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Text: I'm Dave Martin of Harsco.
As previously noted, we are very fortunate to have recruited Anshooman to Harsco and he has held significant financial and operational roles at Siemens, AECOM and Cubic, and he is already adding tremendous value to our company.
Turning to our results, the third quarter was characterized by healthy underlying demand in our two core businesses, Harsco Environmental and Clean Earth.
It also reflected cost inflation and supply chain disruptions across all three business units.
Overall, Harsco consolidated revenue was up 7% versus Q3 of 2020 while adjusted EBITDA was up 22% on the same basis.
Demand in our Rail segment was dampened by continued weakness, in-transit ridership, a slowdown in domestic freight traffic and uncertainty as customers wait for the passage of the US infrastructure bill.
As we have indicated in the past Harsco Rail is not aligned with our long-term strategy to focus on and drive growth in businesses that provide environmental solutions to a broad mix than markets.
However, Harsco Rail is a unique business with innovative solutions and a global reach with meaningful growth opportunities ahead.
We have received solicited expressions of interest from many parties over the past several months and expect a very competitive sale process.
I'll comment on each of our segments beginning with Harsco Environmental.
Harsco Environmental continued to perform in line with our expectations and we are pleased with its momentum.
Capacity utilization of the steel mills we support remains lower than the levels of the first half of 2019 and analysts expect low-to-mid single digit LST growth through next year.
Commodity prices along with the contributions from our so called echo products, previously referred to as applied products, remains strong.
Looking ahead to 2022, against a continued positive outlook for the global steel industry and a decline to normalized levels of capital spending in our business we expect the Environmental business to deliver the highest EBITDA and free cash flow in many years.
Clean Earth experienced a moderate impact in the third quarter from cost inflation and an excess of backlog of material requiring incineration, which negatively affected volume.
The recovery and contaminated soil continues to be a bit slower than anticipated due to delays in certain infrastructure projects.
Nonetheless, Clean Earths EBITDA in Q3 was close to our expectations, and these pressures should abate throughout Q4 and become de minimis by Q1 of 2022.
Similar to Harsco Environmental we believe the Clean Earth has set up to deliver another strong year of growth in 2022.
Underlying market demand, new business, and you had higher benefits from the ESOL turnaround and integration will be the primary drivers.
As noted, our Rail business had a challenging quarter due to cost inflation and the timing of equipment orders and shipments.
Many of our customers have been affected by their own supply chain issues, and as a result, maintenance programs are being put on hold.
While we expect to see some continued impact from these inflationary and supply chain issues in Q4, we expect the situation to improve as we move through the first half of next year.
The passage of the US infrastructure bill and the introduction of new products aimed at improving the efficiency of rail maintenance activities should also support growth.
The other components of our business those being aftermarket technology and contracted services are performing in line with expectations and the outlook is encouraging.
Therefore, we believe the timing of the divestiture of the rail business should coincide with improving market fundamentals and deliver the value we expect for our shareholders.
Let me start by saying I am very excited to be here and a part of the Harsco team.
I joined Harsco because I thought the promise of the Company's ongoing transformation to a single investment thesis environmental solutions company, and the value creation opportunities.
I've enjoyed getting to know and working with the Harsco team over the past three months and my time with Harsco so far has strengthened my optimism.
Harsco's strategy is well defined and our financial priorities are unchanged.
Strengthening of free cash flow and reducing our leverage remain paramount to Harsco and the key priorities for me as CFO.
There is strong underlying momentum within our businesses and the opportunities to grow both organically and inorganically are significant.
Now let me turn to our results for the quarter and our outlook for Q4.
Harsco consolidated revenues in the third quarter increased 7% compared with the prior year quarter to $544 million and adjusted EBITDA increased 22% to $72 million.
The year-on-year improvement can be attributed to steady operational execution, strong performance in our Harsco Environmental segment as well as growth and improvements within the hazardous waste line of business of Clean Earth.
Harsco's adjusted EBITDA margin as a result reached 13.2% in the third quarter versus 11.6% in the comparable quarter of 2020.
Despite strong year-on-year improvement, our adjusted EBITDA was the lower guidance driven by new project delays from rail customers, cost inflation and supply chain constraints.
Transit ridership remains weak, freight traffic has slowed and uncertainty related to the infrastructure bill has put pressure on customer capital and operating budgets.
The majority of the deferred sales for Rail in the third quarter and now expected to be realized in Q4 and early 2022.
Material cost inflation and supply chain pressures had a mid single-digit EBITDA impact in the quarter relative to prior expectations.
Harsco's adjusted earnings per share from continuing operations for the third quarter was $0.20.
This figure compares favorably to adjusted earnings per share of $0.08 in the prior year quarter.
Lastly, our free cash flow for the quarter was nominal.
This outcome was lower than anticipated for the quarter with Rail and related delayed projects as the primary driver.
Our Environmental segment performed very well in the quarter.
Revenues totaled $270 million and adjusted EBITDA was $56 million.
Revenues were 21% higher than the prior year quarter and EBITDA increased 40% year-on-year.
These details illustrate the positive operating leverage in this business.
Compared with Q3 of 2020 the EBITDA improvement is primarily attributable to increased demand for environmental services and applied products on a global basis.
Steel market fundamentals remain strong.
Liquid Steel Tonnage or LST increased roughly 20% versus the prior year.
The outlook for steel consumption remains positive.
We expect to see some modest disruptions in the fourth quarter due to normal seasonality, but the industry and market observers are predicting another year of growth in 2022.
Compared to the second quarter of 2020 revenues increased 3% to $200 million with hazardous materials business driving this growth.
With hazardous materials retail and healthcare activity was strong while volumes from the industrial sector were modestly lower than the prior year quarter due to disposal market constraints.
Also activity within our soil dredged materials business was modestly lower year-on-year, however, we did see sequential improvement.
With that said, the improvement has been slow and recall that soil remediation is a late cycle business, that then trough until the fourth quarter of 2020.
Segment EBITDA increased to $21 million and Q3 of this year supported by higher hazardous material volumes and ESOL integration benefits.
These positive impacts were offset by investments to support Clean Earth and inflation related to containers and transportation.
We have seen a significant increase in the cost of steel containers and transportation and have taken action already, which I will discuss in more details later.
Lastly on Clean Earth, I'd highlight that our year-to-date free cash flow now totals $39 million.
This total represents more than 70% of segment EBITDA.
Rail revenues totaled $74 million and its EBITDA totaled $3 million in the second quarter.
These figures are below those realized in Q3 of 2020.
The change in EBITDA can be attributed to lower equipment sales volume and higher costs.
I have mentioned earlier most of the deferred sales are expected to be realized in the next few quarters.
Also higher material costs impacted results.
We incurred a negative LIFO adjustment in the quarter of approximately $2 million, which has not been anticipated.
These impacts were partially offset by higher contributions from aftermarket parts and contracted services both in US and Asia.
Turning to slide 8, which is our consolidated 2021 outlook.
Our adjusted EBITDA guidance is now $248 million to $256 million for the year while adjusted earnings per share is anticipated to be within a range of $0.51 to $0.54.
These figures consider $4 million of stranded corporate costs that were previously allocated to Rail.
This outlook also includes 100% of Harsco's interest costs and a pro forma estimated tax rate.
A detailed segment outlook is included in the appendix of the slide deck.
And, from a business segment point of view our adjusted EBITDA outlook for environmental is essentially unchanged.
Meanwhile, our outlook for Clean Earth's adjusted EBITDA is lowered by $5 million at the midpoint.
This change reflects the impact of higher container and transportation costs as well as a volume impact from end disposal constraints.
Last quarter we noted certain risk related to Clean Earth including the impacts related to incineration and inflation.
These impacts, however, are larger than what we previously anticipated for the second half of the year.
Looking forward, we do expect these pressures to abate.
There are a number of disposal assets that have restarted or are increasing output.
Also we have been pushing through price increases to offset the inflation.
Price initiatives take time as you have aware driven by timing of contractual annual price increases in many cases, and we expect to fully offset the cost increases we've seen year-to-date during the first quarter of 2022.
Also, we remain very diligent on our cost structure, including corporate costs and the need for continuous improvement.
In this regard, we recently launched a cost improvement program which includes targeted reductions at both Clean Earth and Rail.
These efforts are anticipated to provide annual run rate benefits of $10 to $15 million when fully realized in the second half of 2022.
Any non-recurring costs related to this program as well as our recently announced decision to move our corporate office to Philadelphia are excluded from this outlook.
Let me conclude on slide 9 with our fourth quarter guidance.
Q4 adjusted EBITDA is expected to range from $55 million to $62 million.
Again, this range excludes Rail.
Clean Earth is expected to see a nice improvement year-on-year as a result of integration benefits and higher volumes, including in the soil dredged materials business line.
These impacts are expected to be partially offset by inflation and investments.
Environmental EBITDA is anticipated to be similar or slightly below the prior year quarter.
This guidance contemplates a negative FX impact, some contract exit costs and the less favorable services mix compared to Q4 of 2020.
Sequentially, we anticipate that some seasonality will reemerge across our businesses.
And before opening the call to questions let me again reiterate our focus on reducing leverage and strengthening free cash flow.
We ended the quarter with a leverage ratio of 4.48 times.
Importantly, we are targeting a leverage ratio of approximately 3 times at the end of 2022.
This outcome would be consistent with our long-term targets and reflects our optimism about our businesses and ability to sell Rail.

user
q3 revenue rose 7 percent to $544 million.
intends to explore strategic alternatives for rail business, continuing co's transformation to pure-play environmental solutions provider.
compname says full year 2021 adjusted ebitda guidance updated to range of $248 million to $256 million for continuing operations.
q3 adjusted earnings per share $0.20 from continuing operations.
sees 2021 adjusted earnings per share $0.51 - $0.54.

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