Operator: Good morning. My name is Rocco, and I will be your conference facilitator. Welcome everyone to the Harsco Corporation's Fourth 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 session. Please note this event is being recorded. This telephone conference presentation and accompanying webcast made on behalf of Harsco Corporation are subject to copyright by Harsco 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 Harsco Corporation. Your participation indicates your agreement. I would now like to introduce Dave Martin of Harsco Corporation. Mr. Martin, you may begin your call.
David Martin: Thank you, Rocco, and welcome to everyone joining us this morning. I'm Dave Martin, VP of Investor Relations for Harsco. With me today is Nick Grasberger, our Chairman and Chief Executive Officer; and Pete Minan, Harsco's Senior Vice President and Chief Financial Officer. This morning, we will discuss our results for the fourth quarter and our outlook for 2023, we'll then take your questions. Before our presentation, however, 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 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-K. The company undertakes no obligation to revise or update any forward-looking statements. Lastly, on this 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 and slide presentation. With that being said, I'll turn the call to Nick.
Nick Grasberger: Thank you, Dave, and good morning, everyone and thanks for joining us today. I'd like to begin by acknowledging the efforts of our Harsco environmental colleagues and supporting the people impacted by the earthquake in Southern Turkey. We have nearly 200 employees working across three sites in the area with our partner Tosyali. Thankfully, none of our employees or their immediate families was killed, but many have lost their homes and living conditions are very difficult. So we are doing what we can by providing temporary accommodations and other necessities. Now on to the past quarter. The fourth quarter was above our guidance expectations as adjusted EBITDA improved year-over-year as did revenue and margins.
These results reflect the continued improvements in our Clean Earth segment, due to numerous ongoing operational initiatives, as well as pricing actions implemented in the previous quarter. Harsco environmental also performed somewhat better than we expected as declining steel production over the previous few quarters stabilized in most of our markets. The Clean Earth team executed a very impressive turnaround in the second-half of the year. Adjusted EBITDA margins which were below 4% in the first-half grew to over 12% in the second-half of the year. Adjusted EBITDA and free cash flow were also about 3 times higher in the second half of the year. The external forces that affected our first-half performance, namely inflation, a tight labor market and severely limited incineration capacity largely continued through the remainder of the year.
However, our team moved aggressively to mitigate the impact and executed the action plan that we developed extremely well. Of equal importance, service levels to our customers reached new highs and our safety culture took a big step forward in Clean Earth, following the lead of Harsco Environmental, which delivered record safety performance for the year. Changes in leadership structure and process along with the heightened emphasis of the Harsco values have been the underlying foundation of our success in Clean Earth. We certainly expect this momentum to continue throughout this year as we validate our strategy of building a leading platform in the hazardous waste sector. Turning to Harsco Environmental, while service volumes remained weak, compared to last year, particularly in Europe, steel production appears to be stabilizing and was a bit higher than we anticipated in Q4.
We continue to remove costs and boost productivity across our platform. And at the same time, we were improving our competitive position in light of the bankruptcy of Phoenix Services, the third largest mail services business. We see an opportunity to gain new contracts, as a result without relaxing our standards for economics and risk protection. At Harsco Rail, which is accounted for as a discontinued operation, let me address opportunities and then challenges. Our Rail business is solid and demand is growing. In fact, we are experiencing our highest backlog for standard equipment in several years. To alleviate some of the growing backlog, we will reopen our Ludington, Michigan manufacturing facility in the second quarter, which we expect to be a net positive as it will alleviate some constraints in other parts of the Rail business.
Our aftermarket business, which accounts for about two-thirds of our Rail profit, has also remained strong in the past few years and we expect growth in 2023. The challenges for the Rail segment continue to be our long-term contracts for highly engineered and specialized equipment, due to the impacts of inflation, supply chain disruptions and design changes. To mitigate these challenges, we are negotiating new delivery schedules a reduction in penalties and price increases with many of our customers. To be very clear, divesting Harsco Rail remains a priority, we are focused on value creation and are being thoughtful on our approach given the division's unique attributes and positive outlook. And we plan to reengage on the sale process with prospective buyers in the second-half of the year.
Our 2023 outlook for continuing operations reflects improvement in all key financial metrics for each segment. Namely adjusted EBITDA, margins and free cash flow even with limited volume growth. In terms of adjusted EBITDA margins, we anticipate growth of about 150 basis points led by a 300-basis point jump in Clean Earth margins. Importantly, we also anticipate a strengthening of the balance sheet, driven both by operations, as well as by the future Rail divestiture. Adjusting for the impact of an accounts receivable securitization program last year, the cash flow from our two segments is expected to by more than $100 million. As Pete will discuss, we expect strong revenue and earnings growth in Clean Earth, and while Harsco Environmental is holding its own, segment growth is expected to be slower given the difficult market conditions it faces.
Mine, Steel, Excavation
Photo by yasin hm on Unsplash
So before I turn the call over to Pete, I'd like to thank our 12,000 employees for mitigating the many challenges of the past year. And also identifying the opportunities for future growth in both revenue and productivity. I'll now turn the call to Pete.
Pete Minan: Thanks, Nick, and good morning, everybody. So let's start by turning to slide four. Harsco fourth quarter consolidated revenues from continuing operations increased to $468 million, up 1% compared with the prior year quarter or 6% if you exclude the impact of foreign exchange. The increase was primarily driven by the higher pricing that we implemented in both our Clean Earth and Environmental segments. Adjusted EBITDA totaled $61 million, which is above our prior guidance range and represents an improvement from the prior year. Each of our segments showed stronger-than-anticipated performance, although Clean Earth was the larger and largest contributor . Clean Earth results were better-than-expected due to lower operating costs, as well as the timing and volume of dredge related work, while environmental benefited from lower spending and the mix of services performed during the quarter.
And lastly, corporate expense was lower-than-anticipated given our continued discipline on our functional spending. Relative to the prior year quarter, the EBITDA increase was driven by Clean Earth as a result of price increases and cost improvements initiated mid-year. The success of these efforts is apparent in our results for the past two quarters and we're pleased that Clean Earth's adjusted EBITDA margin exceeded 12% in the second-half of the year. Our adjusted earnings per share was $0.01 for the quarter. The unusual items in the quarter included $4 million of restructuring cost in environmental, which will boost its performance going forward and a non-cash impairment charge of $15 million related to Altek. Free cash flow for the quarter was $3 million, this result was lower than our expectations due mainly to some delayed payments from China-based customers, some of which have since been paid in early 2023.
Please turn to slide five in our Environmental segment. Segment revenues totaled $257 million and adjusted EBITDA was $43 million for the quarter. Adjusted EBITDA decreased by $6 million year-on-year. The decrease from prior year was largely driven by foreign exchange translation, lower commodity prices and the impact of prior year Brazil tax credits, which did not repeat in 2022. And these headwinds were partially offset by higher service activity at certain sites, better site performance as well as new contracts. Overall, steel output at our customer sites remained stable year-on-year and sequentially, which compares favorably to the overall steel industry. Production performance varied by region with weak production in Europe offset by growth in India, China and Latin America.
Now considering the headwinds faced during the quarter, we're encouraged by the solid execution and overall performance of Harsco Environmental. So next please turn to slide six, we'll discuss Clean Earth. For the quarter, revenues totaled $211 million and adjusted EBITDA was $25 million. Compared to the fourth quarter of 2021, revenues increased 9% largely as a result of price. Hazardous materials revenues reached $169 million, up 8% year-over-year with the growth led by industrial markets followed by retail. Meanwhile, soil and dredged revenues totaled $42 million, representing an increase of 13% over the prior year quarter. Clean Earth's adjusted EBITDA increased $8 million year-on-year and margin improved over 300-basis points. This improvement reflects the benefits of our price and efficiency initiatives across the business, including the restructuring program we introduced in Q3, which we expect to deliver annualized benefits of over $7 million.
So now please turn to slide seven. For the full-year, revenues from continuing operations increased almost $1.9 billion and adjusted EBITDA totaled $229 million. As you're no doubt aware 2022 presented some unique and unprecedented challenges. The Russia-Ukraine War had a profound impact on steel volumes, particularly in Europe, where our customer production declined more than 10% for the year. And the financial impacts of inflation were significant as well. We responded quickly and aggressively to these challenges. Leading to a dramatic improvement in financial results during the second half of the year. Our actions to push price and manage costs, while the lasting impact in Harsco and we believe will position us to create additional value for shareholders in the future.
Moving on, our free cash flow was $75 million for the year, including $145 million from our accounts receivable securitization program. We ended 2022 with net debt of just under $1.3 billion, which in part reflects Rail's operating performance and delays in cash collections during the year. Also, we recently executed a variable to fixed interest rate swap for $300 million, which will benefit us in 2023 given the recent and anticipated movement in interest rates. Lastly, on pension, higher rates have positively impacted our pension funding status. Our funded status at year-end improved by $71 million from year end 2021 to an underfunded position of $22 million. Our annual cash contributions of $24 million for pensions are unchanged from the prior year and will actually decrease by more than 50% in two years.
Now let's turn to our 2023 outlook. Starting with our segment guidance on slide eight. Both segments are expected to realize growth in adjusted earnings in 2023. For Harsco Environmental, revenues are expected to grow at a low-single-digit rate. The foreign exchange headwind is estimated to be roughly 100-basis points using the 2022 year-end rates. Profitability for Environmental is expected to be slightly above 2022 levels at the guidance midpoint. The business drivers for Environmental in the year will be pricing, as well as cost and site improvement initiatives, partially offset by foreign exchange, commodities price increases and service mix. Environmental recently implemented a restructuring program which included headcount and other spending reductions.
The annualized benefits from this program are estimated to be $10 million. Customer steel output is anticipated to be largely consistent with 2022. For Clean Earth, revenues are anticipated to grow mid-to-high-single digits with the primary driver being price. And EBITDA margins are expected to increase 200 basis points to 300 basis points for the full-year. Beyond higher revenues and price, EBITDA drivers for Clean Earth include various efficiency initiatives with anticipated benefits of over $10 million for the year. And lastly, corporate costs are expected to be between $40 million and $42 million versus adjusted corporate costs of $33 million in 2022, and the change in corporate costs can be attributed to normal compensation increases, including incentive compensation, as well as travel, IT spending and other smaller items.
So turning to slide nine, which is our consolidated 2023 outlook. Harsco's full-year adjusted EBITDA is now expected to be within a range of $240 million to $260 million, 9% year-on-year at the midpoint. This EBITDA guidance translates to adjusted loss per share of $0.23 to $0.52. And this per share range contemplates year-on-year headwinds from interest and pension expense. Net interest expense is expected to be $100 million to $105 million, including securitization fees, compared with $75 million in 2022 and pension expense in 2023 should be in the range of $20 million to $22 million versus pension income of $9 million in 2022, largely the result of higher discount rates. These items create a headwind of approximately $0.70 per share relative to 2022.
Lastly, we're targeting free cash flow of $20 million to $40 million. As Nick mentioned, improving our free cash flow is an important priority for us, along with lowering our leverage. By the end of 2023, we are targeting a leverage ratio of near 4 times and even better when considering the sale of Rail. For 2023, we are expecting considerable underlying improvement in operating cash flows with both Environmental and Clean Earth expected to show significant year-on-year improvement. Adjusting for the accounts receivable securitization last year, the underlying improvement will be roughly $100 million, despite the fact that our cash interest will increase more than $25 million in 2023. A portion of this improvement will be driven by earnings; however, the majority will be working capital with much of that coming from Harsco Environmental.
This improvement will be a step in the right direction and we are targeting even better performance in the coming years. So let me conclude on slide 10 with our first quarter guidance. Q1 adjusted EBITDA is expected to range from $45 million to $50 million. We expect Clean Earth adjusted earnings to be significantly above prior year results, due to our pricing and cost initiatives. Meanwhile, Environmental results are anticipated to be lower year-on-year given the comparison to a relatively stronger Q1 in 2022. And specific headwinds for environmental include foreign exchange rates, commodity prices and product volumes. Sequentially, and as is typical in the first quarter, results are anticipated to be negatively impacted by seasonal volumes, weather-related challenges, lower commodity prices, as well as the timing of certain expense accruals including for incentive compensation and professional fees.
And lastly, corporate costs should be between $9 million and $10 million for the first quarter. Thanks. And I'll now hand the call back to Rocco for Q&A.
