Harsco : Q1 2022 Transcript

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EDITED TRANSCRIPT

HSC.N - Q1 2022 Harsco Corp Earnings Call

EVENT DATE/TIME: MAY 03, 2022 / 1:00PM GMT

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CORPORATE PARTICIPANTS

Anshooman Aga Harsco Corporation - Senior VP & CFO David Scott Martin Harsco Corporation - Director of IR

F. Nicholas Grasberger Harsco Corporation - Chairman, President & CEO

CONFERENCE CALL PARTICIPANTS

Huang Howe Barrington Research Associates, Inc., Research Division - Senior Investment Analyst & Research Analyst Jeffrey David Hammond KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst Lawrence Scott Solow CJS Securities, Inc. - Senior Research Analyst

Michael Edward Hoffman Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Group Head of Diversified Industrials Research Robert Duncan Brown Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst

Zane Adam Karimi D.A. Davidson & Co., Research Division - Research Associate

PRESENTATION

Operator

Good morning. My name is Jaye, I'll be your conference facilitator. At this time, I would like to welcome everyone to the Harsco Corporation First Quarter Release Conference Call. (Operator Instructions)

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 redistribution of this telephone conference by any other party are permitted without the expressed 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.

David Scott Martin - Harsco Corporation - Director of IR

Thank you, Jay, 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 Anshooman Aga, Harsco's Senior Vice President and CFO.

This morning, we will discuss our results for the first quarter of '22 and our outlook. We'll then take your questions. Before our presentation, however, let me mention a few items. First, our 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 and are subject to certain risks that may cause actual results to differ from those forward-looking statements.

For a discussion of such risks, please see the risk factors section in our most recent 10-K. 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 the earnings release as well as the slide presentation. With that said, I'll turn the call to Nick.

F. Nicholas Grasberger - Harsco Corporation - Chairman, President & CEO

Good morning, everyone, and thanks for joining us today. Before I discuss our results, let me speak to the ongoing crisis in Ukraine.

The global steel market is in the process of rebalancing as a result of the Russia-Ukraine conflict and we anticipate limited impacts to our Harsco Environmental segment over time, given the diversity of our portfolio. Furthermore, Harsco has no direct exposure within either country and any related disruptions at customer sites were short-lived and minimal in the quarter.

Turning to our results. Harsco consolidated revenue was up 1% versus the first quarter of 2021 and adjusted EBITDA totaled $49 million. These adjusted results are consistent with our guidance. Much of the quarter, however, was characterized by unprecedented inflation in commodities and other input costs as well as tightness in our supply chains and labor markets, particularly in the U.S.

We expect these factors to remain a concern and are working aggressively to mitigate the impact on our businesses. That being said, underlying demand within most of our key markets remains firm, including the steel industry and in most of the markets served by Clean Earth.

We also remain confident in the outlook of our Rail business as the industry continues to recover from COVID-related impacts. For example, we have sold more tampers, the core of our product line in the first 100 days of this year than we did all of last year.

Now let me comment on each of our 2 core businesses. Harsco Environmental had a strong quarter despite these conditions as a result of strong execution. Looking forward, our steel industry outlook is largely unchanged as is our expectation for HE for the full year.

Any impacts from the conflict in Ukraine are expected to be muted longer term for our Environmental business. given the diversity of our customer portfolio and of our exposures. HE results are projected to strengthen in the coming quarters, reflecting better seasonal volumes and additional benefits from our growth investments.

These investments include ecoproducts or our SteelPhalt business recently introduced its first carbon-negative asphalt product. SteelPhalt is a compelling growth story within HE, which illustrates our innovation mindset and positions us as a strategic Environmental partner to the steel industry.

The outlook for our Altek business, which we acquired a few years ago, was also beginning to improve. We expect to sign at least 3 contracts this year to either sell directly or to build all you saw plants for customers that need a better environmental solution to process waste from the aluminum manufacturing process.

Looking at Clean Earth, in the first quarter, again, we were impacted by incremental cost inflation, particularly for fuel and price increases for steel containers. These effects were more pronounced late in the quarter and additionally, volumes continue to be affected by the ongoing shortage of drivers as well as weakness within certain retail customers where pandemic-related benefits have waned.

The onboarding of drivers has, however, improved significantly over the past few weeks. While these items will continue to weigh on Clean Earth in the second quarter, we've begun addressing these challenges proactively. Recently, we initiated a series of price increases and surcharges to offset significant increases in the cost of fuel, third-party transportation costs and containers. By and large, the responses from our customers have been favorable.

There are also some bright spots within Clean Earth. Our full-circle service is increasingly supporting sustainability goals for our customers and we'll continue to pursue avenues to expand some of our unique capabilities. In addition, the outlook for our soil and dredge business is quite promising with numerous large projects in the pipeline for later this year and into 2023.

Overall, for Clean Earth, we anticipate margins will recover in the second half of the year and our longer-term view on margins and growth potential remain unchanged. Turning to sustainability. Our strategic direction and environmental focus is quite clear. Harsco is uniquely positioned as the leading provider of recycling and reuse solutions within the industrial waste market.

Customers are increasingly searching for more environmentally friendly solutions for their waste streams, consistent with their value proposition. We continue to drive initiatives internally to improve our carbon footprint across our logistics and processing plant operations.

Since 2019, our carbon intensity has declined 13.5%, putting us on track to deliver a 15% reduction goal by 2025. There is much more for us to do here and we'll have additional details to disclose regarding our sustainability achievements and goals within our next sustainability report to be published later this year.

Next, let me comment on Rail and our efforts to reduce our financial leverage. We're committed to a sustainable leverage ratio of under 3x, as we've discussed in the past. A Rail transaction is an important step for Harsco in this regard. Fundamentals within the Rail maintenance-of-way market have clearly improved in recent months, particularly in North America, where we've experienced a notable pickup in order activity.

The increase in our backlog during the quarter supports our return to a more normalized level of EBITDA in the business for this year, which is about $40 million. The process to divest Rail is continuing to progress as anticipated. There has been tremendous interest in this unique and valuable asset for more than 70 parties globally. We are now narrowing the list of potential buyers and expect to continue with a more detailed due diligence process with this smaller group within the next few weeks.

Our expectations remain unchanged for the sale of the Rail business in the second quarter with the closing of the transaction shortly thereafter.

I would like to conclude by acknowledging Harsco's 12,000 employees for their ongoing dedication to the company and commitment to satisfy our customers in a safe and compliant manner. The engagement of our employees is

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Anshooman Aga - Harsco Corporation - Senior VP & CFO

Thanks, Nick, and good morning, everyone. Please turn to Slide 5. Harsco Q1 revenues from continuing operations increased 1% compared with the prior year quarter to $453 million, including a 2% headwind from FX translation.

Adjusted EBITDA totaled $49 million, which was in line with our guidance. Relative to our expectations, Environmental performed strongly and corporate cost was slightly favorable. Meanwhile, Clean Earth results were impacted by increased inflation pressures related mainly to fuel with diesel increasing approximately 40%, driven by the Russia-Ukraine conflict, also driver availability, including the impact of Omicron earlier in the quarter impacted volume.

Each of these items impacted CE results by $1 million to $2 million. We are taking action to mitigate the spike in inflation due to the Russia-Ukraine conflict, including with respect to pricing, which I'll return to later.

Harsco's GAAP loss per share from continuing operations in Q1 was $0.09, while the adjusted loss was $0.01. This adjusted per-share figure in the quarter was outside of our guidance range due to the higher effective tax rate which was impacted by the geographic distribution of our income.

Lastly, our free cash flow for the quarter was a deficit of $29 million. This result was consistent with our expectation. As we've discussed in the past, Q1 is typically the low point for our cash flows during the year for various reasons, including the timing of interest and pension payments as well as incentive compensation payments. Our cash performance is expected to improve meaningfully for the remaining quarters of the year.

Please turn to Slide 6 and our Environmental segment. Segment revenues totaled $262 million and adjusted EBITDA was $48 million. Revenues increased 2% on higher volumes and commodity prices, partially offset by foreign exchange impacts.

Meanwhile, adjusted EBITDA decreased by $6 million year-on-year. The change reflects the expected less favorable mix of services and higher operating costs, mainly within ecoproducts. Also, FX and Brazil sales tax credits in the prior year combined impacted results by approximately $2 million.

On the Russia-Ukraine conflict, as Nick mentioned, we have not seen any material impact to date on Harsco Environmental. We did see a modest number of steel output disruptions at customer sites due to the high energy prices and the raw material availability. However, higher steel prices have since supported these operations and some production has likely moved elsewhere to offset these impacts. This illustrates the benefit of our global portfolio. Higher commodity prices have also helped Harsco.

Please turn to Slide 7 to discuss Clean Earth. For the quarter, revenues totaled $191 million and adjusted EBITDA was $10 million. Compared to the first quarter of 2021, revenues increased 1%. Meanwhile, adjusted EBITDA decreased $4 million year-on-year. This change primarily relates to hazardous materials line of business, where fewer drivers muted volume somewhat and high inflation following the Russia-Ukraine crisis impacted results.

These costs were greatest later in the quarter, particularly for fuel, third-party transportation and containers. We have instituted additional price increases and implemented surcharges, on top of the price increases we introduced in Q4 across a large percentage of our sales book to offset this inflation.

While most customers understand and support the price increases, it will take till late in Q2 for these impacts to be fully realized, so we are absorbing a cost price timing mismatch. We also continue to focus on cost controls to mitigate our risk here.

Lastly, on Clean Earth. The truck driver shortage is slowly improving. Turnover declined in the first quarter and March was a good month for recruiting drivers. Before turning to our outlook, let me comment briefly on Rail. During the first quarter, we recorded special items in Rail, which totaled $35 million. This amount for additional estimated future costs to complete fixed-price contracts with 3 large European customers.

These contract adjustments relate primarily to supply chain challenges and production delays that have increased anticipated costs and further delayed our progress on these projects, resulting in penalties. We are working with our suppliers and customers to mitigate some of the impacts that resulted in these charges.

And as Nick mentioned, our process to sell Rail is progressing according to plan and we are optimistic of our ability to complete a transaction this year. Selling Rail is important to reduce our leverage.

Now let's turn to our 2022 outlook on Slide 9. Our adjusted EBITDA is now expected to be within a range of $250 million to $265 million, with the change versus our February guidance entirely attributable to inflationary factors in Clean Earth, with the cost price timing mismatch in the first half.

This new EBITDA guidance translates to adjusted earnings per share of $0.35 to $0.44. Beyond the EBITDA change, the revised EPS guidance incorporates a change to our anticipated interest expense due to higher anticipated market rates and our effective tax rates.

Lastly, we are now targeting free cash flow excluding Rail of $25 million to $40 million. You can find our segment guidance within the appendix of the slide deck.

Let me conclude on Slide 10 with our second quarter guidance. Q2 adjusted EBITDA is expected to range from $59 million to $64 million. We expect Environmental adjusted earnings to be modestly lower due to business mix and FX impacts. Clean Earth adjusted EBITDA is anticipated to also modestly be lower due to the cost price timing mismatch. In addition, corporate costs should be within a range of $10 million to $11 million for the quarter.

Thanks, and I will now hand the call back to the operator for Q&A.