Description

Investment Summary

Enviri (NVRI) (formerly Harsco) is a company in the environmental services space that is going through a multi-year transformation to unlock shareholder value.  Albeit overleveraged with some near term earnings drags, the company core businesses will benefit from secular tailwinds over the longer term.

HE believe that despite some of the near term noise, now is an opportune time to invest (as does management with insider buying), as the company progresses on its self help initiatives.

We see the company being valued at a mere 5.8x EBITDA, however the company is 4.1X levered, with not a lot of current excess free cash flow ($30mmish in 2024).

If the company can demonstrate lowering its leverage through operations and non-core asset sales, the company can get out of the woods and see its valuation improve.  HE can see that the company has the potential to generate 200-300 million of cash over the next few years plus grow EBITDA to a level in 2027 which will allow the company to get to 3X leverage.  Under this scenario, you could see the stock trade at 8X EBITDA or $25/share from its current price of $8.    

Company Description

Harsco has business divisions that date back to 100 years ago.  Its business has been evolving from an industrial services and products company to a company focused on environmental services.  It has undergone various acquisitions and divestitures to attempt to position itself.

In 2023, the company rebranded.  The new name and brand identity reflect the Company’s transformation over the previous four years into a single-thesis environmental solutions company that provides services to manage, recycle and beneficially reuse waste and byproduct materials across many industries.

Operating Segments

NVRI operates three operating segments:  Harsco Environmental, Clean Earth and Rail.  The company had been classifying the Rail segment as a discontinued operation as the company was seeking a sale of the business.  This year the company will be adding it back into operations as they HEre not able to find a buyer at the price they wanted for the business.

Harsco Environmental (HE)

HE is a premier, global provider of environmental services and material processing to the global steel and metals industries. HE partners with its global customer base to deliver production-critical on-site operational support and resource recovery services, through management of our customers’ primary waste or byproduct streams.

HE serves approximately 70 mill services customers at approximately 150 sites in approximately 30 countries. T

HE supplies waste solutions for relevant waste or byproduct streams.  HE repurposes processed material for alternative uses to be sold in other markets  This expertise is important to customers as environmental regulations increase and the marketplace grows more averse to landfilling waste.

HE offer our customers a suite of more than 30 services, and our on-site work is largely performed under long-term contracts. The variable fees under contracts are not linked to steel prices. site portfolio results and driven more consistent performance across our operations.

HE’s largest customers today include ArcelorMittal, Gerdau, Tata Steel Group, Taiyuan Iron & Steel and Ternium. HE serve most of our major customers at multiple sites, often under multiple contracts. 

HE provides a broad range of services, most of which address our customers’ environmental challenges. In total, these services reduce both landfill waste and the carbon footprint of our customers’ sites.

Resource Recovery, Metal Recycling and Slag Optimization  Resource recovery, metal recycling and slag optimization is the core component of our service offerings. HE captures liquid steel waste or byproduct (slag) and transport it for cooling, treatment and conditioning. HE then recovers valuable metal from the waste-stream, which is returned to the customers.Residual non-metallic processed material is transformed into environmental products that create new and additional revenue streams.

Scrap Management HE manages customer scrap inventories making it cleaner and denser. Improved scrap characteristics reduce electricity usage.

Ecoproducts  HE manufactures value-added downstream products from industrial waste-streams. Our experience in manufacturing these products and successfully penetrating relevant end-markets is an important differentiator for the Company. These zero-waste solutions preserve our natural resources and reduce or eliminate landfill disposal. These products include: Road Surfacing and Materials, Abrasives and Roofing Materials, Metallurgical Additives, Agriculture and Turf Products and Cement Additives

HE plans to grow its business by various methods: Penetrate Existing Sites, find additional sites where customers need outsourcing, and by developing new downstream products, e.g. Ecoproducts.

Clean Earth (CE)

CE provides specialty waste processing, treatment, recycling, and beneficial reuse solutions for customers in the industrial, retail, healthcare, and construction industries across a variety of waste needs, including hazardous, non-hazardous, and contaminated soils and dredged materials. CE currently operates 18 RCRA Part B permitted TSDFs, wastewater treatment facilities and supporting 10-day transfer facilities across the U.S., serving approximately 90,000 customer locations, while utilizing a fleet of over 700 vehicles. It also holds a portfolio of approximately 600 critically-important permits, and the majority of waste handled by CE is recycled or beneficially reused.Specialty-waste permits have considerable value, and CE is positioned to take advantage of increasingly stringent regulations on the handling of this waste. These dynamics provide recurring revenues and support attractive underlying growth. CE also operates in a fragmented market where acquisition opportunities are likely to develop. 

CE customers include waste generators in numerous industries, including chemicals, power, aerospace, medical, retail and metals, as well as integrated waste companies.  CE also services federal, state and local governments

CE provides testing, tracking, processing, recycling, and disposal services for hazardous waste and it operates 18 RCRA Part B permitted TSDFs and several wastewater processing permits that enable the Company to process a variety of complex hazardous wastes, consisting of toxic, reactive and flammable materials such as industrial wastewater, manufacturing sludge, oily-mixtures, chemicals, pesticides, asbestos, pharmaceutical waste, and landfill leachate with per- and polyfluoroalkyl substances ("PFAS"). These operations possess unique and differentiated processing technologies, such as applications for aerosol can, medical waste recycling, fuel blending, household hazardous waste and lead contaminated soils.  

CE processes approximately 3.4 million tons per year of contaminated soil and 0.3 million cubic yards of dredged material at seventeen locations, which includes fixed-based locations and mobile plants. These soils are contaminated with heavy metals, polychlorinated biphenyls ("PCBs"), pesticides, PFAS or other chemicals, and the related clean-up work is often the result of infrastructure improvements, private redevelopment, industrial site remediation and/or underground storage tank removal. CE treats and recycles this soil through various processes, after which the material is suitable for beneficial reuse as construction fill material or landfill capping. Secular growth driven by increased regulation (PFAS) and a growing list of contaminants and hazardous materials, and investment are anticipated to fuel CE’s growth in the coming years. CE operates in a very fragmented, regionally-driven market, and as a result, they expect to pursue acquisition opportunities.

PFAS Tailwind.  US PFAS abatement costs for water, wastewater, and soil could exceed $200B over the coming decade.  Per- and polyfluoroalkyl substances (PFAS) are synthetic chemicals that have been used around the world since the 1940s. The EPA has classified a group of chemicals as PFAS. PFAS chemicals are slow to degrade and have entered into soils, groundwater, and the atmosphere.  There will be billions spent to remove these chemicals from the environment.

NVRI is in a good position to benefit from the initiatives to remove PFAS

Rail

Harsco Rail is a global supplier for railway track maintenance and construction. With a broad range of high quality equipment, cutting-edge technology, and worldwide support, Harsco Rail takes care of customers’ needs for virtually all major aspects of track maintenance and construction.

Harsco Rail’s Track Construction and Renewal Equipment product line consists of an expanding offer- ing of machines, designed to help the world’s railways to build and maintain their track structure.

Harsco Rail provides a full line of high-production track construction and renewal equipment. These products have been responsible for con- structing more than 13,000 km of new track, and renewing more than 20,000 km of existing lines.

Harsco Rail’s earnings have been dragged down by two large contracts which have been dragging down EBITDA in this segment by approximately 15-20 million.  This segments business generates $40mm from its base business but given these contracts its current EBITDA run rate is $20-25 million.  These contracts run off 2026 and will be additive to the business getting the segment back up to the $40mm range.  Capex is very light in this business at around $5 million.

Earnings Model

Business Segments

Consolidated Earnings

Balance Sheet

Valuation 

The biggest overhang on the valuation of NVRI is its heavy burden of debt.  The company has a leverage ratio of 4.1 and is modestly FCF positive.  Fortunately, they do not have a maturity dates until 2026-2028.

The company was trying to delever through the sale of their rail division which was not successful, and will have to dever through other means such as selling off non-core assets and cash flow from operations.  When the unfavorable contracts in Rail roll off in 2026 and 2027, they will look to sell that operations again.

The company is trading at 5.8X on 2024 EBITDA.  Its waste related comps trade at 10-12x EBITDA.  In no way, does the company deserve this multiple but if they can execute, I believe an 8X multiple is reasonable.  Looking out to 2027, if the company executes and the company trades at 8X, it would be a $25 stock.  

Between now at 8 to $25 in three years you will have a nice appreciation that I believe will occur over time as it executes on its plan. Its plan is not unreasonable, as much of it is “self help” and the company also benefits from some secular tailwinds in remediation and recycling.

Risks

The company may not be able to delever quickly enough over the next few years and be forced to raise equity to pay down debt in 2026.  This seems mitigated in the near term as it appears that the company has gone down the path of selling off non-core assets and there has been recent insider buying from management.

Given the company’s capital constraints, the company may not be able to defend its competitive position in its contracts in Rail, Steel and environmental.

The company is subject to many government regulations which may change affecting profitability and competitive position.

Employees operate in dangerous environments and accidents may happen.  The company may be subject to lawsuits.

Catalyst

2024 Catalysts

Analyst Day this week (6/20) for additional guidance in the business

More Insider Purchases

Execution of plan:  Selling non-Core assets for up to $75mm, executing on margin expansion in Clean Earth Segment

Longer Term Catalysts

Rail Segment rolling off unprofitable contracts

PFAS Remediation

Execution of devering