Enviri Q2 2024 Earnings Call Transcript

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August 1, 2024

There are 8 speakers on the call.

Operator

Good morning. My name is Asha, and I'll be your conference facilitator. At this time, I would like to welcome everyone to the Envoy Corporation's 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 period.

Operator

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

Operator

Martin, you may begin your call.

Speaker 1

Thank you, Asha, and welcome to everyone joining us this morning. I'm Dave Martin of Envireap. With me today is Nick Grasberger, our Chairman and Chief Executive Officer and Tom Vadikath, our Senior Vice President and CFO. This morning, we will discuss our results for the Q2 of 2024 and our outlook for the remainder of the year. We'll then take your questions.

Speaker 1

Before our presentation, let me mention a few items. First, our earnings release and slide presentation for this call are available on our website. 2nd, we will make statements presented that are considered forward looking within the meaning of the federal securities laws. These statements are based on our current knowledge and expectations and are subject to certain risks and uncertainties that may cause actual results to differ from those forward looking statements. For a discussion of such risks and uncertainties, see the Risk Factors section in our most recent 10 ks and 10 Q.

Speaker 1

The company undertakes no obligation to update any forward looking statement. Lastly, on the call, we will also 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 being said, I'll turn the call to Nick.

Speaker 2

Thank you, Dave, and good morning, everyone. Q2 was another strong quarter for Enviry as each of our three segments performed above our expectations in terms of cash flow and adjusted EBITDA. Consolidated EBITDA increased 7% versus Q2 of last year despite the adverse impacts of a strengthening U. S. Dollar and the benefit of the Stericycle settlement in last year's figure.

Speaker 2

EBITDA margin of 14% was about 1 point higher than a year ago and free cash flow was $60,000,000 higher. In terms of our outlook for the full year, we are not changing our earnings guidance as we expect the impact of a strong U. S. Dollar to offset the impact of better performance from our businesses. Our financial leverage continues to decline.

Speaker 2

Debt to EBITDA is now below 4 times for the first time since 2020 and is on a path to our target of 2.5 times in a few years, as we discussed at our recent Analyst Day in Philadelphia. We expect cash flow to steadily rise to $150,000,000 per annum over that period due to EBITDA growth, reduced interest and pension expenses and the runoff of our which will begin to turn cash positive as the vehicles are delivered. We recently noted that we're targeting an incremental $50,000,000 to $75,000,000 of cash proceeds this year from asset sales. At the end of Q2, we had generated nearly $40,000,000 against this goal. Q2 is also a record quarter for Clean Earth with EBITDA of $38,000,000 and EBITDA margin of 16%.

Speaker 2

These were the highest of any quarter since we combined Clean Earth and the ESOL business in 2020. The execution in the business was very impressive as pricing actions and efficiency gains across a number of initiatives are driving the growth and margin expansion. To repeat the main theme of our Analyst Day, we believe we are still in the early stages of creating value in the Clean Earth segment with future catalysts including PFAS remediation, the deployment of common IT systems, restructuring of our commercial organization and M and A. Persco Environmental had a solid quarter with EBITDA growth of 5% to 10% versus the same quarter a year ago. When adjusting for the impact of currency, the sale of a small business and one time severance costs related to 2 site exits.

Speaker 2

Both mill services and Echo products contributed to this growth. These positive results were achieved despite anemic steel production levels, particularly in Europe. HE is also doing an excellent job of improving cash flow through both working capital and capital spending initiatives. Year to date free cash flow in HE of $55,000,000 is more than double the figure generated through the 1st 6 months of last Fresco Rail also delivered healthy growth in both EBITDA and EBITDA margin in the Q2 for the core business. Demand is steady and our operational performance is improving.

Speaker 2

We expect the $9,000,000 ETO charges that we booked in Q2 to be offset in the second half of the year as we conclude negotiations with a few key customers related to relief of uncontrollable cost overruns and delivery delays. After exploring options to divest the business, we are now focused on growing the core business and executing the remaining ETO contracts. At this point, we believe the delivery of the initial vehicles on the 2 large ETO contracts in a couple of years will be the catalyst for the successful sale of the business. We also recently released our 5th annual ESG report. This report outlines our ambitions, our goals, the impact metrics across our focus areas, which include innovative solutions, a thriving environment, safe workplaces and inspired people.

Speaker 2

For 2023, I'm proud to highlight that our total recordable incident rate was 0.8, making us one of the safest companies in the industry. We also recycled or reused 19,000,000 tons of waste with HE recycling or reusing 93% of processed steel slag and Clean Earth recycling or we're using 91% of process waste. We believe these facts illustrate how we are solving the most complex environmental challenges faced by our customers. I will now turn the call over to Tom.

Speaker 3

Thank you, Nick, and good morning, everyone. The Enviry team again delivered strong quarterly results in Q2. Revenues increased 6% on an organic basis and adjusted EBITDA grew 7%, driven by record results for Clean Earth and a nice year on year improvement for Rail. Our cash flow was better than anticipated and our covenant leverage ratio decreased further to below 4 times for the first time since mid-twenty 20. Now let me comment on our 2nd quarter performance further starting on Slide 4.

Speaker 3

In the Q2, revenues totaled $610,000,000 relatively flat versus the prior year on a reported basis, but 6% higher on an organic basis after adjusting for FX translation impacts, the sale of the Performex business, the favorable Stericycle settlement in 2023 and forward loss adjustments in rail for our 3 large engineered to auto European contracts. Adjusted EBITDA was $86,000,000 an improvement of 7% year on year and 10% sequentially with this being our highest quarterly adjusted EBITDA since the acquisition of ESOL and the impact of COVID in 2020. Our year over year earnings growth was driven by cleaner than rail as anticipated. Our adjusted earnings were also modestly above our prior guidance range for the quarter with all 3 operating segments contributing to the better than anticipated outcome. Our adjusted earnings per share was $0.02 for the quarter.

Speaker 3

Free cash flow for the quarter was $9,500,000 versus a deficit of $51,000,000 in the prior year quarter with the year on year improvement reflecting better working capital performance as well as some timing benefits in both capital spending and working capital movements. Lastly here, our covenant leverage ratio improved to 3.9x from 4.1x in Q1 as I mentioned. This change was driven by both lower debt as well as higher trailing EBITDA. In addition to the free cash flow generated in the quarter, the lower net debt also reflects our continued focus on debt reduction. As previously disclosed, we monetize the remainder of our notes receivable related to the sale of our IKG business, generating $17,000,000 in the quarter and we sold our Performix metallurgical additives business in Q2 for net proceeds of also $17,000,000 Please turn to Slide 5 and our Harsco Environmental segment.

Speaker 3

Segment revenues totaled $293,000,000 up 1% compared with the prior year quarter, net of an 8,000,000 dollars FX translation impact. Adjusting for the FX impact and the sale of Performix, organic growth for HE was 6%. Adjusted EBITDA for the quarter totaled $49,000,000 which as expected was modestly lower versus the prior year. The favorable impact from higher demand and pricing was offset by FX, the sale of performance, a less favorable business mix and certain administrative costs including severance and compensation. Next, please turn to Slide 6 to discuss Clean Earth.

Speaker 3

For the quarter, revenues totaled $236,000,000 up 2% versus the prior year and adjusted EBITDA increased 10% to reach $38,000,000 This was a very strong quarter for CE with the business delivering revenue and EBITDA growth despite the favorable impact of the Stericycle settlement in Q2 of 2023 making for a difficult comparison. CE reached record profitability in Q2 with its highest ever EBITDA of $38,000,000 and highest ever margins of 16%. This earnings performance was driven by both price and volumes as well as lower operating costs and efficiency initiatives. As anticipated, volumes were mixed as CE faced a very difficult comparison quarter in 2023 that included strong project related volumes. Healthcare, retail and soil dredge volumes were higher this year versus the 2023 quarter and this growth was offset elsewhere mainly due to lower project work.

Speaker 3

Evidence materials revenues totaled 195 $1,000,000 while soil dredge revenues reached $41,000,000 for the quarter. Now please turn to Slide 7 and our rail business. Rail revenues totaled $81,000,000 and adjusted EBITDA totaled $7,000,000 in the 2nd quarter. This EBITDA total excludes forward loss adjustment of $9,000,000 related to our 3 large ETO contracts in Europe. As we've said before, these contracts are long term in nature with some equipment deliveries lasting through 2027.

Speaker 3

We are continuing to work to stabilize these projects and as we saw in Q2, we could occasionally see additional charges as we fine tune our cost estimates to complete the projects. We're also making good progress with our contract negotiations with our customers. As we have done in the past, we will be excluding both the charges from additional forward loss provisions as well as any favorable impact from contract negotiations from adjusted EBITDA. Excluding the impact of these three contracts, Rail's Q2 adjusted earnings were the highest in a few years with the year on year growth in earnings coming from higher base equipment and services demand. The decline in revenues versus the prior year quarter was driven by the favorable forward loss adjustment from our ETO contracts in the UK in Q2 of 2023.

Speaker 3

While we are excluding the impact of these adjustments from EBITDA, they cannot be excluded from revenues. These adjustments negatively impact the revenue comparison by approximately $15,000,000 versus the 2023 quarter. Now let me turn to our updated 2024 outlook on Slide 8. Enviro's full year adjusted EBITDA is now expected to be within a range of $327,000,000 to $340,000,000 Our midpoint is unchanged from May guidance and continues to point to year over year growth of approximately 9%. Also relative to our May guidance, our better than expected Q2 results are offset by FX translation impacts in HE for the balance of the year.

Speaker 3

Otherwise, our outlook is largely intact. Our detailed segment outlook can be found in the appendix of the presentation. This EBITDA range now translates to adjusted per share guidance of between $0.07 and a loss of $0.09 And we're still targeting adjusted free cash flow of $10,000,000 to $30,000,000 The cash flow upside in Q2 was largely timing related and our outlook for the year remains unchanged. This outlook reflects the collection of some overdue receivables from a customer in China. There is some risk with the timing of these collections, which is reflected in the relatively wide cash flow guidance range.

Speaker 3

Let me move on to Slide 9 now with our 3rd quarter guidance. Q3 adjusted EBITDA is expected to range from $85,000,000 to $92,000,000 Cosco Environmental EBITDA is expected is anticipated to be similar to Q3 2023, with the benefit from higher prices and volumes being offset by FX translation impacts and the sale of our performance business in April. Clean Earth EBITDA is expected to be above the prior year quarter. Here, higher prices and cost improvements are expected to drive the earnings growth. And rail EBITDA is projected to increase year on year due to higher standard equipment and technology demand.

Speaker 3

Lastly, on Q3, I'd note that free cash flow in Q3 is anticipated to weaken from Q2 due to some of the timing benefits we saw in Q2. Finally, on our balance sheet, we've made considerable progress to reduce our covenant leverage and getting to below 4 times is an important milestone. This remains a key priority for us and we will continue to review opportunities for additional asset sales this year. And as communicated at our recent Analyst Day, our goal is to get to below 3 times in the coming years. Thanks.

Speaker 3

And I'll now hand the call back to the operator for Q and A.

Operator

Thank you. We will now begin the question and answer session. The first question comes from Adith Shreeja with Stifel. Please go ahead.

Speaker 4

Hi, Nick and Tom. Thanks for taking my questions. Just on HE adjusted EBITDA margin, I mean, it came in below sort of your expectations usually at 18% to 20%. I think average margin in the first half is around 16%, 16.5%. How do you maybe you can walk us through how you get to the 18% sort of implied margins within the outlook for FY 'twenty four?

Speaker 4

And what do you see in second half twenty twenty four that could get it to that level?

Speaker 3

Well, so the in the first half, as we mentioned, in addition to the FX pressure, Adithya, we did have some more unusual items. There was some severance costs, etcetera. And so we expect over time we don't expect to see those again in the second half. That'd be one piece. There is still will still continue to be some FX pressure, but that won't affect margins because it affects both revenue and EBITDA.

Speaker 3

And we expect the second half to be more normal. So the business, we continue to feel comfortable

Speaker 1

that it will be

Speaker 3

in that 18% to 20% range. Okay.

Speaker 2

In HE that have been underperforming for, in HE that have been underperforming for 18 months. They are improving and we expect that ramp of improvement to increase in the second half and that has a fairly sizable impact on the margin in the second half as well.

Speaker 4

Okay, great. Thank you. So just looking at for sale, you said you received $40,000,000 net proceeds to date from the asset sales. Trying to get to $50,000,000 to $75,000,000 What else is up for sale at this point?

Speaker 3

Yes. Obviously, as you'd imagine, I wouldn't want to comment on any specifics, but we are looking at opportunities to continue to monetize some assets. So, we still have our eyes set on that 50% to 75% range and quite pleased with the progress made so far through the first half.

Speaker 4

All right. Thanks a lot.

Operator

The next question comes from Larry Solow with CJS Securities. Please go ahead.

Speaker 5

Good morning, everybody.

Speaker 1

Nick, could you just

Speaker 5

clarify, obviously, Rail had a really nice quarter, especially relative to last year. Could you just I guess, 2 clarifications of questions. So the growth you said, obviously, better demand on equipment and service. I assume that that's all domestic demand, right? And then I guess the next question is, are you the difference between this year and last year, is there a lower adjustment on the ETO contract, less losses in the EBITDA?

Speaker 5

I'm just trying to figure that the does that also make up some of the difference or no?

Speaker 2

Yes, sure. So let's break it into 2 pieces, the core business in rail and the ETOs. In the core business, standard equipment, aftermarket and our contracted services are all up a good bit year over year. So that's certainly helping. And our reported numbers exclude the ETO charges on the largest three contracts.

Speaker 2

The other ETOs, which are included in the core, Yes, the performance of those year over year is better. But I'd really point to the core business and the improvement in really each of the segments, the product segments and services within the core as doing better year over year.

Speaker 3

And if I just Got it. Yes. So the charges on the large ETO contracts, we have been excluding consistently from the adjusted EBITDA both last year and this year. So those, yes, they are much lower this year than last year, but that's not contributing to this growth. The growth is coming from the underlying core base business.

Speaker 5

Got it. And then the cash flow you said, Tom, is improving. It's still negative, but it's improving, I guess, as those ETO losses decline. Is that right?

Speaker 3

Yes. Yes. I mean, just beyond the numbers, what's happening right now is we have these long term contracts to deliver the vehicles and we are building the vehicles right now. And so that is cash use period and we'll start generating cash on these contracts when we start delivering these vehicles, as Nick said, in negative period, but it will become progressively less negative as we go forward. This year, we haven't talked about specific numbers, but that's what's driving the negative outlook we've shared before on rail.

Speaker 3

The underlying business pretty much throws off cash in line with EBITDA or cash earnings.

Speaker 5

Got it. Okay. And then just switching gears, Clean Earth, a really strong quarter, obviously, you back out the price benefits you had last year. In Q2 last year, it looks like EBITDA grew over 25%, if my estimates are right.

Speaker 1

Can you just give us a

Speaker 5

little more color there in terms of revenue, underlying revenues, volume versus price, and what feels like it's volumes just continuing to grow and where are you getting seeing some of those volumes? Is it retail, industrial, healthcare? Can you give us a little bit of a cross sectional view on

Speaker 4

that shift? Thanks.

Speaker 2

Sure. Sure. So in Q2, Larry, underlying volume was relatively flat. We've seen good growth in healthcare, but some of the larger projects in the so called M and I segment and also in the soils business, While they're in backlog, they haven't yet started. That's the lumpy part of this business as you know.

Speaker 2

So we hazardous soil projects are very high margin. We have a difficult comparison in Q2 to those projects. Also some of the well, soil and dredge, I guess, was up a good bit in Q2. The comp gets tougher in the second half of the year for them.

Speaker 1

But the underlying and then in retail,

Speaker 2

the stock count is about the same, but the volume coming out of retail is a bit soft. And that, of course, is a known trend in

Speaker 3

the U.

Speaker 2

S. For the retail segment. So yes, so again, relatively flat, if you would account for the project work comparison year over year, the rest of the volume is up a little bit.

Speaker 5

Got it. Great. Thanks, I appreciate it.

Operator

The next question comes from Rob Brown with Lake Street Capital Markets. Please go ahead.

Speaker 6

Hi, good morning. Good morning. Just following up on the Clean Earth revenue growth, I think journalists that you talked about that being a bit of a higher growth opportunity. Can you just give a sense on how you see that growth playing out over the next year or 2? And should you see that kind of volume and pricing together get into the double digits in terms of growth?

Speaker 2

Yes. Rob, our view hasn't changed. Again, this parts of the Clean Earth business can be relatively lumpy and that's what we're seeing. And as we highlighted during our Analyst Day, we continue to expect volume growth in kind of the low to mid single digits in Clean Earth over time. I think the demand is there.

Speaker 2

Certainly, the backlog is growing. But these projects quarter to quarter tend to have a sizable effect on the year over year comparison.

Speaker 6

Okay. Yes, makes sense. And then you alluded to the operational improvements you're working on that can kind of help margins expand even further, but what's sort of the timing on those and referring specifically to the IT platform and sales integration?

Speaker 2

Yes. You're referring to Clean Earth? Yes. Yes. So there are a number of them.

Speaker 2

I think we've made dramatic improvements in the last couple of years in the efficiency of our logistics network and where we transport and process waste. So, I think that is a key driver of efficiency. We've also in the facilities a number of initiatives around containers and the flow of material that have served to improve efficiency as well. So there are any number there are probably a dozen different projects that have contributed to that. I don't yet believe that we're reaching diminishing returns.

Speaker 2

I referenced the, a major initiative to move to a common IT platform in Clean Earth. And we had a major milestone in the Q2 where one of our largest facilities converted over to that system really without any glitches. So it gives us a lot of confidence in the further rollout of that system and that system will serve to shorten lead times, response times to customers that will result in lower overhead for the business. So, while the cost reduction initiatives to date in Clean Earth, they focus mostly kind of on the cost of delivering the services, the SG and A reduction is still ahead of us.

Speaker 6

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

Operator

The next question comes from Davis Bacon with BMO Capital Markets. Please go ahead.

Speaker 7

Hi, good morning. So just looking at the Rail segment results, could you please provide some additional color on the ETO contract adjustments? So in the Q1 commentary, you had mentioned that these were weighing on the rail operations, which was part of the thought process behind postponing the sale. And I know this morning you mentioned that the delivery in a couple of years will be that main catalyst, but does recognizing these adjustments help move the needle at all there?

Speaker 3

I'll take that. Hi, it's Tom Vaticat. I mean, yes, I think you could think of it in that way. We have progressively as each quarter goes by getting more accurate if you like. We have more visibility into what it's going to take to build out these vehicles.

Speaker 3

If you imagine, these are highly engineered, highly complex pieces of equipment with thousands of SKUs that go into each one. And these have been occurring over a period when we had COVID and then supply chain issues, etcetera. And so because of all of that, some of the original estimates that we had to build these out have turned out to be insufficient. I think we're getting to the back end of these adjustments frankly. We took a lot last year, particularly in Q4 as you know.

Speaker 3

We didn't have much in Q1. In Q2, we had about $9,000,000 worth. So I do think they are trailing off, but we still have a few years to go before we complete the deliveries. So that's my remarks that they could be a few more, but I do think we're trailing off. In terms of I think you were saying is this a green light to future divestiture?

Speaker 3

I think I'd go back to what Nick said in his prepared remarks. Once we start delivering these vehicles, we'll probably feel a little bit better about the stability of the contracts and potentially then at that point, we could consider whether we restart the divestiture process.

Speaker 7

Okay, great. Thank you. And then just quickly on the rollout of that IT system in Clean Earth. Do you have any visibility into how long that could be to see some of the SG and A cost reductions?

Speaker 2

I think that's likely going to be in the latter half of twenty twenty five.

Speaker 7

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

Operator

This concludes the question and answer session. I would like to turn the conference back over to Dave Martin for any closing remarks. Please go ahead.

Speaker 1

Yes. Thank you for joining the call. Please feel free to contact me with any follow-up questions. And lastly, we appreciate your interest in Enviry and look forward to speaking in the future. Thank you.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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Enviri Q2 2024
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