Enviri Corporation beats earnings expectations. Reported EPS is $-0.07, expectations were $-0.08. 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 MJ and I will be the conference facilitator. At this time, I would like to welcome everyone to the Enviri Corporation Fourth Quarter Release Conference Call. All lines have been placed on mute to avoid any background noise. [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 express 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.
Dave Martin: Thank you, MJ, and welcome to everyone joining us this morning. I’m Dave Martin of Enviri. 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 fourth quarter of 2023 and our outlook for 2024. We’ll then take your questions. Before our presentation, let me mention a few items. First, our quarterly 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 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 materially from these statements.
For a discussion of such risks and uncertainties, see the Risk Factors section in our most recent 10-K and 10-Q. 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 a slide presentation. With that being said, I’ll turn the call to Nick.
Nick Grasberger: Thank you, Dave, and good morning, everyone. The fourth quarter was another strong quarter for Enviri with both Harsco Environmental and Clean Earth, delivering double-digit revenue and EBITDA growth versus Q4 of 2022, capping a very strong 2023. The Rail business, excluding the impact of a few large European contracts, delivered its best quarter in many years. Tom will step through the details of the quarter in a few minutes. So we’re pleased with the continued solid performance of our core businesses. That being said, we believe our share price has not kept pace with the improving fundamentals of our businesses, over the past 18 months. To support the point, I’d like to share a few of the highlights of last year.
Number one, revenue and EBITDA both increased at double-digit rates for the full year of 2023. EBITDA margins were up 200 basis points. Cash flow from our two core segments increased $125 million. Financial leverage declined more than one turn to around four turns. Operationally, Clean Earth – the Clean Earth team did a very nice job executing price increases, achieving record service levels, reducing the risk and cost of accessing disposal capacity and increasing our capabilities and engagement in PFAS-related matters, amongst many other accomplishments. At Harsco Environmental, we continue to expand our footprint with new contracts in faster-growing markets with better financial profiles and also to invest in innovation projects focused on extracting environmental benefits from steel slag.
HE also achieved its financial plan for the year despite much lower-than-expected steel production, demonstrating strong execution. In terms of leadership, we upgraded our senior management team, with Tom Vadaketh and Jeff Beswick the President of Clean Earth. While also continuing to refresh our Board of Directors with two new appointments. The year was not without some challenges. While there is outside interest in the purchase of our Rail division, delays in reaching an agreement on new commercial terms on a single large loss-making European contract, has pushed out the divestiture and negatively impacted our cash flow. Additionally, we were affected by the increase in short-term interest rates. Turning to the outlook for the year. We expect our end markets to be supportive of further growth and improvements in our financial profile.
We anticipate steel production at the mills we support, will increase low single digits, while still remaining below mid-cycle levels. We also expect the domestic retail and industrial and health care markets served by Clean Earth to increase at low single-digit rates. Clean Earth will be somewhat challenged by difficult comparisons to high-margin project work that we saw last year. Nonetheless, the ongoing efficiency programs in both HE and CE should yield an overall increase in EBITDA of near 10%, at the high end of our guidance. Cash flow and margin should also improve. So overall, we’re very happy with the developments in the Clean Earth platform, over the past 18 months, and we’ve largely achieved our margin and cash flow expectations when we acquired these businesses.
We are even more excited today about the value creation potential of the business, and we will be sharing updated margin and growth targets for Clean Earth, later this year. Clean Earth’s value proposition and its pricing leverage within the market are clear. And with specialty waste assets trading at all-time high valuations, we believe the market value of Clean Earth is considerably more than our initial investment. We’re also pleased with the stability of the Harsco Environmental platform. The volatility of our earnings and cash flow have lessened significantly in the business is good cyclical upside, as well as a strong competitive position. Our lengthy pipeline of growth opportunities allows us to focus on those with the best risk-adjusted returns.
And finally, the emerging technologies and ecoproducts can change the game in terms of both economics and environmental benefits. Concerning Rail, I’m encouraged by the performance of the business. The team has made significant operational improvements with a strong finish to the year in Q4. Excluding the impact of the EU contracts, profit and cash flow generation were up nicely year-over-year and will begin in 2024. The team has worked hard to stabilize the large European contracts, and we expect to complete our agreement with a major customer on new commercial terms, later this year. So efforts to divest the business are continuing, and we’re focused on remaining financially disciplined, while executing an acceptable transaction for shareholders.
So to be sure, the Board and the management team are squarely focused on creating value, both across and within our portfolio of businesses, while pursuing our strategic ambition of investing in environmental solutions. We look forward to sharing such developments with investors throughout the year. Now I’ll turn the call over to Tom.
Tom Vadaketh: Thanks, Nick, and good morning, everyone. Let me start by saying that my first full quarter with Enviri was rewarding and refreshing. I’ve learned a great deal more about our businesses and our people as well as the tremendous opportunity in front of us. I’ve been impressed with the quality and engagement of Enviri’s employees, and I’m excited about where the company is headed. The Enviri team delivered a strong finish in the fourth quarter to a strong year. With revenue for the full year 2023 growing 10%, adjusted EBITDA growing 28%, a significant improvement in cash generation and an improvement in our covenant net leverage from 5.3 times on January 1 last year to 4.1 times at the end of the year. Now let me comment on our fourth quarter performance, starting on Slide 4.
Enviri’s fourth quarter revenues from continuing operations increased to $529 million, up 13%, compared with the prior year quarter. The increase was driven by both pricing and higher demand for our environmental services in both Clean Earth and Harsco Environmental. Adjusted EBITDA totaled $73 million, this result represents a 21% improvement from the prior year and is above our prior guidance range. The stronger-than-anticipated results were driven mostly by volumes and the more favorable business mix with, again, both Harsco Environmental and Clean Earth contributing. Relative to the prior year quarter, each operating segment contributed to the growth in adjusted EBITDA, which I’ll discuss shortly. This was partially offset by higher corporate spending, which was mainly driven by higher incentive compensation spending in 2023 and other smaller items that occurred in 2022, that did not repeat, such as some FX-related hedging gains.
Our adjusted loss per share was $0.07 for the quarter. Free cash flow for the quarter was $25 million versus $3 million in the prior year quarter. This improvement was driven by a reduction in working capital and higher cash earnings. Our days sales outstanding improved by 8% or six days from the end of 2022 to the end of 2023, with both HE and CE showing strong improvement, and the finance and operating teams within our business is doing a great job to drive this improvement. Lastly, our net leverage decreased to 4.1 times from 4.5 times at the end of Q3. Please turn to Slide 5 and our Environmental segment. Segment revenues totaled $292 million, up 14% compared with the prior year quarter. Adjusted EBITDA for the quarter reached $56 million, representing an increase of over 30%.
Relative to the prior year quarter, HE benefited from higher services and ecoproducts volumes, including from new sites as well as higher pricing. As a result, HE’s EBITDA margin exceeded 19%, which was its highest quarterly margin for the year. Turning to Clean Earth on Slide 6. For the quarter, revenues totaled $237 million, and adjusted EBITDA reached $29 million, compared to the fourth quarter of 2022, revenues increased 12%, and revenues decreased only modestly from the record levels we saw in the third quarter of 2023. The year-on-year, price contributed about one third of the increase, with underlying volume growth led by industrial markets, which included the impact of project-related work, followed by retail. Hazardous Materials revenues reached $189 million, while soil-dredge revenues totaled $48 million for the quarter.
These figures represent increases of 11% and 14%, respectively. Clean Earth adjusted EBITDA increased 17% year-on-year. In addition to price and volumes, the businesses – the business benefited from efficiency initiatives, and these positive items were partially offset by higher incentive compensation, restructuring costs and some internal investments or spending. Now please turn to Slide 7. For the full year, revenues from continuing operations increased to almost $2.1 billion, an increase of 10% year-over-year. And adjusted EBITDA totaled $293 million, an increase of 28% over 2022. Additionally, Enviri’s underlying free cash flow performance was positive. HE and Clean Earth together generated free cash flow of approximately $185 million in 2023, an improvement of over $125 million compared with the prior year due to higher earnings and working capital performance.
This increase was partially offset by higher interest costs at corporate. We reduced our covenant net leverage ratio by over one turn during the year from 5.3 times to 4.1 times. Without a doubt, 2023 was a very strong year for Enviri, our strong market positions and value proposition enabled us to drive increases in volume as well as price. Our operating teams executed well and realized meaningful benefits from various growth and improvement initiatives. Clean Earth, for example, reached an all-time high for on-time customer service, while recycling and reusing 10 billion pounds of waste. Harsco Environmental won more than 20 service contract renewals. And secured five new growth contracts during the year, illustrating its continuing premier position in the market.
We expect these positive trends to continue in 2024. We’re also very pleased with the performance of our Rail business and the team. Rail performed strongly in Q4 with revenues up more than 30% year-on-year. It generated fourth quarter free cash flow and its quarterly adjusted earnings was the highest in two-plus years. As Nick mentioned, the Rail team has done a great job this last year to drive operational improvements on the base business, while working towards stabilizing our large ETO contracts and agreeing to a go-forward plan with our customers. We recorded charges of $40 million in Q4, reflecting forward losses on these contracts, where we now have significantly improved visibility. Importantly, we think we’re at or near an inflection point for Rail.
It’s earnings and cash flow are projected to strengthen further in 2024, and its cash flow is set to improve further beyond 2024, as these large contracts mature. Now, let me turn to our 2024 outlook on Slide 8. Harsco’s full year adjusted EBITDA is expected to be within a range of $300 million to $320 million, up 6% year-on-year at the midpoint. These – this represents continued momentum in the business after a very strong 2023, with EBITDA growing strong double digits over a two-year period. This EBITDA range translates to adjusted earnings per share guidance of between breakeven and a loss of $0.25. Lastly, we’re planning for capital spending of between $130 million and $140 million, which is comparable to 2023, and we’re targeting free cash flow of $20 million to $40 million.
For 2024, we are expecting an underlying improvement in operating cash flows within HE and CE – with HE and CE expected to see an increase of up to $30 million year-on-year. The impact will be partially offset by a slight increase in cash interest and higher incentive payouts linked to 2023 performance. Also note that this free cash flow outlook again excludes Rail. It also excludes finance leases. We have entered into finance lease obligations of approximately $50 million, mostly for Clean Earth, that will commence in 2024 and are expected to carry into 2025. These leases for Clean Earth relates to the refreshment of its vehicle fleet, which occurs once per decade roughly. As a result of EBITDA growth and free cash flow, our leverage ratio is anticipated to decline further during 2024.
Now let’s turn to our segment guidance on Slide 9. Both segments are expected to realize growth in adjusted earnings in 2024. For Harsco Environmental, revenues are expected to grow at a low single-digit rate and HE’s profitability is expected to be slightly above 2023 levels at the guidance midpoint. Growth in HE revenue and EBITDA will be driven by higher customer steel production, new contracts, site improvement initiatives and pricing. The outlook for better steel production is principally driven by Europe, India and the Middle East. For Clean Earth, revenues are also anticipated to grow low single digits while CE’s EBITDA will grow at a higher rate with its margins expected to improve 50 basis points to 100 basis points for the full year.
Beyond higher revenues, EBITDA drivers for Clean Earth again include various efficiency initiatives with anticipated gross benefits of over $10 million for the year. Lastly, corporate costs are expected to be comparable with 2023 levels. Let me conclude on Slide 10 with our first quarter guidance. Q1, adjusted EBITDA is expected to range from $63 million to $70 million. Harsco Environmental EBITDA is anticipated to increase slightly versus Q1, 2023. Higher volumes, price and improvements will contribute to the growth. Clean Earth EBITDA is also expected to be modestly above the prior year quarter. Here, higher price and improvements are expected to offset a less favorable business mix. Compared with Q4, this outlook contemplates seasonal weakness in each of our business segments.
And lastly, I’d note that Q1 is traditionally a weak free cash flow period given seasonal business performance and cash flows. This will be the case again in 2024. We expect to consume cash in Q1, given the seasonality, as well as the timing of interest and incentive compensation payments. Thanks, and I’ll now hand the call back to the operator for Q&A.