Enviri Corporation (NYSE:NVRI) Q1 2024 Earnings Call Transcript May 4, 2024
Enviri Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning. My name is Jason and I will be your conference facilitator. At this time, I would like to welcome everyone to the Enviri Corporation First Quarter 2024 Release Conference Call. [Operator Instructions] Also, this telephone conference presentation and accompanying webcast made on behalf of Enviri Corporation are subject to copyright by Enviri Corporation and all rights are reserved. No recordings or redistributions of this telephone conference by any other party are permitted without the expressed written consent of Enviri Corporation. Your participation indicates your agreement. I would now like to introduce Dave Martin of Enviri Corporation. Mr. Martin, you may begin your call.
David Martin: Thank you, Jason and welcome to everyone joining us this morning. With me today is Nick Grasberger, our Chairman and Chief Executive Officer; and Tom Vadaketh, our Senior Vice President and Chief Financial Officer. This morning, we will discuss our results for the first quarter and our outlook for the remainder of the year. We’ll then take your questions. Before our presentation, let me mention a few items. First, our earnings release and 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 and uncertainties that may cause actual results to differ from these statements.
For a discussion of such risks and uncertainties, 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 the 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 the earnings release as well as the slide presentation. With that said, I’ll turn the call to Nick.
Nick Grasberger: Thank you, Dave and good morning, everyone. Q1 was a strong start to 2024 as each of our three segments performed above our expectations in terms of both cash flow and adjusted EBITDA. Consolidated EBITDA increased about 20% versus Q1 of last year while the EBITDA margin improved nearly 150 basis points to 13%. Of note, that’s 3 points higher than the last year’s figure and 3x the figure in Q1 of 2022. In terms of our outlook for the full year, our updated guidance reflects about a 5% improvement in the underlying performance of the Clean Earth and Harsco Environmental segments compared to our previous guidance. Our primary focus from a financial standpoint continues to be improving cash flow and reducing leverage.
We expect cash flow from our 3 segments to improve by $40 million to $50 million this year, including the Rail business with the CE and HE segments each generating in excess of $100 million for the first time. When combined with the expected double-digit increase in cash earnings, leverage should approach 3.85x at year-end but we are pushing to reduce it further to 3.75. The Board and management continue to focus on levers to create shareholder value. Enviri’s cash earnings are at the highest level in the last decade. And our environmental businesses are more stable with more upside potential than those in our portfolio a decade ago. Nonetheless, our degree of financial leverage is higher than we would like in this economic and interest rate environment.
So besides continuing to grow our businesses and improve our cash flow yield, we are considering other means to reduce leverage through sales of assets and businesses. At this time, we are targeting to generate $50 million to $75 million of cash from such disposals this year and our leverage goal continues to be below 3x. Turning to a discussion on our 2 environmental businesses which comprise about 95% of the EBITDA from our 3 segments. In Harsco Environmental, volume growth of 6% in mill services was consistent with expectations while pricing was a bit better. ecoproduct volumes and profits were also up. The impact of a stronger U.S. dollar partially offset the better operational performance. And these currency headwinds will likely be more of a challenge over the remainder of the year than we expected a few months ago.
Overall, I’m pleased with the improved demand for our services and products as well as our execution and expect HE to deliver a solid year of underlying earnings and cash flow growth. In Clean Earth, higher volumes and lower costs in the haz waste business drove the favorable EBITDA and cash flow variance versus our previous expectation. The retail and health care markets performed relatively better than the industrial market while the soil and dredge business met expectations. CE’s leadership team also continues to reduce cost in the business. And as a result, we’ve improved our EBITDA and cash flow outlook for the full year and now expect cash earnings to be up by a mid- to high-teens percentage over what was a very strong 2023. We look forward to hosting a Clean Earth-focused Investor Day here in Philadelphia on June 20.
Jeff Beswick and his team will highlight our strategy and key initiatives and provide an updated financial outlook for the next few years. As noted in our press release, we have decided to pause our divestiture process for Harsco Rail and reconsolidate the business into our financial statements. While there was strong interest from many potential buyers, the risk associated with a few large European contracts proved to be a barrier to completing the divestiture with attractive terms for shareholders at this time. We believe the risk on these contracts has been largely recognized. And the ongoing negotiations with customers should result in favorable adjustments. Overall, the core of Harsco Rail is performing quite well. And the divestiture remains both a strategic and a financial objective for the company.
In our view, the value of the business has not changed. Once the European contracts stabilize and the associated risk is clearly reduced, we believe this will be an attractive business. I’ll now turn the call over to Tom.
Tom Vadaketh: Thanks, Nick and good morning, everyone. As stated in our press release and by Nick just now, our results now include Harsco Rail within continuing operations and my prepared remarks mirror that presentation. The Enviri team delivered a strong first quarter of 2024. Revenues grew 7%, adjusted EBITDA grew nearly 3x that rate. Our cash flow was slightly better than anticipated. And our covenant leverage ratio decreased modestly. Now let me comment on our first quarter performance, starting on Slide 4. In the first quarter, revenues from continuing operations increased to $600 million, again up 7% compared with the prior year quarter. Adjusted EBITDA totaled $78 million, an improvement of 19% from the prior year. Each of our three business segments delivered higher revenues and higher EBIT — higher adjusted EBITDA versus the prior year, driven by a combination of price, volume growth and cost initiatives.
Also, corporate costs were comparable with the prior year quarter. This EBITDA figure isn’t comparable to our prior guidance due to the inclusion of Rail. But both Clean Earth and Harsco Environmental exceeded our expectations in the quarter due to higher volumes, a more favorable service mix and lower operating costs, driven by initiatives in Clean Earth. Our adjusted loss per share was $0.03 for the quarter. Free cash flow for the quarter was a negative $17 million versus a positive $16 million in the prior year quarter. The year-on-year change in free cash flow can be mainly attributed to the amount and timing of incentive compensation payments in Q1 this year but which occurred in Q2 in 2023 as well as working capital movements. Please turn to Slide 5 and our Harsco Environmental segment.
Segment revenues totaled $299 million, up 9% compared with the prior year quarter. Adjusted EBITDA for the quarter reached $49 million, representing an increase of over $5 million versus Q1 2023. Relative to the prior year quarter, HE benefited from higher services and ecoproducts volumes as well as higher pricing. The positive items were partially offset by currency impacts and higher labor costs to support our revenue base. Next, please turn to Slide 6 to discuss Clean Earth. For the quarter, revenues totaled $226 million, up 2% versus the prior year. And adjusted EBITDA reached $34 million which is a Q1 record for the business and was up 25% versus the prior year. The year-on-year increase in revenues of 2% was driven by price. Volumes were mixed as anticipated against a very difficult comparison quarter in 2023 that was marked by higher project volumes which were not expected to repeat at those levels.
Higher health care volumes in Q1 2024 were offset by other verticals. Our retail volumes, for example, were down a bit because of less project work relative to the prior year quarter. Industrial was also down slightly for similar reasons. Despite these puts and takes, we believe underlying demand remains stable to improving. Hazardous materials revenues reached $192 million while soil/dredge revenues totaled $34 million for the quarter. Clean Earth’s adjusted EBITDA increased 25% year-on-year, driven by pricing and efficiency initiatives. The net result was an adjusted EBITDA margin of 15.1% in Q1, a quarterly record for CE and is a testament to the effort of our employees and the improvements the team continues to drive to strengthen the business.
This margin is in line with our strategic goal when we acquired and created the Clean Earth business a few years ago and we are confident that we will continue to see further margin growth over the next few years. Now, please turn to Slide 7 and our Rail business. Rail revenues totaled $75 million and adjusted EBITDA totaled $2 million in the first quarter which is seasonally a weak quarter for the business. Revenues were higher year-on-year while adjusted EBITDA was similar to the prior year. As we have discussed in prior quarters, the Rail business includes a few large, long-term engineered-to-order, or ETO, projects where, generally speaking, we are contracted to deliver highly customized equipment to our customer on a fixed price basis.
Some of these contracts are loss-making for which we have taken forward loss charges in the past. Accordingly, as we make progress on these ETO projects going forward, the Rail results each quarter will include ETO-related revenue with little gross profit impact. The Rail revenue for Q1 2024 included approximately $14 million of ETO-related revenue. The remainder of the Rail business or base Rail business delivered revenue of $61 million. Compared with the 2023 quarter, higher equipment and services volumes were offset by lower aftermarket demand and a less favorable business mix. Now, let me turn to our updated 2024 outlook on Slide 8. Harsco’s full year adjusted EBITDA is expected to be within a range of $325 million to $342 million which is up approximately 9% year-on-year at the midpoint versus 2023.
This range is not comparable to our February guidance as it now includes forecasts for Harsco Rail. With that said, our expectation for HE and CE together on a comparable basis is consistent with prior guidance, driven by an improvement in underlying performance in both businesses. More specifically, our outlook for CE is increased to reflect greater visibility and lower operating costs. And this impact is offset by HE. For HE, expectations for underlying operating results and year-on-year growth are also up. However, our outlook now reflects the sale on April 1 of Performix, a small downstream metallurgical additives business that sat within HE. This impacts our EBITDA outlook for the remainder of the year by approximately $3 million. Also, the U.S. dollar strengthening versus a handful of currencies is leading to an FX translation headwind of nearly $10 million compared to our prior guidance.
For Rail, we are expecting adjusted EBITDA within a range of $18 million to $20 million on revenues in excess of $300 million for the year. This EBITDA range now includes a $4 million allocation of corporate costs. We see potential upside to this range for Rail if we can fill the order book for the base business later in the year and execute successfully on our ETO contracts. Our detailed segment outlook can be found in the appendix of the presentation. Our EBITDA range translates to adjusted per share guidance of between $0.12 and a loss of $0.09. Lastly, we are now targeting adjusted free cash flow of $10 million to $30 million. We continue to see cash flows from CE and HE increasing roughly $30 million year-on-year. The change to our free cash flow guidance is attributable to Rail which wasn’t included previously.
For Rail, we expect its non-ETO cash flows to be positive in 2024. ETO-related cash flows will be negative in 2024 as we build the equipment to be delivered under these long-term contracts. We expect overall free cash flow for the Rail business to be less negative in 2024 than in 2023. Importantly, we believe Rail is at an inflection point on its ETO contracts and related cash flows as these contracts are set to mature or conclude. We anticipate Rail cash flows will improve in 2024. And we’re optimistic that its total cash flows will turn positive in 2025. Let me move on to Slide 9 with our second quarter guidance. Q2 adjusted EBITDA is expected to range from $78 million to $85 million. Harsco Environmental EBITDA is anticipated to decline versus Q2 of 2023.
Lower product volumes, currency impacts and the sale of Performix will contribute to this change. Clean Earth EBITDA is expected to be modestly above the prior year quarter despite a tough comp from 2023. Here, higher prices, volumes and cost improvements are expected to offset the positive impact of $6 million from the Stericycle settlement in the prior year quarter. And Rail EBITDA is projected to increase year-on-year due to higher standard equipment and technology volumes. And lastly, I’d note that free cash flow in Q2 is anticipated to improve modestly from Q1. And as is traditionally the case, the majority of the company’s annual cash flow is expected in the second half of the year. Finally, let me touch briefly on our balance sheet, starting with the fact that both of our credit rating agencies upgraded our credit outlook recently.
We were pleased to see these changes. As I mentioned earlier, our covenant leverage improved slightly this quarter as we continued our focus on improving the balance sheet. In Q1, we sold our two aircraft, generating some incremental cash flow. The gain on the sale is treated as a special item within our Q1 earnings. And the disposal will also reduce ongoing corporate overhead expenses. We have recently monetized the remainder of a notes receivable related to the sale of our IKG business which was sold a few years ago. This cash was received in Q2. And finally, on April 1, we sold a small downstream business within HE, our Performix metallurgical additives business which will also help lower our debt. We will continue to take actions to improve the balance sheet.
Thanks. And I’ll now hand the call back to the operator for Q&A.
See also Top 20 States Where the US Military Spends the Most Money and 15 Biggest Aircraft Carriers in the World.
To continue reading the Q&A session, please click here.