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David Scott Martin; Director of International Relations; Environmental Corporation
Bro. Nicolas Grasberger; Chief Officer; Environmental Corporation
Thomas G. Vadaketh; Senior Vice President and Chief Financial Officer; Environmental Corporation
Davis Robert Baynton; Associate; BMO Capital Markets Stock Research
Lawrence Scott Solow; Research Physician; CJS Values, Inc.
Robert Duncan Brown; Senior Research Analyst; Lake Street Capital Markets, LLC, Research Division
Unidentified Analyst
Operator
Hello and welcome to the Enviri Corporation Third Quarter 2023 Earnings Conference Call. (Operator Instructions) Please note that this occasion is being recorded. I would now like to call Dave Martin for the remainder of the conference. Please come forward.
David Scott Martin
Thank you, Debbie, and welcome to everyone who joins us. I’m Dave Martin from Enviri. I’m joined today by Nick Grasberger, our President and CEO; and Tom Vadaketh, our senior vice president and chief financial officer. This morning we will discuss our third quarter 2023 effects and our updated outlook. But before our presentation, let me mention a few things. First, our effects pitch and slideshow for this call are on our website. Second, today we will make statements that are considered forward-looking within the meaning of the federal securities laws. These statements are based on our existing wisdom and expectations and are subject to certain risks and uncertainties that could cause actual results to differ materially from such forward-looking statements. For a discussion of those dangers and insecurities, see the Risk Factors section of our latest 10-K. The Company undertakes no legal responsibility to revise or update any forward-looking statements. Finally, on this call, we will reference adjusted monetary effects that are considered non-GAAP for SEC reporting purposes. A GAAP reconciliation is included in our earnings release as well as in the slideshow. With that, I’ll turn the call over to Nick. THANK YOU.
Brother Nicholas Grasberger
Thanks Dave and hello everyone. I welcome Tom to Enviri. Tom is an experienced executive who has worked in public and private companies and achieved great success. He fits our culture very well and I look forward to running with him as we continue our transformation. So Tom, welcome. Once again, I would like to thank Pete Minan for his determination towards our company and its shareholders. Pete’s contributions to the company over the past nine years are countless and we wish him the best in his retirement. The past quarter was our fifth consecutive quarter of double-digit EBITDA expansion compared to the prior-year quarter. And once again, we exceeded expectations. Accordingly, we are also raising our full-year guidance and remain firmly focused on expanding cash flow, reducing our leverage and completing the next point in our transformation. The cash flows of our two process segments, Harsco Environmental and Clean Earth, will improve by more than $100 million this year, and we expect further expansion in the coming years. Our challenge lies in the flow of money from our railway sector and in much higher interest costs, mainly due to the short-term interest rates that are emerging. However, our debt will be reduced by approximately one turn this year and we expect relief of at least part of the turn next year, before taking into account the effect of the sale of the rail sector. The main contributor to our deleveraging was margin expansion and cash flow generation at Clean Earth. Clean Earth’s EBITDA margin improved to 14% in the past quarter, up 150 foundation issues from last year’s strong third quarter, driven by price gains, volumes, a favorable mix and projects aimed at achieving better operational efficiency. Cash flow will reach about $100 million at Clean Earth this year, or 11% of currencies and more than 80% of EBITDA. These measures reflect the fact that our assets require relatively modest sustaining capital and that we have been able to pass through the inflation we have experienced in divestitures and other costs. We are about to complete our third full year of the Clean Earth segment, which was created through the acquisitions and consolidation of 2 corporations. EBITDA has grown from around $80 million at the time of acquisition to more than $120 million this year. This expansion of our monetary concentrate has fueled Clean Earth’s strong cash flow, giving us a respectable return on investment. Given the recent multiples paid for acquisitions in our industry and the outlook for our business, we are confident that this segment has created and will continue to create significant value for shareholders. Our efforts to build a much larger business from a unique set of assets come with building a new control team, greater pricing discipline, optimizing logistics, reducing general and administrative expenses and several other programs. operational improvement. Implementing a regular IT operating platform next year will be another very important step in unlocking business value. Harsco Environmental continues to perform well despite minimizing metal production than our consumers expect. Like Clean Earth, cash flow will be particularly higher in higher education this year due to higher cash earnings and particularly improved running of current capital. The company has effectively expanded the scope of existing contracts with less capital-intensive services, and the green products sector is exceeding expectations. HE’s operating leverage is quite high and we expect the effect of metal production volumes to recede at least to normalized levels in the coming years. Let’s move on to our railway segment. We expect to announce a matured sale transaction this year or early next year once due diligence is completed. The strong monetary development of the railway sector in the fourth quarter will help the process and we continue to work to reduce the risk of long-term contracts with European consumers. Then we published our annual ESG report a few weeks ago. The report is essential for Enviri because our project is to create and offer environmental solutions. And the report highlights how we measure ourselves and our progress against those measures. In 2022, we saw a record level of safety performance from Harsco Environmental and, for the company, a 20% improvement in protection compared to the previous year. In total, we recycled or reused 35 billion pounds of waste last year. Clean Earth recycled 90% of the waste collected and Harsco Environmental recycled or reused 87% of the treated slugs. I inspire you to check out our report at enviri. com. Looking ahead to 2024, we are optimistic. As noted, we expect to complete the sale of Rail in the coming months. And while we may not provide a formal financial forecast for 2024 until February, we can safely say that we are aiming for continued margin and profit expansion in each of our businesses next year. Now I’ll turn it over to Tom.
Thomas G. Vadaketh
Thanks Nick and hello everyone. Let me start by saying that I am excited to be part of the Enviri team. I am excited about the project and the company’s goal and look forward to helping Enviri complete its transformation into an environmental responses company. I’ve enjoyed meeting and working with the team over the last few weeks, I have a lot to report on the business and I can’t wait to catch up. Enviri’s strategy is well explained and its charge creation opportunities are not superseded. Reducing leverage and strengthening flexible cash flow generation remain paramount and are our most sensible priorities for me as CFO. I also love the consistent international aspect and look forward to working with our businesses to increase margins and drive expansion. Let me now address our effects for the quarter and our outlook for the fourth quarter. Turn to Slide 4. Enviri’s third-quarter earnings from settlement-consistent procedures increased to $5,25 million, an increase of 8% from the prior-year quarter. This accumulation is due to value and volume expansion in Clean Earth and Harsco Environmental. Adjusted EBITDA amounted to $79 million. This result is a 12% improvement over the previous year and is above our targeted diversity. The better-than-expected effects were mainly due to volumes and business mix, as well as Clean Earth’s consistently strong financial burden. Declining business performance also contributes to the situation. Compared to the prior-year quarter, each of our consistent internal segments brings a contribution to the expansion, which I’ll talk about in the next few slides. Percentage-consistent adjusted earnings were $0. 05 for the quarter. Exceptional parts for the quarter amounted to $0. 08 and consisted largely of an accounts receivable provision for an HE contract in Oman, where our client has barely seen production and the factory is reportedly for sale. Free cash flow for the quarter was $10 million. Excluding the benefits of securitization of accounts receivable in the prior-year quarter, the year-on-year accumulation of loose cash flow was $66 million. This improvement was driven by current capital, as well as a decrease in capital spending and an increase consistent with monetary profits. As Nick mentioned, so far this year, our procedures in conjunction with HE and Clean Earth have combined to generate a cash flow of $12. 5 million, a significant improvement over the $16 million generated in the same year. period last year, thanks to expansion in profits and money flow. current capital. This improvement in activity was partially offset by an interest accrual of almost $25 million and other smaller parts, resulting in an improvement in underlying cash flow of more than $70 million for the entire company, at the same time time than last year. . Finally, our net leverage decreased to 4. 5x at the end of the quarter and should continue to increase towards 4x at the end of the year. Turn to slide five and our environmental segments. Segment earnings totaled $286 million, up 8% from the prior-year quarter. Adjusted EBITDA brought in $54 million in the quarter. Compared to the prior-year quarter, HE benefits from the creation of higher volumes of green products and facilities, onboarding from new locations, and consistency with pricing and rate improvement projects. These positive pieces were partially offset by an accretion of selling, general and administrative expenses, primarily due to the accrual of increased incentive pay. HE’s EBITDA margin approached 19% in the quarter. Overall, the HE effects are, in our opinion, quite positive, especially as metal production at our consumers decreased slightly compared to the previous quarter and plant utilization rates remain weak. In all, other provided facilities, innovations and national values offset those headwinds. Next, turn to slide 6 to talk about Clean Earth. For the quarter, earnings were $239 million and adjusted EBITDA was $34 million. Compared to the second quarter of 2022, profit generation increased by up to 7%. Price accounts for a bit more of this upgrade, with underlying volume expansion driven by the healthcare and commercial markets. Profits from hazardous fabrics totaled $195 million, while soil dredging profits totaled $44 million during the quarter. These figures represent increases of 7% and 10% respectively. Our quarterly profits in the soil dredging sector were the highest since the first quarter of 2020, reflecting the advantages of infrastructure finishing, giant structure projects in our applicable markets and our strong market position. We continue to see strong expansion in soil dredging reserves, which are now up more than 60% so far this year. Clean Earth’s adjusted EBITDA growth increased 20% year over year and Clean Earth’s margin increased 14% in the quarter. In addition to pricing and volumes, the company gains benefits from a favorable mix and internal load power projects compared to the comparable quarter of 2022. Now turn to Slide 7 to see our revised outlook for 2023. And let me highlight two questions about this. slide. First, Enviri’s full-year adjusted EBITDA is now expected to be in the range of $282 million to $289 million. Our new midpoint is up 24% year over year. Secondly, we now expect our free cash flow to be between 2 and 3 five million dollars for the year. The change in our free money flow midpoint is due to an increase in alignment with interest and our updated view of an increase in line with the schooling of working capital in line with performance. As we mentioned above, HE consumers in China have been slow to pay. We made smart progress with some Chinese consumers in the third quarter, but there is still work to be done here. As a result, some expected earnings have been pushed back to next year. Let me conclude on Slide 8 with our guidance for the fourth quarter. Fourth-quarter adjusted EBITDA is expected to be between $62 million and $69 million. Harsco Environmental’s EBITDA is expected to increase significantly compared to the fourth quarter of 2022. Higher volumes, pricing and tariff innovations will contribute to the expansion. Clean Earth’s EBITDA is expected to be comparable to the prior-year quarter. In this case, advances and innovations deserve to be compensated by an increase consistent with incentive payments and with compensatory expenses and professional fees. Sequentially, the effects of either segment are expected to diminish due to seasonality and a less favorable business mix. Finally, the company’s charges are expected to be approximately $10 million in the fourth quarter, with the year-over-year increase driven by incentive pay, consistent with professional fees and other miscellaneous items. Thanks, and now I’ll call oconsistent withator again for Q&A.
Operator
(Operator Instructions) The first comes from Rob Brown of Lake Street Capital Markets.
Robert DuncanBrown
First of all, in Clean Earth, you’ve noticed a very smart shift in your margin and you’ve made smart progress. I was just looking to get an update in your mind on how far you can go further. And what steps can you take next year to increase your margin?
Bro. Nicolas Grasberger
Well, as we’ve been pointing out for a few years now, the target EBITDA margin within Clean Earth, since the time of acquisition, is 15%. And as we noted, margins here were 14% in the third quarter. And we had a favorable combination for that. Soil activity, let’s say, has seen a slightly higher expansion than hazardous waste and the margin differential there is four or five points. That definitely helps. And the delay is quite significant. Therefore, we expect these advantages to continue next year. And many of those operational power-focused projects will continue next year as well. And I think we’ve learned that our price field and our opportunities in this sector are somewhat greater than they have been in recent years. So I think we’ll definitely provide a little bit more guidance on the expected EBITDA margin for Clean Earth next year in February, but we’re very pleased with the trends. And this 14% is the new record and is in line with our plan from the beginning.
Robert Duncan Brown
Alright. Excellent. And then let’s move on to the environmental sector. You talked a little about the expansion of organic products. Could you tell us how that happens and what that percentage is in terms of mix and what you see can be done in terms of. . .
Bro. Nicolas Grasberger
So there are several elements to this. We have some corporations within HE that are nothing like a factory facility. The acquisition of Altek that we completed a few years ago and the Reed Minerals business that is also part of HE, those two corporations, which are part of our green product portfolio, are doing well year after year. The green products sector, which is, for example, contained within the metal grinding plant sector, is either strong or has increased year-on-year, heavily impacted by declining nickel costs and the volume of upcoming nickel scrap sales. But overall, organic products are having a very good year. And that’s 15-20% of our business.
Operator
Next up is from Larry Solow of CJS Securities. Pass ahead.
Lawrence Scott Solow
Welcome, Tom. First question, about the environment. I guess, as you mentioned, metal production has been low this year, and I’m not taking into account our production, in the last few years it’s been below the production averages of your customers and the industry. But even so, you controlled the construction of your turnover increased by 9% this quarter. Could you just talk about some of the resources of earnings growth?I know this is partly due to the recovery in prices, but does it help us to analyse the differences?
Brother Nicholas Grassberger
Yes. So, as we do every year, we have new contracts, new sites that will be online in the second half, which will actually generate revenue in the fourth quarter. Price also continues to be a credit to us year after year, as throughout this year we have offset inflation with value increases. And then getting back to green products, some of those corporations are growing in the fourth quarter. So while metal production declines frequently at the sites, I guess the other thing I think I mentioned earlier is that we’ve also had success at the existing sites, adding new facilities to the scope contracts and those facilities obviously take advantage of the infrastructure that we have on the sites. They have a tendency to require less capital and therefore greatly increase our returns on capital in those locations. And that helps too, Larry.
Lawrence Scott Solow
Alright. Excellent. And then moving on to Clean Earth, which has obviously been a glorious change in recent quarters, the effects have been good. And I think a lot of things have been done without many improvements in the appearance of the field. I know it’s a smaller portion of the business, but clearly you talked about at least the dredging and I guess the rainy soils have built up and the reserves have increased by 80%. Can you help us break down in particular that 80% of reservation accumulation that ultimately generates sales? As? What does that mean in relation to the actual length of Clean Earth and how much it can move the needle up a notch? No, if you need to give me some details.
Bro. Nicolas Grasberger
As a result, soil and dredging activities account for approximately 15% of Clean Earth’s revenue. You may remember from past discussions that we’ve been waiting for some time for some of those infrastructure projects to take off and for that volume to increase. to our facilities. And in recent quarters, that’s been the case. We have noticed a record increase in the order book that will of course continue in 2024 as well. Therefore, it is not 1 or 2 projects that are at the origin of this phenomenon. This is a fairly widespread improvement in project start-ups. And as I pointed out, the mix is favorable because margins in this business tend to be four or five points higher than Clean Earth’s. Hazardous Waste Segment. And even in the soil sector, there is a detail of diversity that has been favourable lately.
David Scott Martin
Just to explain one point, you discussed a 60% expansion in reserves. This is more commonly similar to dry soil when you label them than to rainy soil.
Lawrence Scott Solow
It’s going to be more. . . well, the dredging aspect. Yes, that’s fine. I appreciate it. And just in terms of the harmful aspect of the gathering aspect, I know it. . . there were bottlenecks. . . In terms of getting some of the products to the incinerators or. . . I think some of that is going to cement the horns, and if I’m wrong, is it kind of a bottleneck, is it moving forward?Or I know it hurts you a little bit too, right?
Brother Nicholas Grassberger
Yes, that’s a smart question, Larry, because it’s been a challenge for us, but it has been recently. So I would say that we are not giving up any gains due to lack of disposition capacity.
Lawrence Scott Solow
It is ok. And finally, when it comes to the rail sector, it turns out that there is more to it than just emerging interest rates, which is obviously a macroeconomic issue. It looks like things are progressing and you seem to be confident that you will make the sale in the next 1 or 2 quarters. On the topic of reducing the dangers associated with long-term contracts, I know you provided us with an update last quarter. I think there were 2 types of notable issues or 2 distinct customers. I felt like we were moving forward. An overall update?
Bro. Nicolas Grasberger
So, as you probably recall, I think we noticed this in the second quarter: we had effectively renegotiated and modified the contract with one giant European customer, and we’re in the process of doing the same with another. And yet, we have some of those long-term contracts are complex. Supply chains are complex. Due diligence on those contracts takes time, but yes, the procedure is moving forward.
Operator
The next one comes from [Adit Trafalgar] with Stifel.
Unidentified analyst
Is the EBITDA run rate now back to pre-COVID-19 grades?Or are we going to go back there in the fourth quarter of 23, because I think you commented that you expect wonderful functionality from Rail?And then, maybe you can just let us know what’s holding back the final deal right now: the prospective buyers who are on the ground?A little more on this would be wonderful.
Bro. Nicolas Grasberger
Of course. Yes. So, I would say the core business outside of long-term contracts is getting close to what it was pre-COVID, but it’s not there if you look at the fourth quarter. This will be the strongest fourth quarter we have seen in the rail sector in the core business in some time and we will obviously return to pre-COVID-19 levels. And the outlook for next year is quite healthy, and we’re seeing a lot of that in the backlog today. So we’re pretty happy with the core. As I noted a moment ago, those long-term contracts in Europe are important. They are complex. Supply chains are very complex. You can believe, during COVID, the disruptions in that supply chain, you can also believe the effect of inflation on contracts in recent years. So the renegotiation procedure on our part and on the part of the buyer, doing due diligence and understanding the risks involved in those contracts, takes time, longer than we would like, but that’s how it is. So I don’t think it’s a question of if we’re going to get a deal done at the end of this year or early next year, but when. And again, as I mentioned, I think the fourth quarter, which we expect to be strong, will make things easier.
Unidentified Analyst
I guess the change is still tied to the rail sector, but I think you talked about leverage, you’ll expect it to come down 0. 5 in line with the return in FY24, so it potentially comes out of 24 to 4x. Do you think this will result in some sort of debt repayment?And to what extent can leverage be further reduced after the sale of Rail?Does it transmit 0. 5 rounds? So, will you potentially come out of FY24 with 3. 5x leverage?
Bro. Nicolas Grasberger
I believe that, without taking into account the effect of the divestment of the rail sector, we deserve to be well below four times by the end of next year. And we expect the rail transaction to be a deleveraging event. So, I probably wouldn’t give an express figure now. We’ll have a much broader view in February at our next call, but this slow reversal of deleveraging next year, plus the deleveraging effect of divestment. In fact, the rail sector will put us well below four times as much.
Unidentified Analyst
Excellent. And then just one last one for me. So, the consultant increased EBITDA through $10 million. Just, and then I think, I’m sorry, the loose money was reduced by $10 million, but then the EBITDA was increased by $8 million. So what explains this decrease in loose cash and the increase in EBITDA?
Bro. Nicolas Grasberger
Actually, it’s a matter of claims in China. We started this year with, I’ll call it, a $50 million challenge. We made $35 million from this. And we have $15 million that will be injected in the first quarter. And again, it’s not a question of if the item is collectible, but simply when. And there are some contractual issues that want to be solved and will be resolved. And I see that that $15 million or so that we were aiming to raise in the fourth quarter, we’ll see, we’ll see in the first quarter.
Operator
(Operator Instructions) The following comes from Davis Baynton of BMO Capital Markets.
Robert Davis Baynton
It’s Davis for Devin Dodge. So, the year before, I had talked about a loss of profits due to the shortage at Clean Earth, but it turns out that has taken a step forward in 2023. What is your current view of Clean Earth’s ongoing situations?
Brother Nicolas Grassberger
I think you’re referring, like a lot of other companies, to the shortage, the pretty acute shortage of truck drivers that we had at Clean Earth last year. This was one of the many demanding situations we faced, in addition to inflation. , logistics costs, diesel prices, etc. But yes, it was a challenge for us last year. I wouldn’t possibly say that we have a full complement of the point that we would like in terms of drivers, but we are in a much better position. than in previous quarters. So I don’t think we’re wasting much in terms of revenue source or profit depending on the situation of the paintings.
Robert Davis Baynton
It is ok. And then I’ll turn to Harsco Environmental. You’ve already talked a little bit about the lower-than-expected metal production by consumers in this segment. But it could explain a little more what consumers are saying about their metal factories. In terms of short-term production levels?And what visibility do they have about this company?
Bro. Nicolas Grasberger
Yes. Well, first of all, let me comment on the combine within HE. Certainly, certain geographic spaces are experiencing quite attractive expansion, as is the case of India. We are the only factory service provider in India. And India is doing quite well. We have noted moderate expansion in China this year. We have noticed smart expansion in Türkiye. It is the Americas and Western Europe that have held us back. Fortunately, our premium margins are skewed toward emerging markets that are doing relatively better than Europe and the United States. Regarding visibility, we of course adhere to many other forecasts for metal production. We also pay attention to our consumers. We thought that in the second part of this year we would see a rebound, but that just didn’t happen. So we figured we would be up 1% or 2% in the second part of this year compared to the second part of 2022. And it’s down slightly. Most of the forecasts that we see from most of our clients, when we talk about 2024, foresee an expansion in volume. If you look at the capacity utilization of metal plants, at least the metal generators that we support, if you exclude the first part [2020], it is at its lowest level in 10 years. So we sure hope that improves. Our consumers do it, economists do it, so we expect an expansion in 2024.
Operator
That concludes our Q&A session. Now I’d like to turn it over to Dave Martin for any final remarks.
David Scott Martin
Thank you, Debbie, and thank you to everyone who participated in this call. Please feel free to reach out to me if you have any additional questions. And, as always, we appreciate your interest in Enviri and look forward to speaking with you soon. Thank you.
Operator
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