Prepared remarks
Good morning. My name is Danielle, and I will be your conference facilitator. At this time, I would like to welcome everyone to the Enviri Corporation Second Quarter Release Conference Call. Today's conference is being recorded, and this telephone conference presentation and accompanying webcast made on behalf of Enviri 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 expressed written consent of Enviri. Your participation indicates your agreement. I would now like to turn the call over to Dave Martin of Enviri Corporation. Mr. Martin, you may begin your call.
Thank you, Danielle, and welcome to everyone joining this morning. 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 second quarter and our outlook for the year. We will also discuss briefly our announcement this morning related to the evaluation of strategic alternatives. We'll then take your questions. We ask that you keep your questions focused on earnings, operations and the outlook as there is limited additional information we can provide on strategic alternatives at this time. Before our presentation, let me mention a few items. First, our 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 materially from these forward-looking 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 statement. 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 our earnings release today as well as the slide presentation. With that being said, I'll turn the floor to Nick.
Thank you, Dave, and good morning, everyone. Before we dive into our Q2 results, I would like to take a moment to discuss the announcement that we made this morning about our review of strategic alternatives. As you would expect, the Board and our management team are continuously focused on evaluating options and taking actions that are in the best interest of Enviri and its shareholders. In this context, we continue to believe there is a significant and persistent gap between our market valuation and the sum of the parts value of the company. Over the past several years, we have created a portfolio of valuable businesses focused on delivering compelling solutions to our customers. Clean Earth is an especially valuable business in an attractive and consolidating industry, while Harsco Environmental is a market leader with unmatched service capabilities and a strong earnings and cash flow profile.
We are also continuing to take actions to stabilize rail, building on the improvements that we've made there. We're confident that executing our operating plan will continue to create value over time. With that said, we believe there may be alternatives to unlock this value sooner, and we think now is the right time to initiate a formal evaluation of our business portfolio and strategic options with the assistance of our advisers. This evaluation will consider a wide range of alternatives, including a tax-efficient sale or separation of the Clean Earth business, along with the continued execution of the company's business plan. This process will also consider, among other things, the capitalization needs for our businesses in the future. I am proud of what our teams have accomplished, and I'm excited about the opportunities this process may present for our company and its employees. We expect that this evaluation will take some time given the complexity of our business.
I also hope you appreciate that we do not intend to disclose further details or developments on the evaluation process until the company determines that disclosure is appropriate or required. Now let me turn to our second quarter earnings, starting with our Environmental segment, which performed quite well in the quarter despite some unique and short-term external challenges. Tom will cover our financial results in more detail shortly. Clean Earth's revenue and earnings grew single digits and its margin reached 16.3%. The Clean Earth team achieved these results despite weather-related pressures, a weaker business mix in soil and dredging, and a temporary rise in disposal costs. CE continues to perform remarkably well overall, and the team is executing against its priorities by investing in new service capabilities and building a strong business pipeline. CE's ongoing project to implement a common IT platform is also on track with further productivity benefits anticipated next year from the completion of this project.
Turning to Harsco Environmental. The business is managing well through persistent softness in the global steel market by managing its costs and flexing capital expenditures, among other actions while maintaining industry-leading service levels. We have experienced a modest uptick in volumes in the U.S. of late due to added trade protections, but this benefit has been offset elsewhere. Overall, volumes are flat and more trade actions are needed, particularly in Europe, to deal with excess steelmaking capacity in China. With that said, recent U.S. dollar weakness is a positive, and we expect HE's results to improve considerably in the second half of the year, much of which will be driven by internal initiatives. New sites will benefit us more in the coming quarters as will improvements at a few underperforming locations. Moving to Harsco Rail. Demand for standard equipment and parts has slowed considerably since the end of Q1.
Orders from U.S. customers as well as those from China have paused in recent months. Demand from key customers elsewhere, including in Canada and Mexico, is also very weak. We attribute this softness to economic and global trade uncertainty with the related impacts appearing more pronounced in our niche segment of maintenance of way. We expect these impacts to be temporary and are confident in our market position. We may benefit from the finalization of U.S. trade agreements, but we would not expect to accrue any related benefits until next year at this point. As a result, we have reduced our outlook for the year, and our Rail leadership team is increasingly focused on internal initiatives to help offset these impacts. Supply chain and factory improvements are ongoing, and we're focused on lowering Rail's overhead. The team also continues to advance and reduce our risk on the large ETO contracts.
Last quarter, we announced an amendment to our Deutsche Bahn contract, and we are still engaged in discussions with Network Rail. Several other smaller ETO contracts have been completed, and the remainder will be finished next year. As we've said in the past, the cash flow in our Rail business will change materially over the next few years as these and the larger ETO contracts are completed. Overall, we expect continued economic uncertainty to result in weaker demand that will cause pressure for Enviri in the short term. And as I mentioned, we've lowered our outlook for the year to reflect this. However, our Environmental businesses continue to perform well, and we expect business performance to strengthen for each of our segments in the coming quarters. Looking further ahead, our optimism regarding the earnings and cash flow potential for our company is unchanged. And the same is true with respect to the intrinsic value we see in our business. We look forward to progressing the evaluation of our strategic alternatives, and we'll update you on that process when appropriate. I will now turn the call over to Tom.
Thank you, Nick, and good morning, everyone. In the second quarter, total revenue was $562 million and adjusted EBITDA was $65 million. As Nick mentioned, our Environmental segments executed well and performed consistent with our expectations in the second quarter. Favorable cost performance and a weaker U.S. dollar in Harsco Environmental offset the impact of sluggish product and service volumes relative to our expectations earlier in the quarter. At Clean Earth, better pricing and volumes as well as administrative cost controls offset weather impacts and higher disposal costs resulting from outages at our primary service providers. Overall, our adjusted EBITDA was within guidance, albeit at the lower end, driven by the Rail results. Rail performance was negatively impacted by volumes with equipment, aftermarket, and technology sales coming in much lower than anticipated. We saw our customers adopting a very cautious view on maintenance-related spending.
Rail's order activity has been unusually weak by any historical measure as a result. This demand weakness is most prominent in the U.S. where customers, including the Class 1s and others now seem to be deferring maintenance and related capital spending due to economic uncertainty. And we're also seeing limited to no demand out of Mexico, Canada, and China, likely as a result of global trade tensions. Given these trends in Rail, we have lowered our guidance for the year. I'll come back to Rail and our outlook in a bit when I'll comment on actions underway to mitigate Rail's operating and market challenges. Now let me turn to our second-quarter performance details. In the first quarter, revenues totaled $562 million, which was down approximately 6% on an organic basis. Adjusted EBITDA was $65 million with Clean Earth achieving record second-quarter profits in the quarter. Divestiture impacts were an unfavorable $3 million compared with the prior year and FX impacts were not material.
Our adjusted diluted loss per share was $0.22 for the quarter, excluding the impact of unusual items. These unusual items include $16 million in Rail, mainly related to additional costs anticipated to complete our Network Rail and SBB contracts. The amount related to Network Rail assumes we continue with the contract. As Nick mentioned, our discussions with Network Rail are ongoing. In fact, we recently sent Network Rail a letter communicating our urgent need to bring these negotiations to closure and summarizing various options, including a substantial revision of the contract's economic terms or finding a mutually acceptable exit. And the additional SBB costs are for manufacturing and commissioning expenses as we approach completion of deliveries of the first vehicle type and work towards the final phase of this contract to complete production and deliveries of the second vehicle type.
The remaining unusual items in the quarter include project-related costs and an $8 million impact in Harsco Environmental, most of which relates to our decision to exit a downstream products business in France. Lastly, on this slide, our adjusted free cash flow for the quarter was a negative $14 million, which is in line with our expectations. Our cash flow performance is expected to improve in Q3 despite our semiannual interest payment on our bond and free cash flow should further improve in Q4. Now please turn to Slide 5 and our Harsco Environmental segment. Segment revenues totaled $258 million and adjusted EBITDA totaled $40 million. The year-over-year change in earnings is the result of divestitures and lower service levels resulting from site exits and closures as well as lower product sales from our Excell operations. These impacts were partially offset by lower SG&A expenses and severance costs that were incurred in 2024 that were not repeated this year.
Steel production at our customer locations on a continuing site basis rose modestly compared with the prior year with various puts and takes across our global and diverse footprint. The implementation of steel import tariffs in the U.S. has supported higher production at our customer locations domestically. However, this impact has been offset elsewhere, including in Canada, where output has declined. Overall, steel demand globally remains stable, although utilization rates remain well below optimal levels. Next, please turn to Slide 6 to discuss Clean Earth. For the quarter, revenues totaled $246 million, which was up 4% compared with the 2024 quarter and adjusted EBITDA reached $25 million, up 5%. Revenue growth was slightly more weighted to price over volume. CE's earnings growth is attributable to the increase in revenue as well as cost efficiencies, partially offset by higher transportation and disposal expenses.
As mentioned earlier, transportation and disposal costs were higher as we utilized alternative and more costly disposal options given that our primary outlets were not available for a period of time. This situation has improved in early Q3. Each of our industry segments, verticals within hazardous waste, saw solid growth in the quarter, while soil dredge volumes and earnings were lower as anticipated. The lower contribution from soil dredge relates to seasonal weakness due to dredging restrictions in the Northeast and some higher-margin projects in 2024 that are not repeating this past quarter. Now please turn to Slide 7 and our Rail business. Rail revenues totaled $58 million, and its adjusted EBITDA loss was $3 million in the second quarter. The year-over-year EBITDA change is the result of lower volumes and a less favorable product mix, as well as higher manufacturing costs due to inefficiencies and inflation.
We've discussed our manufacturing challenges previously, and these continue. Supply chain and manufacturing improvements are underway. These initiatives take time, however, and the related benefits are taking longer than we originally expected. Rail is now also dealing with a weak demand environment. Q2 standard equipment bookings were anemic, and our year-to-date orders are now down more than 30%. Rail's backlog has contracted as a result. We're taking actions to rightsize the rail organization in line with the lower demand. The team is currently working on restructuring plans to support the lower demand outlook, with these actions starting in late Q3 and fully implemented in Q1 of next year. Finally, on the ETOs, we've already mentioned Network Rail. We are making good progress on our smaller contracts as well as the SBB and Deutsche Bahn contracts. We expect to complete most of our smaller contracts, which total roughly 10 this year.
The remaining two should conclude in 2026. On SBB, where we are delivering two vehicle types, we expect to have completed deliveries of the first vehicle type by the end of this year. On the second vehicle type, we will be testing the equipment later this quarter and expect to complete deliveries by the end of next year. On Deutsche Bahn, which is a contract to deliver 23 vehicles, we are encouraged by our internal testing results on the first unit. The first three vehicles will commence the formal acceptance process in Germany by the end of this year, after which they can be accepted by the customer. Production of the remaining 20 vehicles are on track to be completed and delivered by the end of 2027. We continue to expect that our existing ETO contracts will consume roughly $50 million of cash this year, an improvement from the $80 million outflow in 2024. Next year, we expect similar cash impacts before these contracts turn positive in subsequent years.
Importantly, we continue to expect that project cash flows on these ETO contracts will be neutral on a go-forward basis. Now let me turn to our full-year outlook. The midpoint of EBITDA and free cash flow guidance is reduced by $15 million, driven by Rail. Our EBITDA range is now $290 million to $310 million, and our free cash flow range is now $15 million to $35 million. Let me conclude with our third-quarter guidance. Q3 adjusted EBITDA is expected to range from $76 million to $86 million. Each of our segments is anticipated to see sequential improvement in earnings. Compared with the prior year quarter, HE results are expected to be lower as a result of divestitures and site exits, while results for CE and Rail should be higher due to volumes and/or price.
Questions and answers
The first question comes from Larry Solow from CJS Securities.
I'm just curious on the reduced outlook revised guidance. Is it driven entirely by Rail? I missed a little bit of the call. I was actually juggling a couple here. It does sound like some of the trends in Clean Earth and Environmental maybe just temporarily a little bit below our expectations certainly in the quarter. So I'm just curious, is that $15 million entirely Rail and the other is just kind of rounding errors? And then the related question, just kind of housekeeping, does the currency impact the weaker dollar? Is that a benefit for you? Has that been a little bit of an added benefit as the years progress?
Yes. Larry, it's Tom Vadaketh. Yes. So the reduction in outlook for the year, both on EBITDA and free cash flow, is entirely due to the reduction in Rail and stemming from some of the demand issues and market issues that we've covered in the call. And then on FX, as you know, we went into the year expecting a $9 million or $10 million impact. There's been some clawback. The dollar has weakened during the year. And at this point, we still see a slight negative year-on-year, but not as large as we thought at the beginning.
Okay. Regarding Clean Earth, it seems to be performing well. I'm interested in how tariffs have impacted the business. Have you noticed any indirect effects from your customers who operate globally? Is there anything that raises concerns for you regarding that or the overall economy? Additionally, I want to follow up on Clean Earth, as you may have mentioned this already, but I noticed the margins have remained flat year-over-year and have even declined slightly this quarter. Was there a specific reason for that? I think you might have touched on it, but I may have missed it.
Larry, it's Nick. On your first question about the tariffs, no, we've not seen any direct impact. In fact, the volume trends in our so-called manufacturing and industrial segment of our hazardous waste business, which is the largest segment, have been quite good, not only revenue but orders and our pipeline. So we're really encouraged by the performance of that segment within our haz waste business. So really no impacts to speak of in regard to tariffs on Clean Earth. I would say on the margin, it was a little softer than we expected, primarily due to some unplanned maintenance-related outages at some disposal facilities. So we had to move the waste further distances to dispose of it and also in a few cases, pay some higher rates than our standard solution. So that's behind us. It's not continuing. It actually was behind us later in the second quarter. So very much a temporary impact.
Okay. You also mentioned the mix, too, I guess...
Larry, sorry, one second. Yes. I'll just supplement. So in the quarter for Clean Earth, margins are slightly up year-on-year. And then, as Nick said, sequentially going into Q3 and Q4, we would expect margins to climb versus the first-half performance.
Yes. And Larry, the other impact that I think we mentioned in terms of margin was the mix with our soil and dredge business. As you may know, the margins in that business generally are a few points higher than the hazardous waste business. And that segment was a bit weaker in terms of volume than we expected. And I think you also know that this tends to be a function of project starts, which can be difficult to predict and a bit lumpy. So it's really not a demand issue. It's more of a short-term issue.
The orders and the backlog in that, I think, had done well, at least in '24, right? So that business, hopefully, it's just a timing thing.
Exactly. The outlook is good for that business.
Larry, do you have another question?
No, no. I think I'm all set. You discussed it. All set.
The next question comes from Rob Brown from Lake Street Capital Markets.
On the Environmental business, I think you talked a little bit about an expectation of some improvement in margins and results in the back half. Could you just clarify sort of what's driving that at this point?
In HE?
Correct.
Yes. Well, we have some new sites ramping up, and that will help. We have some cost reduction initiatives, which we'll have a full six months of in the second half of the year. So that's certainly going to help. And then we talk about a handful of sites that we have a lot of focus on improving their performance and some of those benefits should also help us in the second half of the year.
Okay. Okay. Great. And I know there's a lot of cross currents on Rail right now. But I guess, historically, when you have these down cycles in Rail, how long do they last? What's sort of the kind of a down cycle? Or is there such a thing as a typical down cycle, but maybe a sense of how long these cycles last in the Rail business?
Yes, we anticipate that this situation will be temporary. Although there is considerable uncertainty and significant developments affecting our customers in the Class 1 railroads in the U.S., spending cuts do occur periodically. Our access to various data across customers and competitors indicates that this is an industry-wide challenge rather than a specific issue for Harsco Rail. We believe this downturn will not extend into 2026.
The next question comes from Devin Dodge from BMO Capital Markets. We are not in a recession. There is a lot of uncertainty and significant events occurring among our customers in the Class 1 railroads in the U.S. This situation sometimes leads them to reduce spending. We have access to various data points from customers and competitors that indicate this is an industry-wide issue, not specific to Harsco Rail. However, we anticipate it will be short-lived and do not foresee it extending into 2026 at this time.
So I was going to maybe take a stab at asking a question around that other announcement this morning. Just wondering if you could provide just a bit of background on the strategic review and what prompted the Board to consider its options now? I'm just trying to get a sense if there have been some inbound interest or if it was prompted by new challenges in the business that a turnaround in financial performance may be pushing out a bit.
Well, certainly not the latter. I would say we've done a lot of work. The discount to our sum of the parts value continues to persist. I think we have a bit more confidence in the potential outcome of a few of these options. We're digging deeper into them and have hired advisers. The process is now a bit more formal. Beyond that, we really can't comment. We have done a lot of work on several different options.
Okay. Okay. Fair enough. I had to ask there. Okay. Second question, look, apologies, I may have missed it during the remarks, but I believe there was a pretty meaningful step-up in forward loss provisions at Harsco Rail. Just can you provide a bit more color behind the drivers behind those charges?
Both charges are related to Network Rail, which accounted for the largest portion at approximately $10 million, while a smaller amount pertains to SBB, totaling around $15 million. This reflects a revision in our estimated costs to complete the contract, which is part of our regular quarterly process. As we approach the completion of the vehicles, with about 11 left to deliver, this is simply an update to our cost estimates. There’s nothing particularly unusual about it. Additionally, we are currently negotiating with Network Rail, which could lead to various outcomes, including improvements in contract terms similar to those negotiated with Deutsche Bahn earlier this year. Alternatively, we might discuss exiting the contract on mutually agreeable terms. The adjustment recorded in Q2 is based on the assumption that the situation remains unchanged without any of those potential modifications. Regarding SBB, this project is nearing its conclusion. We expect to complete the delivery of about 50 vehicles by the end of this year and the second vehicle type by the end of next year. This process is also part of our regular quarterly review, where we assess what is needed to finalize the vehicles as designs are finalized and input costs become clearer, which naturally influences our estimates. This adjustment amounted to about $4 million to $5 million.
I appreciate the information. I have one last question. There's been a new leader in Rail for a little while now. Could you highlight the focus areas and any early successes from the new leader, especially considering there may be some near-term demand challenges?
Yes. Well, he has a rail industry background. He's very operationally oriented, and that's much of his background. So his focus, of course, I guess, early on has been operations and supply chain and the logistics with our outsourced warehouse that feeds the Columbia plant. And we have seen some better metrics over the past couple of weeks in terms of that warehouse filling the needs of the Columbia, South Carolina factory. So we're quite encouraged by the team. We have a new finance leader in that business as well. Our operations leader has been with us for about a year. So we feel quite confident that this team has the requisite background and skill set to resolve our operational issues.
This concludes our question-and-answer session. I would like to turn the conference back over to Dave Martin for closing remarks.
Yes. Thank you, Danielle, and thank you to everyone that joined us this morning. Please feel free to contact me with any follow-up questions. And as always, we appreciate your interest in Enviri and look forward to speaking with many of you in the near future. Thank you.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.