Good morning. My name is Jay, I'll be your conference facilitator. At this time, I would like to welcome everyone to the Harsco Corporation First Quarter Release Conference Call. Also, 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 redistribution of this telephone conference by any other party are permitted without the expressed feeding 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.

Thank you, Jay, and welcome to everyone joining us this morning. I'm Dave Martin of Harsco. With me today is Nick Grasberger, our Chairman and Chief Executive Officer; and Anshooman Aga, Harsco's Senior Vice President and CFO. This morning, we will discuss our results for the first quarter of '22 and our outlook. We'll then take your questions. Before our presentation, however, let me mention a few items. First, our earnings release as well as a 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 that may cause actual results to differ from those forward-looking statements. For a discussion of such risks, 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 may 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.

Good morning, everyone, and thanks for joining us today. Before I discuss our results, let me speak to the ongoing crisis in Ukraine. The global steel market is in the process of rebalancing as a result of the Russia-Ukraine conflict, and we anticipate limited impacts to our Harsco Environmental segment over time, given the diversity of our portfolio. Furthermore, Harsco has no direct exposure within either country and any related disruptions at customer sites were short-lived and minimal in the quarter. Turning to our results. Harsco consolidated revenue was up 1% versus the first quarter of 2021 and adjusted EBITDA totaled $49 million. These adjusted results are consistent with our guidance. Much of the quarter, however, was characterized by unprecedented inflation in commodities and other input costs as well as tightness in our supply chains and labor markets, particularly in the U.S. We expect these factors to remain a concern and are working aggressively to mitigate the impact on our businesses. That being said, underlying demand within most of our key markets remains firm, including the steel industry and in most of the markets served by Clean Earth. We also remain confident in the outlook of our Rail business as the industry continues to recover from COVID-related impacts. For example, we have sold more tampers, the core of our product line in the first 100 days of this year than we did all of last year. Now let me comment on each of our 2 core businesses. Harsco Environmental had a strong quarter despite these conditions as a result of strong execution. Looking forward, our steel industry outlook is largely unchanged as is our expectation for HE for the full year. Any impacts from the conflict in Ukraine are expected to be muted longer term for our environmental business, given…

Thanks, Nick, and good morning, everyone. Please turn to Slide 5. Harsco Q1 revenues from continuing operations increased 1% compared with the prior year quarter to $453 million, including a 2% headwind from FX translation. Adjusted EBITDA totaled $49 million, which was in line with our guidance. Relative to our expectations, environmental performed strongly and corporate cost was slightly favorable. Meanwhile, Clean Earth results were impacted by increased inflation pressures related mainly to fuel with diesel increasing approximately 40%, driven by the Russia-Ukraine conflict, also driver availability, including the impact of Omicron earlier in the quarter impacted volume. Each of these items impacted CE results by $1 million to $2 million. We are taking action to mitigate the spike in inflation due to the Russia-Ukraine conflict, including with respect to pricing, which I'll return to later. Harsco's GAAP loss per share from continuing operations in Q1 was $0.09, while the adjusted loss was $0.01. This adjusted per share figure in the quarter was outside of our guidance range due to the higher effective tax rate which was impacted by the geographic distribution of our income. Lastly, our free cash flow for the quarter was a deficit of $29 million. This result was consistent with our expectations. As we've discussed in the past, Q1 is typically the low point for our cash flows during the year for various reasons, including the timing of interest and pension payments as well as incentive compensation payments. Our cash performance is expected to improve meaningfully for the remaining quarters of the year. Please turn to Slide 6 and our Environmental segment. Segment revenues totaled $262 million and adjusted EBITDA was $48 million. Revenues increased 2% on higher volumes and commodity prices, partially offset by foreign exchange impacts. Meanwhile, adjusted EBITDA decreased by $6 million year-on-year.…

And our first question comes from the line of Michael Hoffman of Stifel.

Can we -- I'd like to start for Rail for 1 second and try and put something to bed. There is a perception that you can't sell this well enough to get a delevering event. And you've talked about the number of bidders, should we be concerned about these charges? How do you work that through a due diligence process? What does everybody need to understand why you can get net proceeds that will take 1 turn, 1.5 turns out of this business model.

Yes. Well, first of all, I think it's important to reiterate the strength of the process so far with a very large number of interested parties, a very large number of bidders that are really focused on the core of the business and its future growth potential, which, of course, we believe is quite high. the large European contracts where we have adjusted the future profitability will be looked at effectively along with excess working capital as debt-like items by the buyers. And I will say that the charges we took in the first quarter we believe there is a reasonable path to reversing all or a part of those as we continue to dialogue with our customers about the COVID-driven nature of those adjustments, whether it be for late delivery or for cost inflation. So -- but I think it should be relatively straightforward for the buyers to look at those contracts and kind of assess what the future cash flow impact would be plus or minus and adjust in their valuation for the core. So that's, I guess, a long-winded way of saying that we do expect this to be a significant delevering event as we've said in the past.

Okay. Switching gears into the fundamentals. Cost issues aside, are you seeing an industrial -- North American industrial economic environment that is creating a favorable top line outlook and your ability to account for cost issues timely aside that's good.

Yes. I think the volume trends in U.S. industrial market are quite good. We did see in the first quarter some softness with a few major retailers that we serve on a national basis, but we expect those to be somewhat short-lived. But the volumes in health care and industrial and other retail accounts are actually quite good.

And the retail issue is a timing one? Or did they see a reduction in foot traffic and that led to less activity?

Yes, it's the latter. These are a few retailers that in particular benefited from the buying patterns of consumers during the pandemic.

Got it. Okay. And then Anshooman, on the free cash in the press release, you have a line item that's a pension income number. So 1 is that cash and two, how is that -- how do I think about that in the context of the 30% to 50% being revised down to 25% to 40%?

The pension income is a noncash item, and that doesn't impact our 25% to 40%. If you really think of a free cash flow change in guidance, there were 2 items. One, our cash interest cost is going up as the new projections for interest rates are 7 to 8 hikes this year. And the second, we did reduce our EBITDA guidance slightly for the year. Combined, those are about $14 million, and we've reduced cash at midpoint by about $7 million. So we've compensated for part of the decline.

Okay. And when you think about in the HE business, are you expecting the rest of the world to make up the 30 million tons of Russian steel that's exported and therefore, you could see increased level of production across your customer base? Or you're still sticking with we're 1% to 2% production growth net of China year-over-year?

Yes. Yes, it's a good question. Michael, I -- we're sticking with our original guidance on volume growth in HE. But to answer the first part of your question, yes, given the demand trends in the global steel industry, we would expect that production gap in Russia and Ukraine to be made up elsewhere.

Next question comes from the line of Larry Solow of CJS Securities.

Sorry, I was doing the core a little late. Just a couple of questions on Clean Earth, which and you may have addressed some of the stuff. It was a little bit -- I think that was sort of the source boom in the quarter. In terms of revenue shortages and whatnot, is that a driver shortages, as -- is that improving? And do you make up -- what happens if you don't pick up some of this waste and stuff, do you make that up? Does that accumulate? Are you losing share to other companies? How does that -- on the hazardous side on the retail side? Is that -- or is that just lost revenue that you can't get back?

Yes. Well, first of all, clearly, our competitors move the material by truck as well. And I think we're all in the same situation here. No. We do think as the situation improves, and I think as I mentioned, maybe Anshooman did as well, we do expect and we have seen the last several weeks the trends improving in terms of the hiring of drivers. So we do see the situation improving in the second quarter clearly should be better than the first, which was better than the fourth of last year. With that said, I think it probably would be a bit aggressive to assume that we can simply recover all of that lost volume. I think there's certainly an element of that, that we're confident will recover, but I wouldn't expect to fully recover that volume.

And how about on the soil side. I can't -- I don't know if you guys addressed this. I know that's been down considerably the last couple of years hasn't come back. It went down coming into COVID in terms of construction activity and infrastructure and hopefully starts to move forward. Do you see any visibility light at the end of the tunnel on that side of the business and the dredging side as well? I know that kind of dry and wet wells, I guess, are kind of combined now. But comments on that, color on that?

Yes, Larry, we are, for the first time in some time, we do have visibility into a more robust pipeline of projects. And so I would kind of tend to view that as a bit of upside for the year for us. We have relatively modest volumes built into our guidance, but we're hoping that some of these projects to break loose and generate revenue for us later this year. But we've been frustrated before on that front. So we're perhaps taking a bit of a cautious view in our guidance, but we are seeing improved visibility for the first time in a couple of years.

A lot of talk on the PFAS side. And I know Clean Earth, I think, had 1 -- I think maybe right before you acquired a couple of quarters before had a couple of projects all the stars aligned, I think they did a few million of EBITDA in 1 quarter, maybe half a year on the on the PFAS side. And I don't expect you probably have much visibility for this year or putting any numbers in your guidance, but a lot of talk about it. Do you see Clean Earth being at least an incremental provider for PFAS cleanup as we look out over the next few years?

Yes. There's no question. We view that as probably one of the top 3 to 5 growth drivers in the business over the next few years. And in fact, this summer, we'll be starting a project on Cape Cod at the joint base on Cape Cod with our mobile technology processing PFAS contaminated soils. And so that should be a very critical project for us, and we believe that if that is as successful as we expect it to be that many more opportunities, similar opportunities should become available to us.

Okay. Then just last question. Just on ESOL. And I realized you did this acquisition; it was over 2 years ago. So it's now part of Clean Earth and it's not separate. But just in terms of -- I know when you guys acquired it, there were some pricing issues there and just inefficiencies and excess storage facilities. Just on those couple of items. And I know now you're raising pricing across the business. So is there still a server discrepancy if it's on the ESOL units and then what -- your legacy business there or the Clean Earth legacy side, if you will.

Yes. I think we've largely addressed that issue. We've stopped, I guess, tracking directly the integration benefits we set a target for -- and we achieved that in, I don't know, maybe 1/3 of those benefits were related to pricing.

Next question comes from the line of Rob Brown of Lake Street Capital.

Just wanted to follow up on the price increases in CE. What sort of the percentage of price increases that you're deeming to take? And how -- maybe just how again does that sort of flow through into the year?

Yes. Well, it's quite a mix across the various customer types, retail, industrial and health care. And there are surcharges, there are also price increases depending upon the nature of the contract or the customer. So it's a real mix. I think the easiest way to look at it is that relative to our original budget for this year, inflation in Clean Earth is about $20 million higher than we expected. And the price realization that we expect to offset that is only about $10 million. So that kind of drives the delta and the guidance for Clean Earth that you would mention. Now certainly, as we roll into next year and have the full year impact of those price increases and continue to adjust our contracts to give us the flexibility in the future, if needed, to address surprises, I'll call them, in cost inflation, that should be a nice enhancement to margins. But the -- but the GAAP this year is in terms of EBITDA, about $10 million.

Okay. Great. That's very helpful. And then Anshooman, maybe on the interest expense line, what do you sort of expect for interest expense in '22?

So -- we're somewhere between $68 million and $70 million of interest expense this year. From our prior guidance at that stage, the expectations were for interest rate hikes this year now, the expectations built in is 7 to 8 interest strikes this year. Sorry, just 1 additional clarification. This doesn't -- the interest expense doesn't include any benefits from reduction in debt after the sale of rail and the corresponding interest reduction then.

Next question comes from the line of Chris Howe of Barrington Research.

I wanted to follow up on the soil and dredge business. You had mentioned that there are projects for later this year. As we think about that, along with some other buckets, such as pricing increases, which will benefit later in Q2? And perhaps future price increases, how should we look at these different channels as it relates to the margin recovery in the second half for Clean Earth or even beyond that.

Go ahead Anshooman.

Yes. So if you really start thinking of price increases, the $10 million that Nick mentioned that was uncovered is really in the first half of the year. So there's a cost price mismatch during the first half of the year. The second half of the year our price increases are covering inflation. And as Nick was mentioning, we put in place has a lot of surcharge stop fees, which really is going to be tighter diesel, which has been one of the big contributing factors for inflation for us. So our margins will recover from that. The soil and dreg business is, from a guidance perspective, relatively flat to last year. That business has a very high contribution margin as incremental volume would come in. So if we were able to pull in some work into this year, there could be good margin upside, as Nick mentioned. Now a lot of the projects, the pipeline is developing for later this year into 2023. So as you start thinking margins '23, '24 in we see a recovery in the soil rice business, which really could be a couple of points of margin expansion into our long-term targets. And then on top of that, as you factor in our efficiency program through the digitalization effort through our logistics improvements and continued growth in the business, that's how we get to our midterm margin targets of the 15%.

Got it. That's perfect. And no specific order here. If we go to the driver shortage in Clean Earth, you mentioned March was a little bit better for recruitment. Can you give a sense of the current magnitude of shortage versus where you hope to be?

Yes. So we're probably about 60 to 70 drivers short and March was a good month for us in both the number of drivers we onboarded, but also we -- in the first quarter saw a reduction in the turnover so actual people leaving drivers leaving the business. So net positive on both ends for us. Additionally, as we've mentioned earlier, during the last quarter, we basically took into effect certain new procedures on onboarding to cut the time for onboarding of our drivers and getting them productive and about half all of that is starting to help us hold.

Okay. And then my last question, just going back to these ongoing challenges of inflation, supply chain, labor, doesn't seem at this point, things are getting much better, but more of the duration is being extended. How are you factoring in future price increases to perhaps over compensate for these challenges to not be on the short end.

Yes. Well, I think a lot of the work comes down to the structure of our contracts. Of course, this business had not experienced inflation of this magnitude in the past, certainly not as quickly as it developed. And so the contracts were written at a time when accommodating that was not even a thought. So a lot of the work will be done through giving us the avenue to make appropriate adjustments for the contract going forward.

Okay. And then likewise, I would assume that these price increases somewhat stick with us for a while to account for the challenges that are occurring and have occurred?

Yes. That's certainly what we're anticipating.

Next question comes from the line of Zane Karimi of D.A. Davidson.

So first off, you're on Clean Earth, can you speak a little bit more to your previously announced 2024 Clean Earth expectations? And what has changed between initial announcements and today? And in particular, what changes, if any, need to be worked on to hit those targets?

Yes. I assume you're referring to the EBITDA margin targets of 15% that we've discussed.

Yes and/or top line.

Yes, yes. Yes. So I think Anshooman mentioned a key component of that bridge to get from where we are today to the 15%, at least 2 points of that will be the soil and dredge business returning to pre pandemic volume levels. So that would be a few points I would expect -- we do expect an incremental 1 to 2 points in margin from the leverage that we'll receive from incremental volume. And then I think on Anshooman also mentioned a lot of the IT initiatives that are underway, which will serve to both improve the customer experience but also to help the back-office operations become more effective likely leading to a reduction in G&A costs. So those are the principal components of let's call it, that 5-point gap been normalized current margins, adjusting for inflation and the 15% target that we have.

Okay. And maybe – I know we’ve discussed a lot of the Clean Earth potential near-term headwinds, but I was hoping to talk a little bit about what you’re seeing for as best you can, the 2023 and 2024 opportunities there? A –Nick Grasberger: Well, I think those opportunities are consistent with kind of the investment thesis that we stated when we bought the business. There significant opportunities in areas like PFAS, there are opportunities with our front-end work that we’re doing to improve the customer experience to take what has been kind of negative churn in large accounts to 1 that’s positive. And of course, the ongoing opportunity to expand permit capabilities at our federally permitted sites to process different kinds of waste. So – there are many, many opportunities that are consistent with those that we mentioned when we bought the business a few years ago. And we indicated that we think that the volume opportunity in this business on an annual basis is kind of mid-single digits, plus, of course, any benefits of price. So we still believe that’s achievable.

Next question comes from the line of Jeff Hammond of KeyBanc.

Sorry, if I jumped on a little late. I don't know if you gave EBITDA for the quarter for rail even though it's disk ops or what it is trailing. I know you're talking about the $40 million go forward.

We didn't give the EBITDA, but really the results were impacted by the $35 million charge that I referenced during the call. But really going forward, as Nick mentioned during the call, we've seen a very strong recovery into Q1 and the early parts of Q2 in the Rail business. The number of tampers we sold in the first 100 days. Our core product this year is more than we did all year last year. We've received another order this early in this quarter. Q2 that will help continue to show good growth in the base business of this Rail segment. And as a result, we feel pretty comfortable that as buyers are looking at this business, they should be looking at the near-term earnings potential, which is around the $40 million mark.

Okay. Perfect. And then just on HE, can you just talk about kind of how -- if there's any moving pieces within the guide, it seems unchanged, but it seems like certainly nickel scrap should be kind of a tailwind. I don't know if there's offsetting headwinds?

Yes, there are a number of moving parts, as you noted, in our Echo products group, some of the input costs to producing those products, the costs have increased. So we've recovering that in price as we speak, but there was a bit of a headwind in the quarter and probably some of the second quarter as well due to that, as you point out, some other commodity prices, which tend to benefit the business have remained a bit higher than we thought. But overall, the volume in the business is consistent with our original thoughts. Yes, we're quite comfortable with the original guidance that we provided for the full year.

Okay. Great. And then last one, just on -- I know when you bought ESOL, you were talking about I guess, restructuring some of the transfer facilities in the transportation business. And I'm just wondering kind of where you are in that evolution and kind of how you maybe think about it the same or differently given all this kind of driver shortage inflation, et cetera.

Well, we've made a number of changes already to our route planning and so forth. So a lot of that has already been addressed, although as you can imagine, in this market, it certainly is prompting us to look a level deeper and to continue trying to find efficiencies in our route planning. So that's -- it's an ongoing initiative, I'd say, Jeff.

Next question comes from the line of Michael Hoffman of Stifel.

I just wanted to get a point of clarity. So of headwind, $10 million offset in its contract structural limitations that are preventing you from doing that faster. So is that what I think I heard.

Yes. In effect, that's correct. And that, of course, is something we're addressing now if and when this sudden and severe inflationary environment, whatever recur. But yes, I think that's taken us a bit more time to work through the appropriate mechanisms to increase prices given the structure of the contracts. Again, whether they be surcharges or price increases and temporary versus permanent and it's quite a mixed bag of contracts. So it has taken a bit of time to work through that. But quite pleased with the effort of our Clean Earth team to get where we are today and certainly have confidence that we'll be in a better position to mitigate this going forward.

And I get -- and I appreciate that these businesses are all being run as one, but they're now underlying segment. So is this an industrial issue, a retail issue, a health care issue, which is it more of something and that's why there's some timing here?

Yes. It's more retail and industrial. It's not a health care issue. It's really not a legacy Clean Earth issue. It's more of an stall issue with respect to industrial and retail customers.

All right. And then what are the plans to term out the debt? Is it something that's tied to you get Rail sold you delever and then try and term out and get out from under some of this variable versus fixed issue?

We -- currently, we're 50-50 from a variable versus fixed. And as we get the rail proceeds, obviously, we'll be paying down some of the variable debt. So our percentage for the rest of this year goes a little bit higher towards fixed. At this stage, interest rates are up, so taking out the high yield and replacing that probably isn't strategy given the current interest rates, but we'll continue to monitor interest rates and look at mechanisms to further reduce our interest costs as we continue to delever and have a stronger balance sheet.

Okay. And then lastly, Nick, I want to ask about the 15% margin. My recollection was Clean Earth legacy was very high margin because soils in dredge such high incrementals. You saw it was virtually 0. But the combined was meant to be better than '15 because of the benefit of Clean Earth. Now we're only getting to 15% because of soils and dredge. I thought 15 was without soils and dredge recovering.

Well, we're talking just over the next few years. We really haven't looked out beyond a few years and where the margins can develop to. I think pick up 5 or so points of margin in the next few years is an aggressive but reasonable target for the team. And that's what we're asking them to do when we have a pretty good road map on how to get there where the margins can go beyond 15%, we'll discuss that later.

There are no further questions at this time, and would like to turn the call back to Dave Martin for closing remarks.

Thank you for joining the call, and I apologize for the technical issues with Nick at the very end of his prepared remarks. Feel free to contact me with any follow-up questions. And again, we appreciate your interest in Harsco and look forward to speaking with you in the future. Have a great day.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect. Have a great day.