear that ESG is closely aligned with our strategy and central to the shifting identity of Harsco. Looking back on what the Harsco team accomplished, I could not be more proud about the effort and the results.

[Pete Minan:]

Well, thanks, Nick, and good morning, everyone. So please turn to slide five and our consolidated financial summary for the fourth quarter. Harsco's revenues totaled $508 million and adjusted EBITDA totaled $62 million in the fourth quarter. Our revenues increased 27% over the prior year quarter, with ESOL contributing most of the growth, followed by revenue increases within both our Environmental and Rail segments. The revenue increase for Harsco Environmental is noteworthy, as Q4 was the first year-on-year increase in revenues for the business in a number of quarters. This reflects both successful execution of our strategy and the positive trends in the underlying markets. Relative to the third quarter, revenues were a little changed, as continued growth from the Q2 lows for environmental and hazardous waste processing were offset by increasing market pressures related to COVID within our Contaminated Materials and Rail businesses. Our fourth quarter adjusted EBITDA of $62 million was near the high end of our previously disclosed guidance range. EBITDA for Q4 improved both sequentially and year-over-year, reflecting the business reasons I mentioned earlier and the actions we undertook in response to the pandemic in 2020. Harsco's adjusted earnings per share from continuing operations for the fourth quarter was $0.12. This adjusted figure excluded costs for the ESOL integration and the severance costs related to additional restructuring actions in environmental. The actions in HE supplement those taken in the first quarter of 2020 and illustrate our focus on continuous improvement and further strengthening the business results.

[Operator:]

Your first question is from Larry Solow of CJS Securities.

[Larry Solow:]

Good morning. And thanks for taking my question. And Peter, I haven't worked with you very long, but I enjoyed it and wish you the best of luck.

[Pete Minan:]

Thanks, Larry.

[Larry Solow:]

Yes, absolutely. A couple questions maybe on -- I'll start with Clean Earth. So a little bit surprised a little bit of a sequential drop from the performance in Q3. And then, sort of, if we look at what the Q3 run rate was which I realize was you had ESOL under your belt by that. If you, sort of, take that Q3 run rate your 2021 guidance is sort of in line even maybe even a little bit below that. So I'm just trying to parse some of the moving parts out there I would assume it would be going up a little bit as COVID hopefully starts to wane and your integration starts to advance. So maybe you can give me a little color on that?

[Pete Minan:]

Yes. Thanks, Larry. This is Pete. So the biggest driver by far, of course, relates to the contaminated materials the soil-related business that I mentioned earlier. And if you recall that business was hit pretty substantially in the early days of COVID as construction was ceased on many projects for a period of time and that kind of set us back in the Q2 and early Q3 timeframe. And that's how things are going to get better. But if you recall the resurgence occurred of the pandemic, kind of, in the fall and that had another impact particularly in Regional Northeast where most of our business is located. There were additional projects that were being deferred, there was non-residential construction that was pushed back and then there were just off and on projects that were stopped. Now the good news about this if there is the bright spot, I guess I should say, is that the backlog for that business in terms of the volume of soil that will be excavated and remediated it remains very strong. So we see this as very much of a deferral as opposed to an elimination. These revenues will come back for the most part in 2021, Larry.

[Larry Solow:]

Okay. Okay. And then how about on the Rail segment. Obviously, the backlog remained very high. It sounds like in terms of operating efficiencies and getting the plant up to full speed and through the consolidation is that completely behind you now? And obviously, you're looking for an increase this year, but we've kind of expected this, sort of, 15% to 20% increase the last couple of years and haven't seen it. So I'm just kind of getting concerned a little bit things keep getting pushed to the right in terms of the backlog and do you still, sort of, see that you had an ultimate goal of, sort of, reaching $500 million in revenue and $100 million EBITDA? Do you still feel that this division can do that in maybe a three year period?

[Nick Grasberger:]

Yes. It’s a good question, Larry. First of all, as I noted, I believe the rail business was really in a position to have a very strong 2020, if not for the impact of COVID. The backlog continued to grow. We're launching new products. The footprint was expanding into -- continues to expand into new geographic markets that are attractive and the operational benefits of the so-called project SCOR were favorable as well. So clearly, the big impact this year was COVID. On the freight side and about half of our business serves the freight sector and the other half the transit sector. And we're seeing some recovery in the freight sector really nothing to speak of on the freight side. And that affects both equipment aftermarket as well as some of our high margin technology sales to those sectors. So the issue really is a front end issue for us. With that said, there certainly is further to go on the operation and supply chain side. While we achieve the project SCOR objectives, there clearly is further efficiency to gain and through operations based on the learnings of project score. So, yes, it's frustrating because we to your point have continued to be optimistic about this business in 2020 COVID really knock us off the track so to speak. Looking forward, we have not at all diminished our optimism and our expectations for this business over time. And I continue to believe there's really good evidence of this again based on the backlog and the number of large contract opportunities that remain available to us and the operational upside to achieve those figures of $500 million and $100 million of EBITDA. I remain quite confident we can do that. But to your point, it's certainly been pushed to the right.

[Larry Solow:]

Got it.

[Nick Grasberger:]

Okay.

[Larry Solow:]

Fair enough. I appreciate the color, Nick. Thanks a lot.

[Operator:]

Your next question is from Rob Brown of Lake Street Capital.

[Rob Brown:]

Good morning. Sticking with Rail as it pushes to the right when does the visibility, sort of, improve? Is it really COVID-driven, or how much visibility do you have in that business? And when do you, sort of, start to see an uptick? And how long does that take to hit the revenue?

[Nick Grasberger:]

Yes. Well, we certainly have decent visibility on the equipment side and that's manifest in the backlog. I think it's the aftermarket and what we call Protran or technology sector of the business that are shorter cycle and the visibility is therefore much less. And even on the equipment side, the core of the range is really the North American Tampa market. And those are shorter lead-time items than some of the other equipment. And we're really expecting that to bounce back in the second half of the year. And I think based on the chatter and the conversations with our Class I customers we believe that will be the case.

[Rob Brown:]

Okay. And I just want to clarify you talked a little bit about weakness in the aftermarket in Asia. Is that a market timing weakness or was there a change in the market there that says that will continue?

[Nick Grasberger:]

Yes. So, we've had a multiyear program to supply what we call upgrade kits to the grinding fleet -- our grinding fleet in China. That program is largely winding down because for the most part the machines have been upgraded. And secondly, China Rail is the large ultimate customer has really been hit hard by the pandemic. So, that was a very high margin program. We certainly have a pipeline of aftermarket opportunities in China to replace the grinder kits over time but that's not all going to be replaced this year. And so there is a gap in EBITDA in rail this year because of the winding down of one program and the timing of the restart of the next series of programs.

[Rob Brown:]

Okay, great. And then last question on Clean Earth. You gave an adjusted EBITDA number. Did that include -- you said net of $3 million of corporate allocations, but the -- I guess $72 million to $78 million of adjusted EBITDA that includes the corporate allocations. Is that correct?

[Pete Minan:]

Yes, that's correct.

[Rob Brown:]

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

[Operator:]

Your next question is from Chris Howe of Barrington Research.

[Chris Howe:]

Good morning everyone. Good to talk to you Pete. And best of wishes on your retirement, definitely enjoyed the relationship we've had thus far.

[Pete Minan:]

Thank you.

[Chris Howe:]

Following up on some of the questions we've been getting on the Rail segments. As we move from the first half to the second half of fiscal year 2021, I assume things will become incrementally better as technology starts to come back and you start to gain some more aftermarket business. But perhaps you can comment on those two pieces specifically technology and aftermarket. And what your expectations are for those as a part of the mix as things improve? And when you expect those two pieces to kind of get back to or more towards where we were pre-COVID.

[Nick Grasberger:]

Well, you're correct. In terms of the sequential lift in the business which we expect from half one to half two. And certainly part of that is the technology in the aftermarket and a good bit of the shortfall in EBITDA expectations in 2020 was in those two areas. And for the most part those programs have not been canceled. They've certainly been deferred based on budgetary constraints and lack of visibility in the freight and in particular in the transit arena. So, that's the expectation that the second half is going to be stronger really across all three of our segments equipment aftermarket and technology. But from a margin standpoint the lift that we're expecting in the second half is weighted towards the higher-margin aftermarket and technology platforms.

[Chris Howe:]

That makes sense. And another question on the Rail segment. You had mentioned you're still have your sights and you still believe in the long-term potential of the Rail segments previously $100 million of EBITDA and $500 million of revenue. But as we kind of look forward to the right for the business the backlog has remained consistently strong. How do you balance the backlog strength and the realization of its growth potential with the timing of your strategic initiatives as we kind of move out into fiscal year 2022 and even fiscal year 2023 given your movement towards a pure-play environmental services company?

[Nick Grasberger:]

Yes. So, Chris, that's a very good question and very much top of mind for Pete, myself, and others in the organization. And it's a difficult balance because on one hand we're as I mentioned quite optimistic about the prospects of our Rail business over time. There are also benefits to timing potentially of a transaction. So, we're very much thinking through how to balance those two. We do believe that when we undertake a process for the Rail business that it will be a very competitive process. There are a number of buyers that have expressed interest and that would drive significant strategic benefits from it when you consider our pipeline the footprints new products growing installed base that will yield good aftermarket opportunities going forward. So, there's an awful lot to like about the business. And so we're quite confident that a process would be quite successful and that we will receive a strategic multiple for it. But I really can't indicate at this point what that best timing will be, but it is very much top of mind.

[Chris Howe:]

That's helpful. Thanks for that color. And one last question just to shift gears away from Rail. You commented about the ESG performance of the business perhaps, you could share some more granular detail into the E, the S, the G and how that's being received? It seems to be a more common question these days.

[Pete Minan:]

Well, I appreciate the question. We have allocated an awful lot of resource to our ESG journey initiative here over the past 18 months or so. And when you look at the S and the G, the social and governance issues, I think Harsco is for some time now had very strong programs in place as evidenced by our performance on safety and the engagement of our employees and the governance processes where I believe we are kind of best-in-class. But nonetheless, we continue to focus on the S and the G, and there's always room for improvement. It's really on the E the environmental side, where we've really seen some significant improvements. Honestly, based on focus and communication, I think we've had a good environmental story to tell at Harsco for some time we just hadn't been telling it. And when you add to that a stepped-up focus in each business led by the corporate, I'll call it ESG function. We've seen – we've really seen very good leverage on those results. And as we have seen the metrics move in the right direction and have communicated those the various agencies have taken notes the industry press has as well. Newsweek magazine put us on a prestigious list for the first time ever. So we like where we're going. And of course, it's very closely linked into where we're headed strategically. You really can't separate, the ambition to be a top-tier environmental solutions company from being a top-tier ESG company. They're one and the same, and they complement each other very well. And I look forward to continuing to progress on ESG at the same pace, we did in 2020 which was quite notable.

[Chris Howe:]

That's excellent. Thank you for your color. And I’ll hop back in the queue to allow others chance.

[Operator:]

Your next question is from Jeff Hammond of KeyBanc.

[Jeff Hammond:]

Hey, good morning, guys.

[Nick Grasberger:]

Hey, Jeff.

[Pete Minan:]

Hi, Jeff.

[Jeff Hammond:]

Best of luck to you Pete. It's been great working with you over these years.

[Pete Minan:]

Thanks, Jeff.

[Jeff Hammond:]

So just on Clean Earth, or I think what you're implying is basically the pro forma the kind of the organic growth for both of the businesses is kind of in the low to mid-single digits which seems kind of low just given the easy comps and the improving macro. So I don't know, if it's just the soil piece being a headwind in the first part of the year, or are you seeing kind of more modest sequential improvements in the hazardous side as well?

[Nick Grasberger:]

Yeah. I think it's both. It is primarily in the contaminated materials or soils business, as Pete indicated in Q4 was actually the low point, surprisingly, even weaker than Qs two and three in terms of non-res construction in the Northeast the Mid-Atlantic, where we're focused. So, that business is primarily what's holding back what should be more of a mid- to high single-digit volume lift year-over-year. The hazardous business, the expectations are I think in line with expectations both ours and the broader market. And we simply don't have the visibility yet on a contaminated materials side to be a bit more aggressive. We certainly expect it to bounce back. We just don't know when.

[Jeff Hammond:]

Okay. And then just – I'm just trying to work through the bridge on EBITDA for Clean Earth. So you had some corporate costs coming in. And then it sounds like some branding and other investments. Is there a way to talk about what the incremental integration savings are, and what you think the underlying incremental margins are on that 3% to 5% pro forma growth?

[Pete Minan:]

Yeah. So it's – I'll try to take it in bits and pieces, Jeff, and we can see – you can ask more kind of questions, if you like. The – first of all, the duplicative costs I mentioned earlier and the corporate allocation they total about $10 million or so would be a little more than $10 million in 2021. That's what we expect to incur. And those costs as I mentioned earlier are non-recurring, so they should go away in starting in 2022. The allocation won't go away, but the incremental duplicative costs will go away. At the same time, we are expecting to achieve and realize about $20 million of benefits from the integration and optimization efforts that we've got underway. So when I quoted the $20 million net realized anticipated benefits that was net of the cost incurred.

[Jeff Hammond:]

Just the underlying incremental on the growth?

[Pete Minan:]

Yeah. So the incremental margins there should be 30% to 35% on the growth going forward for the combined business.

[Jeff Hammond:]

Okay. And then just last one on corporate. So the corporate cost line is going from 20% to 33%, 34%. And it seems like you've been kind of allocating some of the corporate costs back into Clean Earth what's driving the big increase there?

[Nick Grasberger:]

Yeah. So it's really three components that make up the total. It's what I can refer to as normalization. So there's some compensation and travel, and that type of T&E type of expense normalization, which probably accounts for about half of that $11 million or so $11 million to $12 million delta. Then, we've got increase in professional fees things like audit fees for example are increasing. And there's the insurance costs for some of our policies, which I mentioned back in Q3 that are increasing year-on-year as well. That's the bulk of it. The additional cost allocated to ESOL represents, incremental costs that are related to specifically, ESOL which is why we're increasing the allocation to the Clean Earth segment.

[Jeff Hammond:]

All right. Okay. Great. Thanks, guys.

[Operator:]

Your final question is from Brian Butler of Stifel.

[Brian Butler:]

Hi. Thank you for taking my questions.

[Nick Grasberger:]

Hi, Brian.

[Brian Butler:]

Just first at kind of a high level, can you give some color on what the magnitude of the revenues that were displaced kind of related to the pandemic and then maybe how much is expected in 2021 guidance coming back?

[Pete Minan:]

Well, it varies by segment. The actual quantification, I can't tell you – but it's steel production which of course affects the AP business was down 12% year-on-year and that had a pretty substantial impact. Those – in the hazardous waste business, there was probably a 15% year-on-year impact in the early part of the year. And as I mentioned earlier we see that coming back to some degree in 2021, with the exception of the soils business which was down at a much greater percentage and that will come back a lot slower over 2021. And the Rail business was even more dramatic still, and most of it occurred in the second half of 2020. I can take the percentages, Brian.

[Brian Butler:]

That's helpful. Just on just kind of the high level is this 2021 guidance expecting that the business that was lost is coming back to half to where it was or it's not fully coming back I'm assuming. I mean that's what's included in guidance. But there's some amount. I was just trying to get a feel if that's very little coming back in that expectation of guidance or the majority of it?

[Nick Grasberger:]

Yes. So let me just take the question by business as Pete did. So in Harsco Environmental the guidance anticipates that really all of the COVID-related impact on revenue in total will be recovered by the end of 2021. In the Clean Earth segments, that's true for hazardous waste as well, but not for soil. So I would say there's probably $50 million or so maybe a little more of revenue and contaminated materials that -- where we'll be short versus kind of the pre-COVID run rate on the contaminated materials side. In Rail there are a number of puts and takes when you think about this aftermarket program in China. That of course was somewhat linked to COVID, but mostly not. And so that will not be replaced this year and that's probably $10 million to $15 million of margin on that China aftermarket program. In terms of equipment and other aftermarket and technology, we certainly will be a good bit ahead by the end of 2021 compared to what we -- the volume that we sold in 2020.

[Brian Butler:]

Perfect. That's very helpful. Because then I look at Clean Earth and just kind of think about the baseline margin as we get through kind of the noise of 2020 and 2021 coming back post integration how should we think about that margin progression getting into '22 and what that baseline level should be?

[Nick Grasberger:]

Yes. So I would expect -- and I think Pete even I alluded to it a bit. There's an SG&A investment in the business that's needed to sustain the integration efforts that will be coming out in '22. Not to mention the -- I think we mentioned the incremental $20 million of integration benefits this year. And as we see that then on a full year basis in 2022, we would expect a few hundred basis point lift in the EBITDA margin in the consolidated Clean Earth platform legacy Clean Earth plus ESOL. And then I would say over the next two years, we expect between 100 to 200 basis points lift each year in the margin of the business. So we'd be looking at probably a five to 6-point lift in EBITDA margins over the next few years with a good chunk of that coming in 2022.

[Brian Butler:]

Okay. Great. And then one last one. Just when you think about the growth CapEx they're spending can you give a little color on kind of what the -- what you guys look at internally on a return basis kind of what the IRR is on that money and maybe a thought on where that is versus your cost of capital?

[Nick Grasberger:]

Yes. Yes. So the return that we target is generally 18%-plus and depending upon the type of service the geography the profile of the customer that can vary. Oftentimes it's over 20%. And the payback period importantly is generally 2.5 to 3.5 years. So these investments that we're making this year, while we expect as we do good returns over time the payback is not of course immediate. The -- we've -- as we noted as we change the focus of that business to being more environmental which brings with it a less capital-intensive profile, we expect that growth capital and even the maintenance capital to decline over time. So we would expect our total capital in Harsco Environmental to be $100 million or so in 2022 versus the $160 million or so this year. And that's how we then get to that 8% to 9% free cash flow to revenue in 2022 and again the target over time. And we have a lot of initiatives in place to do this -- would be 10% -- plus free cash flow to revenue.

[Brian Butler:]

Great. Thank you so much for taking my question.

[Operator:]

There are no further questions in queue. I'd like to turn the call back to Nick for any closing remarks.

[Nick Grasberger:]

Okay. Thank you, Shelby. I'd also like to make a few comments about Pete here in closing. I'd certainly like to thank Pete for his -- I'll use the word innumerable contributions that he's made to our company over the past six years, certainly to our financial and IT organization certainly to our businesses. But I think more importantly to our value-based culture. I mean he's been a terrific fit into this organization with me and the rest of the team and he's highly, highly respected across the company. At the same time he's been a very close partner to both me and the executive team. And I hear this every day how much Pete will be missed by his colleagues again across the company not just his organization, but his impact on the business relationships that he's formed. There are – many, many of his colleagues will greatly miss Pete. So I'd like to wish Pete his wife Bianca and his -- happy to say growing family only the best in his retirement and we'll really miss Pete. But sI know Pete will always be available to us and he's a big part of who we are and he'll remain in many ways committed to this company for some period of time. So thank you Pete.

[Pete Minan:]

Thank you, Nick.

[Nick Grasberger:]

Okay. So I'd like to thank all of you for joining today and I wish you a good day.

[Operator:]

Ladies and gentlemen this concludes today's conference call. Thank you for your participation. You may now disconnect.