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Text: Our fourth quarter results reflected the continued positive trends in our largest businesses.
Harsco Environmental and the hazardous waste portion of our Clean Earth segment.
Overall, Harsco delivered both sequential and year-over-year growth in Q4, and EBITDA was consistent with our expectations.
With that said, we are very happy to have 2020 in our wake.
Harsco, like many other companies, faced challenges in 2020 that required us to shift our focus, essentially overnight to keeping our employees safe, our businesses resilient and our liquidity position strong.
At the same time, we closed the largest acquisition in Harsco's history in terms of revenue, ESOL.
Beyond its scale, ESOL required a complicated carve-out from its parent company, was in need of basic process discipline and was underperforming its market.
Additionally, in 2020, we made a step change in our ESG journey as evidenced by significant ratings upgrades, external recognition and improved metrics in nearly all areas.
It is clear that ESG is closely aligned with our strategy and central to the shifting identity of Harsco.
Looking back on what the Harsco team accomplished, I could not be more proud about the effort and the results.
There are many reasons to be optimistic about the direction of our company.
Most notably, the continued improvement in our end markets and the value creation potential of our environmental services businesses that represent about 80% of our revenue.
Our strategic focus is clear, and we look forward to executing the next major steps of our portfolio transformation as conditions warrant.
We have four principal objectives this year.
Apart from our primary objective of continuing to manage the impact of the pandemic on our people and on our businesses.
The first objective is to realize the targeted benefits of the Clean Earth and ESOL integration and prepare for accelerated growth in this new platform.
Second, enhancing the value proposition and the cash flow profile of Harsco Environmental by shifting the revenue mix further toward environmental solutions.
Third, increasing the enterprise value of our rail business through further operational improvements and backlog growth; and fourth, reducing our financial leverage to a level much closer to our target of about 2.5 times.
Regarding the Clean Earth platform, the benefits realized from the integration of ESOL were about twice what we expected in 2020.
We anticipate incremental benefits of about $20 million this year, also or about double those realized in 2020.
We still expect total benefits of $40 million to $50 million by the end of 2022 on a run rate basis.
Although external integration costs are behind us, we will incur about $10 million of cost this year for branding and IT initiatives that will not repeat in 2022.
Overall, while the negative impact of the pandemic on the business could not have been predicted, I'm pleased with our execution and the foundation we are building in this new platform.
In Harsco Environmental, it's terrific to have following seas after 18 months of medicine head seas.
I'm excited to see the development of the business this year, particularly in the areas of Altek, applied product sales and innovation.
As previously discussed, a significant amount of maintenance capital was deferred from 2020 to this year, and capital spending on new contracts will also be higher than in future years.
Nonetheless, the growth and cash flow trends in the business are favorable, and we are targeting free cash flow generation of 8% to 9% of revenue in 2022 on a path to 10-plus percent in future years.
Our Rail business was set up to have a very strong year in 2020, based on operational improvements and a record backlog.
The impact of COVID on capital spending in both the freight and transit sectors has been dramatic.
Although the freight sector is recovering, spending on maintenance of way equipment will lag by a few quarters.
And the transit sector remains particularly weak.
Another challenge for our business is overcoming the margin loss associated with a large Chinese aftermarket program that is winding down.
Fortunately, our backlog and the launch of new products and our global reach should enable us to outperform the market this year.
While our project SCOR met its objectives in terms of capacity and data analytics, it uncovered more opportunity to improve manufacturing costs than we had realized.
Just a few comments on our portfolio.
As noted previously, an aggressive slate of internal initiatives and our financial leverage will likely push the next major step in our portfolio transformation into next year.
We also continue to focus on the best avenue to create shareholder value with our Rail business.
But our strategic ambition remains clear, continuing our transformation to a pure-play environmental solutions company.
Now over to Pete.
Harsco's revenues totaled $508 million and adjusted EBITDA totaled $62 million in the fourth quarter.
Our revenues increased 27% over the prior year quarter, with ESOL contributing most of the growth followed by revenue increases within both our Environmental and Rail segments.
The revenue increase for Harsco Environmental is noteworthy as Q4 was the first year-on-year increase in revenues for the business in a number of quarters.
This reflects both successful execution of our strategy and the positive trends in the underlying markets.
Relative to the third quarter, revenues were a little changed as continued growth from the Q2 lows for environmental and hazardous waste processing were offset by increasing market pressures related to COVID within our Contaminated Materials and Rail businesses.
Our fourth quarter adjusted EBITDA of $62 million was near the high end of our previously disclosed guidance range.
EBITDA for Q4 improved both sequentially and year-over-year, reflecting the business reasons I mentioned earlier and the actions we undertook in response to the pandemic in 2020.
Harsco's adjusted earnings per share from continuing operations for the fourth quarter was $0.12, this adjusted figure excluded costs for the ESOL integration and the severance costs related to additional restructuring actions in environmental.
The actions in HE supplement those taken in the first quarter of 2020 and illustrate our focus on continuous improvement and further strengthening the business results.
The ESOL integration process remains ongoing, but our related external costs are now essentially complete.
For 2021, we don't expect to incur any significant external integration costs.
However, there will be other internal integration costs, which I'll outline later in my remarks.
Lastly, our free cash outflow was $8 million in the fourth quarter.
This outcome, while below our expectations, was largely the result of higher-than-anticipated capital spending and the timing of receivables collections.
With respect to receivables, some customers chose to manage payments at year-end, with this cash subsequently received by us in the first and second week of 2021.
And these factors are considered in our cash flow guidance for the current year, which I'll discuss later.
Revenues totaled $246 million and adjusted EBITDA was $52 million, representing a margin of 21%.
This EBITDA figure of $52 million compared to $51 million in the prior year quarter and $40 million in the third quarter of 2020.
Overall, these were very strong results for HE with attractive incremental margins against comparable periods.
We're very pleased with these results as they demonstrate the increasing resilience of the segment despite the persistent impacts of the pandemic.
Compared with the fourth quarter of 2019, the EBITDA change can be attributed to higher demand for Applied Products in North America and lower SG&A spending.
And this lower administrative spending is the result of our actions linked to the pandemic deflects our costs as well as permanent reductions, some of which were taken in the fourth quarter, as I mentioned earlier.
Steel consumption and production at our customer sites continues to improve.
The LST or steel production volume increase from the third quarter was strong, more than 10% sequentially.
Relative to the prior year quarter, customer LST also improved incrementally.
This marked our first positive year-on-year comp for LST since early 2019.
The increase was, however, modest, and the benefit was largely offset by a less favorable mix of services, as shown in our bridge.
It is encouraging nonetheless to see the market recovery accelerate and financial performance strengthen within the steel industry in recent months.
I would also emphasize that the industry continues to operate well below its normal utilization rates, which for our customers, averaged just over 75% in Q4.
So we look forward to further capitalizing on additional growth as the industry continues to recover.
Lastly, Harsco Environmental's free cash flow totaled $5 million in the quarter and totaled $69 million for the year.
This full year figure compares with free cash flow of $13 million in the prior year, with the improvement during 2020 driven by lower capex and cash generated from working capital.
For the quarter, revenues were $185 million, and adjusted EBITDA totaled $16 million.
Growth compared to the fourth quarter of 2019 reflects the inclusion of ESOL in our hazardous waste line of business.
This impact was offset by lower contributions from our contaminated materials business line, which continues to face pandemic-related impacts.
The change in our contaminated materials performance also reflects a challenging comp to the fourth quarter of 2019, which was a very strong period for the business from a mix point of view, both for soil and dredged material processing.
Also, as we've discussed before, our corporate cost allocation to Clean Earth also impacted the year-on-year EBITDA comparison.
Relative to the third quarter of 2020, revenues were approximately 5% lower, and adjusted EBITDA declined to $16 million.
These changes reflect lower soil and dredge revenues in Q4 and again, a less favorable mix across all way streams relative to the sequential quarter.
Hazardous waste volumes were modestly higher quarter-on-quarter.
Next, Clean Earth's free cash flow was again very strong for the quarter.
The segment's free cash flow totaled $17 million in the quarter and for the year, it totaled $55 million versus adjusted EBITDA of $58 million.
We are pleased with its results in the second half, and we remain ahead of our plan on integration.
ESOL contributed approximately $20 million of EBITDA in the second half of the year, which represents a meaningful improvement year-on-year.
The benefits realized from synergy or improvement initiatives now total approximately $10 million, with the largest improvements coming from disposal optimization and commercial levers.
This total was higher than our original goal for 2020.
Looking forward, we still have more work ahead of us to complete the ESOL integration this year.
Areas of focus and investment in the coming quarter will be IT integration, logistics, procurement, site productivity and additional commercial opportunities to name a few.
We remain confident that we will reach our improvement targets by year-end, and I'll discuss the anticipated 2021 benefits within our outlook in just a bit.
Rail revenues reached $77 million while the segment's adjusted EBITDA totaled approximately $2.5 million in the fourth quarter.
This EBITDA figure compares with a loss of $2 million in the prior year quarter.
The improvement relative to the prior year can be principally attributed to lower manufacturing costs and higher contracting contributions from new contracts in North America and Europe.
These positive factors were partially offset by lower short-cycle equipment and aftermarket results.
Relative to the third quarter of 2020, the changes in our aftermarket business also led to the slight decrease in EBITDA sequentially.
Lastly, let me highlight that our rail backlog remains healthy at just over $440 million, representing a slight decrease from the prior quarter as we continued production under our long-term contracts.
As we mentioned with our third quarter results, economic or business conditions within the rail maintenance-of-way market remained challenging.
Many customers continue to defer required maintenance spending and equipment replacement or upgrade expenditures.
This pandemic related trend continued throughout the entire fourth quarter.
With that said, rail industry metrics are improving, and we expect that Harsco Rail will begin to see the benefits from this positive trend in mid-2021.
For this reason, we are optimistic that business conditions will see improvement in 2020 as it progresses, putting our business in the right direction to achieve some of the financial goals we've discussed in the past.
Turning to slide nine, which is a high-level summary of our full year 2020 results.
For the full year, revenues increased to $1.9 billion, and adjusted EBITDA totaled $238 million.
Also, our free cash flow was $2 million.
Let me start by saying that given the extremely difficult environment we all saw in 2020, I am very proud of the extent and depth of the actions and processes we put in place as a result of the pandemic to protect our people, continue serving our customers and support our financial health.
From a financial point of view, we trimmed the capital spending by roughly $65 million and pushed out project spending.
We took advantage of the CARES Act legislation and deferred other payments.
We also took actions to reduce our cost structure by more than $20 million with some of these being permanent savings, as I mentioned earlier.
And secondly, the acquisition of ESOL accelerated our strategic transformation, and as I mentioned earlier, our integration work to date has exceeded our expectations.
Also related to ESOL, you will recall that we successfully raised capital to fund this acquisition during a period of extreme market volatility.
We ended the year with net debt of $1.2 billion, a leverage ratio of 4.6 times and liquidity of more than $300 million.
We are also now evaluating opportunities to take advantage of attractive credit markets to extend our debt maturities by another three years and provide even more financial flexibility.
Regarding our segment outlook on slide 10.
There is no need to remind everyone of the continuing volatility in the end markets caused by the pandemic.
However, we believe we have enough visibility in our businesses to provide outlook commentary for 2021.
Of course, this assumes there are no significant negative pandemic-related market developments from what we see presently.
With that in mind, in summary, each business is expected to show improvement compared with 2020.
Starting with Harsco Environmental, revenue is projected to increase 10% to 15%.
Adjusted EBITDA is projected to increase approximately 20% at the guidance's midpoint.
The business drivers for HE in the year will be higher customer output and related services demand, increased Applied Products volumes, growth initiatives and new contracts.
Next, for Clean Earth, we are guiding to adjusted EBITDA of $72 million to $78 million for the year on revenues of approximately $790 million.
We anticipate that CE's pro forma revenue growth will be within a range of 3% to 5%, while we expect double-digit pro forma EBITDA growth for the business.
Higher revenues will support the EBITDA growth, but the primary earnings driver for CE in 2021 will be integration or operational improvement benefits.
We expect to realize an uplift of roughly $20 million from our actions taken to date and those contemplated in 2021.
Most of these efficiencies will be operationally driven, including lower disposal and transportation costs.
We also anticipate some commercial benefits as well.
And as I alluded to earlier, these benefits will be partially offset by additional support costs and investments.
And it's important to note, a portion of these expenses, approximately $6 million to $8 million, comprising largely duplicative costs for IT integration and branding will not recur in 2022.
We've also allocated an additional $3 million of corporate costs to Clean Earth.
This allocation and the nonrecurring expenditures will total approximately $10 million for the year.
Lastly, for Rail, we project top line growth of 15% to 20% and adjusted EBITDA growth of 25% at the guidance's midpoint.
For the year, higher equipment, technology and contracting sales will offset the impact of a weaker parts mix, reduced Asian aftermarket demand and investments, including R&D.
And lastly, corporate costs are anticipated to be within a range of $33 million to $34 million.
Turning to our consolidated 2021 outlook on slide 11.
Our adjusted EBITDA is expected to increase to within a range of $275 million to $295 million.
This guidance translates to adjusted earnings per share of $0.59 to $0.76.
The earnings per share range contemplates interest expense of $63 million to $66 million and an assumed effective tax rate of 36% to 38%.
Lastly, we are targeting free cash flow before growth capital spending of $100 million.
And after considering all capex, our full year free cash flow should range from $30 million to $50 million.
This forecast anticipates net capital spending will be within a range of $155 million to $175 million.
And this amount compares with net capex of $114 million in 2020, with most of the increase attributable to growth and renewal expenditures in environmental that were deferred in 2020.
While capital spending will increase year-on-year, we will continue to employ strict spending discipline.
As in 2020, capex remains an important lever to support free cash flow.
Also at this point, I expect that our capital spending beyond 2020 will normalize to levels below our current year forecast.
Also note that our projected free cash flow ranges include cash payment deferrals from 2020, including those related to the CARES act of roughly $12 million to $15 million.
But looking past 2021, our cash flow generation will increase as capex normalizes and the cash payment deferrals from 2020 are behind us.
We expect to see consolidated run rate free cash flow generation in excess of 6% to 8% of revenue by the end of 2022.
So let me move to slide 12 with our first quarter guidance.
Q1 adjusted EBITDA is expected to range from $52 million to $58 million.
Compared with the first quarter of 2020, we expect HE results to improve due to lower administrative spending and a more favorable service mix.
Clean Earth results are projected to be modestly higher as ESOL contributions will offset the impact of lower contaminated soil and dredge volumes and the nonrecurring expenses I mentioned earlier.
We also assume that we'll be able to make up in March, some volume that was lost in January and February, due to weather conditions in the Northeast and in Texas.
Rail results are anticipated to be lower year-on-year as a result of lower aftermarket volumes and mix.
Also, corporate costs are expected to be modestly higher due to timing of expenditures and some normalization of costs.
Lastly, let me comment on this year's phasing.
As you'll likely conclude, we expect our results to strengthen as the year progresses.
And the factors to consider regarding this phasing include the seasonality of HE and Clean Earth, the impact of growth investments in the maturing of new sites in environmental, the timing of synergies at Clean Earth and the conversion of our rail backlog and anticipated improvements in the rail maintenance-of-way market.
While my wife and I are extremely excited about it and very much looking forward to my retirement and entering the next stage of our lives, it is hard not to have mixed emotions.
I look back fondly and proudly at my time here at Harsco, and there is so much I will miss.
Above all, Nick's excellent leadership, counsel and friendship these past six years, which I value immensely, for which I'm extremely grateful.
I will also greatly miss my colleagues on the executive leadership team who are far more than just colleagues.
And finally, I will miss the world-class global finance and IT organizations I've had the privilege to lead and the countless members of the Harsco team I've met and worked with, each of whom clearly reflects the values and culture of this exceptional organization.
Yes, I will certainly miss much, but rest assured I'll be watching eagerly and optimistically as a shareholder as Harsco continues to achieve success.

user
q4 adjusted earnings per share $0.12 from continuing operations.
q4 revenue $508 million versus refinitiv ibes estimate of $513.6 million.
2021 adjusted ebitda expected to increase to between $275 million and $295 million.
2021 free cash flow projected to increase to $30 million-$50 million.
sees 2021 adjusted earnings per share $0.59 - $0.76.

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