Enviri Q2 2023 Earnings Call Transcript

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Provided by Quartr
August 2, 2023

There are 7 speakers on the call.

Operator

Good morning. My name is Desiree, and I will be your conference facilitator. At this time, I would like to welcome everyone to the Enviry Corporation 2nd 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 Also, this telephone conference presentation and accompanying webcast made on behalf of Enviry Corporation are subject to copyright by Enviry Corporation and all rights are reserved.

Operator

No recordings or redistributions of this telephone conference by any other party are permitted without the expressed written consent of Enviro Corporation. Your participation indicates your agreement. I would now like to introduce Dave Martin of Enviry Corporation. Mr. Martin, you may begin your call.

Speaker 1

Thank you, Desiree, and welcome to everyone joining us this morning. With me today is Nick Grassberger, our Chairman and Chief Executive Officer and Pete Meinen, our Senior Vice President and Chief Financial Officer. Please note that we are doing this call from different locations today, so This morning, we will discuss our results for the Q2 and our outlook for the remainder of the year. We'll then take your questions. For our presentation, however, let me mention a few items.

Speaker 1

First, our quarterly earnings release and slide presentation for this call are available on our website. 2nd, we will make statements today that are considered forward looking within the meaning of the federal securities laws. These statements are based on 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 the Risk Factors section in our most recent 10 ks. The company undertakes no obligation to revise or update any forward looking statement.

Speaker 1

Lastly, on this call, we will 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 today as well as the slide presentation. With that being said, I'll turn the call to Nick. Thank you.

Speaker 2

Thank you, Dave, and good morning, everyone. We delivered a strong second quarter with revenues and adjusted EBITDA exceeding forecasts across our continuing segments, Parsco Environmental and Clean Earth. Revenues were up 8% and adjusted increased over 50%. This better performance is attributable to several pricing and cost initiatives in both divisions as well as increased operating efficiencies and improvements in some end markets. As a result, after lifting our outlook for the year last quarter, we are once again raising our full year outlook this quarter.

Speaker 2

Additionally, our leverage, which was below 5 times at

Speaker 3

the end of the

Speaker 2

Q1, continues to decline and sits at 4.6 times. And I believe the figure should decline to 4 times at year end. Before adding further commentary on our performance. There are a few items of note that I want to discuss. First, we have initiated the process of selling our rail segment and started reaching out to selected potential strategic buyers.

Speaker 2

This is a priority for both the Board of Directors and Management. We expect to sell the business by the end of the year. And as I've mentioned, one of the necessary steps to selling the business is reducing the risk associated with our long term contracts. We've taken a significant step in that regard by successfully amending the Network Rail stoneblower manufacturing contract, the effect of which was a favorable modification of our delivery schedule and a reduction in our financial exposure. I should also note that the underlying business continues to perform ahead of our plan and well ahead of last year.

Speaker 2

2nd, we successfully resolved our dispute with Stericycle during the quarter regarding price increases. Both parties are satisfied with the result and I'm pleased that the settlement was amicable.

Speaker 4

We have

Speaker 2

an even stronger relationship with this customer and continue to provide Stericycle Exceptional Service. Next, as you are no doubt aware, on June 5, we changed our name to Enviry. A new name and brand identity reflect the company's transformation over the past few years into a single thesis environmental solutions company. One that provides services to manage, recycle and beneficially reuse waste and byproduct materials across many industries. As we considered how our business has evolved and our commitment to the environment, It is important to have a name and brand identity that align with that image.

Speaker 2

We are energized by this change and look forward to continuing to operate with the same commitment to excellence that has been part of the company's legacy for more than 170 years. Finally, in late June, we announced that Rebecca Martinez O'Meara was elected to Enviry's Board of Directors. We're committed to refreshing our Board and Rebecca is the 3rd new Director in the past 18 months. During her 30 year career, she worked in executive positions for a series of industrial and manufacturing companies including Stanley Black and Decker, Caterpillar, Fiat Industrial and AT and T. In particular her experience in leadership and business transformations and promoting cultural diversity will be of great value to us.

Speaker 2

I'll now provide a few comments on each of our segments. At Harsco Environmental, we effectively manage the business in the face of lower steel production, particularly in Europe and Latin America compared to last year at this time. Strength in India and Turkey partially offset this effect. And despite the lower volumes, the steel mill service business and certain Echo Products businesses performed better in the quarter. We continue to expect full year EBITDA and HE to be modestly above last year's figure with higher EBITDA margins and free cash flow generation near $100,000,000 We continue to limit growth capital in HE only to opportunities to provide a strong risk adjusted return.

Speaker 2

More broadly, the competitive position of HE remains quite strong. We continue to renew contracts successfully and initiate price increases to offset inflationary pressures. We look forward to the impact that our operating leverage will have on earnings and cash flow as steel production volume returns to more normalized levels. At Clean Earth, this segment delivered its 4th consecutive quarter of 12% or so EBITDA margins. We expect margins in Clean Earth to remain strong for the remainder of the year as we continue to progress towards our 15% EBITDA margin target.

Speaker 2

It's also important to highlight that Clean Earth is a capital light business with cash flow conversion this year expected to be roughly 85% of EBITDA. Price and improvement initiatives as well as higher retail and healthcare volumes support our strong results. Underlying the financial performance is much improved operational performance as well, namely service levels, safety and labor efficiency. Overall, there's no doubt that the segment is back on track to deliver on the promise to create shareholder value from the acquisitions made a few years ago to create our Clean Earth platform. Finally, I'd like to discuss our PFAS initiatives.

Speaker 2

Within Clean Earth, we continue to see PFAS remediation work as a significant opportunity. As related litigation continues, management budgets increase, the body of supporting technical data expands and federal and state regulations are finalized. Our approach anticipates using a toolbox of technologies to address each customer's specific requirements that will vary based on risk and economics to provide a more sustainable and resource friendly solution than landfills, incineration or deep well. We see soil and water as the 2 major market opportunities that align with our national footprint, which includes both fixed base and Mobile Thermal Desorption and Oxidation Assets. We're actively working with identified public and private partners to pilot our existing capabilities and to expand our water treatment technologies to couple with our hazardous waste wastewater treatment facilities.

Speaker 2

These new and existing technologies are undergoing internal trials with anticipated testing and evaluation by the DoD, the EPA and various state environmental agencies to follow. We were encouraged by the recently published DoD interim guidance on PFAS, in which the DoD highlights that a state permitted destruction technology could be considered rather than a hazardous waste incinerator. For example, as the memo states, a state permitted thermal desorption unit could be considered. So in summary, it was another strong quarter for Enviry and a very good first half of the year. In the second half, we will focus on the rail divestiture and continuing to capitalize on the operational and financial efficiencies at Harsco Environmental and in Clean Earth, including cost savings and a pricing escalation strategy.

Speaker 2

I'll now turn the call over to Pete.

Speaker 5

Thanks, Nick, and good morning, everyone. So please turn to Slide 4. Enviry's 2nd quarter consolidated revenues from continuing operations increased $520,000,000 up 8% compared with the prior year quarter. The increase was primarily driven by pricing as well as increased demand within both our Clean Earth and Harsco Environmental segments. Adjusted EBITDA totaled $78,000,000 which is above our prior guidance range.

Speaker 5

And this represents a 58% improvement from the prior year in a 24% improvement sequentially. Both of our segments realized stronger than anticipated performance. Clean Earth results were better than expected due primarily to the inclusion of the impacts realized from our recent Stericycle agreement. Clean Earth also benefited from stronger volumes in its retail and its soil dredge businesses as well as lower operating costs for containers, disposal, labor and energy across the business. For Harsco Environmental, results were higher than anticipated due to better services demand despite lower customer production as well as favorable pricing.

Speaker 5

Relative to the prior year quarter, the consolidated EBITDA increase was largely driven by Clean Earth as a result of price increases, internal efficiency initiatives, lower operating costs and higher volumes. Parsco Environmental results also improved modestly against the prior year. Our adjusted earnings per share was $0.01 for the quarter, which also compares favorably to our May guidance. Free cash flow for the quarter was a negative 23,000,000 Relative to the Q2 of 2022, the change reflects the benefit of our accounts receivable securitization transaction in 2022 and the timing of certain payments from Q1. Also, higher cash interest and capital spending impacted free cash flow.

Speaker 5

Importantly, operating cash flow performance within Harsco Environmental and Clean Earth was positive and our consolidated free cash flow performance for Quarter was consistent with our expectations. We expect our cash performance to improve for the balance of this year. Lastly, due to strong operating performance, our net leverage decreased to 4.6 times at quarter end, and we are confident that our leverage will decrease to near 4x at year end before considering the benefit of asset sales. Please turn to Slide 5 and our Environmental segment. Segment revenues totaled $290,000,000 up 6% excluding the impact of foreign exchange translation.

Speaker 5

Adjusted EBITDA reached $53,000,000 for the quarter. Relative to the prior year quarter, Harsco Environmental benefited from higher eco products and services demand, as well as higher pricing and cost improvement initiatives. These positives were partially offset by lower commodities prices and foreign exchange, which negatively impacted results by approximately $5,000,000 in the quarter. Overall, we're pleased to see that HE performed well despite lower steel production at customer locations due largely to operational improvements, other services performed and a favorable mix. Of note, steel output at our customer sites decreased approximately 6% year on year and was little changed sequentially.

Speaker 5

Regarding our improvement initiatives, Q2 results were supported by our cost reduction program, which is on pace to realize benefits of $10,000,000 annually. And our focus on strengthening performance at a small number of sites is driving positive actions with benefits expected to increase as the year progresses. Next, please turn to Slide 6 to discuss Clean Earth. For the quarter, revenues totaled $231,000,000 and adjusted EBITDA was $35,000,000 Compared to the Q2 of 2022, revenues increased 13%, primarily as a result of price increases and the Stericycle settlement. Volumes were only modestly higher as strength in retail, healthcare and infrastructure was offset by softness and project timing in Manufacturing and Industrial.

Speaker 5

Hazardous Materials revenues reached $198,000,000 up 15% year over year, while soil and dredge revenues totaled $33,000,000 for the quarter. Clean Earth's adjusted EBITDA increased $30,000,000 year on year and Clean Earth's margin reached 15%

Speaker 4

in the

Speaker 5

quarter. In addition to price and volumes, the business is benefiting from internal initiatives and lower operating costs. The positive impact from these internal initiatives is running roughly $3,000,000 per quarter, with much of the benefit attributable to logistics and labor savings. Clean Earth is also seeing incremental benefits from lower container and transportation costs. Now before turning to our outlook, let me comment briefly on the Rail business.

Speaker 5

As Nick mentioned, we recently renegotiated our equipment supply contract with Network rail. We have now extended and redefined the delivery schedule for the machines into 2025 and therefore reduced our estimate with liquidated damages due under the contract. And for the benefit of our customer, we have also dedicated specific additional capacity to manufacture the equipment. This amendment is a very important milestone for Rail as it helps to reduce the financial risk associated to our long term contracts. Now please turn to Slide 7 for our revised 2023 outlook.

Speaker 5

And note that our detailed segment outlook can be found in the appendix of our slides. Enviry's full year adjusted EBITDA is now expected to be within a range of $270,000,000 to $285,000,000 This compares to the prior range of $260,000,000 to $275,000,000 with our new midpoint up 21% year on year. This revised EBITDA guidance translates to an adjusted loss per share of between $0.09 and $0.25 Lastly, we now expect that our free cash flow will be between $30,000,000 $50,000,000 for the year. Let me conclude on Slide 8 with our Q3 guidance. 3rd quarter adjusted EBITDA is expected to range from $67,000,000 to $74,000,000 At the midpoint, Harsco Environmental's EBITDA is expected to increase compared to the prior year quarter due to higher contributions from ECO Products, new contract additions and internal improvements.

Speaker 5

Clean Earth results are anticipated to be similar to the prior year as price, higher volumes and operating improvements will be offset by labor and disposal cost inflation and higher incentive compensation. Sequentially for Clean Earth, the adjusted earnings projected to be between $11,000,000 $12,000,000 for the 3rd quarter. Thanks, and I'll now hand the call back to the operator for questions and

Operator

Thank you. We will now begin the question and answer The first question comes from Larry Solow with CJS Securities. Your line is open.

Speaker 4

Great. Thanks. Good morning, guys. Hey, Larry. This is Nick.

Speaker 5

Hey, Larry.

Speaker 4

Good morning. Hi. Just I guess a couple on the rail. So I guess the agreement that you've reached out with Network Rail, was this the major for a major obstacle in terms of contracts that issues you had. Or are there still others that you kind of feel like you need to resolve?

Speaker 2

Yes. It's a good question, Larry. Yes, there are a few others, one in particular in Germany that we are working to resolve kind of as we speak. In effect, the way we're marketing the business is the kind of the core of the business remains very strong, good margins. Demand is increasing well above last year.

Speaker 2

A few of these longer term contracts, as you know, were affected by supply chain challenges and inflation about a year ago. And so we've been working hard both operationally and in terms of our agreements with our customers to kind of reduce the risk of the range of outcomes from those contracts over time. And we've done a lot of that work, most notably the network rail contract that Pete and I mentioned, but there are others as well.

Speaker 4

Okay. And I guess the improved performance, that's mostly domestic or other international contracts, I guess supplies and all of those supply chain stuff, I imagine, is getting better for you guys. So have those contracts actually the work stopped until some of these things were settled and most of the

Speaker 2

No, no, no. We're continuing to fulfill those contracts. But what's stronger is the standard equipment, the aftermarket business, the contract and services, the technology piece. Those core elements of the business Are doing quite well versus planned and also versus last year.

Speaker 4

Got it. Great. And then on the environmental piece, just obviously you It performed well in a pretty difficult environment, kind of somewhat lackluster steel production volumes. Can you just speak to sort of some Growth opportunities as you look out, whether it be new projects, new customers or potentially maybe more importantly with less CapEx just expanding services at existing customers. I think that's sort of been something you guys are sort of driving towards.

Speaker 4

Maybe update us on that. Yes.

Speaker 2

Well, first of all, I'd say that capacity utilization in steel mills, if you Exempt the first half of twenty twenty is at its lowest level in about 10 years. So we think there's a good bit of volume uplift potential here in the next couple of years. And given our cost structure and our operating efficiency that's going to yield pretty high fall through to EBITDA and cash flow. Beyond that, and we saw that the first half of the year, our non steel production based services are doing quite well, and offsetting and mitigating the impact of lower steel production. So I would expect that to continue to ramp over time.

Speaker 2

And of course, there's much less capital associated with those services. And so that will yield to will lead to better returns Capital. And then as we also noted, there are a handful of very attractive growth opportunities that have good returns that you'll see us executing over the next year or 2. So I think those three components are going to lead to a pretty healthy outlook for EBITDA and cash flow growth in HE.

Speaker 4

Got it. And if I could just sneak one more in. Just on the congrats on the settlement with Stericycle, good to get that behind you. It looks like it's beneficial. Was that the feels like that's kind of the driver for the beat in the quarter and predominant for the raise for the year.

Speaker 4

Is that fair enough?

Speaker 2

Yes, it certainly was a component of it. I think we the midpoint of our range has increased By about twice what that settlement value was in the

Speaker 4

quarter. Okay.

Speaker 2

And we We're kind of at or a little bit above the high end of our guidance on EBITDA if you exclude the Stericycle benefit in Q2.

Speaker 4

Right. But when some of that settlement then carry forward in higher EBITDA going forward, right? That's why I was kind of adding that the settlement plus the Next couple of quarters in 'twenty three, right, which you'll be getting higher.

Speaker 2

Yes. So part of the settlement was an incremental price increase this year and then next year as well. So yes, there's a little bit of tailwind as well on top of the 6,000,000 A mid year price increase.

Speaker 5

Got you.

Speaker 4

Fair enough. Thanks, Nick. I appreciate the color. Yes. Thank you.

Operator

Our next question comes from Rob Brown with Lake Street Capital Markets. Your line is open.

Speaker 6

Good morning. Hey. Just wanted to follow-up on that kind of the price realization comments that you talked about in Clean Earth. You said that there's a pending price increase. I guess, have you are you at in terms of getting your price increases there and how much is left to go?

Speaker 6

Could you clarify that? Thank you.

Speaker 2

Is the question related to Stericycle or More broadly. More broadly. Yes. So as you know, we moved quickly and I think aggressively this time last year to increase prices to offset The unprecedented inflation that we saw in the Clean Earth business. And then at the beginning of this year, instituted our more standard annual price increases across the book.

Speaker 2

And selectively throughout this year as certain inflation components move ahead of expectations. We are raising price as well. But for the most part, The benefits that you're seeing in price in Q2 were a result of the midyear price increase last year and the price increase again early this year. But I would anticipate going forward The price increases will more likely be an annual event.

Speaker 6

Okay, good. Thank you. And then I think you mentioned some kind of mixed kind of end market demand environment, but how's demand environment looking for Clean Earth over the next sort of 12 months and what markets are you seeing some, I think you mentioned a little bit of weakness in housing, but where are you seeing sort of the strength and weakness in Clean Earth?

Speaker 2

Yes. So kind of in order of performance. Healthcare is probably the best performing segment of our end market, followed by retail and then industrial. Now industrial It was a little weaker in the quarter, but that was driven by the so called project work. Think of a hand sanitizer project.

Speaker 2

I think the underlying demand in industrial is still healthy. When you strip out the impact of is somewhat lumpy project work on a quarter to quarter basis. And the soils business, The bookings in that business this year are the highest level we've seen since we made the acquisition a few years Most of that is yet to flow through to revenue because the projects have yet to begin. But the outlook for soil and dredge is quite good, not only in terms of volume, but the mix And the soils business is improving.

Speaker 6

Okay. Thank you. I'll turn it over.

Operator

Our next question comes from Our next question comes from Davis Bacon with BMO Capital Markets. Your line is open.

Speaker 3

Hi, thanks. This is Davis on for Devin Dodge. So you've made a lot of progress on restoring the profitability of Clean Earth. And I know you've touched on this a bit, but just wondering if you could expand a little bit on what the drivers are that can push that the underlying EBITDA margins to that 15% goal and then maybe what's a reasonable timeframe

Speaker 2

Yes. So first of all, I'd say just the operating leverage that will Apply to volume growth in the business, which we expect to be kind of low to mid single digits. So that would be component of it. Secondly, the overhead in the business, in my view, was still elevated based on a series of processes and systems that are just highly inefficient and very labor intensive. So we would anticipate over the next 2 years another significant reduction in the overhead structure.

Speaker 2

We've reduced the overhead a few times since we acquired it, but there's another significant reduction that we believe will execute in the next, say, 18 to 24 months. 3rd, I would say that, as we've seen over the past year. Our ability to improve margin through price and mix is encouraging. At this point, we have gone beyond recovering cost Inflation with price and margins are now higher because of that on a net basis.

Speaker 4

3rd,

Speaker 2

from a mix standpoint or 4th, I should say, The mix, the margin on the Soros business is higher And that on the hazardous waste business, at least at this point. And I think the volume growth potential in soil because of the PFAS volume, I think, is fairly significant. So that should lead to higher margins as well. So And there are of course a few other items. But I would say that to get to 15% in the next 18 months to 24 months would certainly be our target and I think quite realistic.

Speaker 3

Great. Thank you. I'll turn it over.

Operator

This concludes our question and answer session. I would like to turn the conference back to David Martin for any closing remarks.

Speaker 1

Thank you, Desiree, and thank you for everyone joining us. Feel free to call me with any follow-up questions. And again, as always, we appreciate your interest in Invery and we'll speak to you soon. Thank you.

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