Waiting for execution-driven turnarounds can be frustrating, and not all companies do turn around, but when the execution of a fundamentally solid and undervalued business does improve, the results can be impressive. When I last wrote about Enviri (NYSE:NVRI) (known as Harsco at the time), I saw opportunities to do better and potentially meaningful undervaluation, but I was concerned about an execution track record that just wasn’t good enough to give me confidence. Since then execution has improved meaningfully in the hazardous waste business and the shares are up about 40%.
I think there are macro challenges that Enviri management can’t really do much about in 2024 and into 2025, but I’m encouraged by the improvements that I’ve seen and management is earning back some of that benefit of the doubt. If low-to-mid single-digit revenue growth can drive mid-teens EBITDA margins, I can argue for a fair value in the low-to-mid teens and further upside in the shares.
The Metal Waste Processing Business Will Have Some Challenges This Year
Enviri reported 9% growth in the Environmental segment in the first quarter, with 13% growth in services offset by a 5% decline in EcoProducts and a 13% decline in the aluminum processing business. Adjusted EBITDA margin improved modestly (40bp to 16.5%), but management guided toward pretty flattish performance for the remainder of the year.
I think that’s a fair guide from management given what’s happening in the steel industry and other related markets. Steel volumes are basically flat year-to-date on a global basis, but Enviri’s geographical skew doesn’t match global production and the areas where the company operates are doing a little weaker in terms of volume.
That can be offset to some extent by new contracts – the company announced a new deal with Gerdau (GGB) earlier this year for its Mexican operations – and Enviri’s customers can outperform within their geographies, but I’d say the overall environment for steel is not particularly strong at the moment given weakening non-residential construction, weakening heavy machinery, and weakening short-cycle industrial markets.
I expect that Enviri is also being hampered by weaker pricing for its metal reclamation operations. Nickel prices are down about 20% year over year, and while I don’t believe nickel is as large a part of the business as it used to be (it once drove about 50% of segment revenue), it still counts. This is offset by ongoing progress with the company’s efforts to grow its range of slag/waste-derived products, like its low-carbon AgroSilicio fertilizer product.
Environmental is a proven business for Enviri and one where they perform relatively well. Margins can hit the high teens in the good times (and management is targeting a 20% margin in three years) and it doesn’t fall off too badly in the interim.
CleanEarth – There’s More Room For Improvement, But The Pace Will Slow
Relative to my last article on the company, management’s performance with CleanEarth has surprised me the most (and in a good way). This was a business that management was struggling to integrate for a while, and the business was weighed down by inadequate pricing, network inefficiencies, and labor challenges (getting the drivers they needed, among other things).
A lot of that has turned around since then. Management has been repricing contracts and with the network now running smoothly and with better volumes driving improved scale efficiencies, the business is showing more of what it can do. Volumes were lackluster in Q1’24, but EBITDA margin improved about three points (to 15.1%) on 2% revenue growth that was price-driven.
Like for the Environmental business, management isn’t expecting much top-line improvement for the remainder of 2024, and that seems reasonable. Volumes are being held back by tougher year-ago comps, the absence of certain large projects that occurred last year (most notably, I think, in retail), and a general slowdown in industrial activity. With industrial and retail both driving meaningful volumes here, the overall slowdown in the economy has similar implications for Enviri’s CleanEarth operations.
I do like the business for the longer term, though, and I think there are arguments for the business growing at more than just volume proxies like industrial production. In addition to opportunities in PFAS remediation, CleanEarth can leverage increased volumes from reshoring (particularly increased electronics production) and growing zero-waste initiatives. CleanEarth can work with customers to reduce the amount of waste that makes it to landfills to virtually nil, while along the way exploiting opportunities to reclaim products for reuse and recycling, like alcohols and solvents for fuel additives.
When I last wrote about Enviri, CleanEarth EBITDA generation was inconsistent and margins seldom exceeded the high single-digits. Now the business is generating margins in the low-to-mid teens and management’s 2027 target of 17% seems attainable.
Rail Will Stick Around A While Longer
Enviri has been shifting its business toward environmental services (waste management and reclamation) for many years, and that has left its Rail business as a piece that doesn’t quite belong. Making matters worse, the business has languished under Engineered to Order (or ETO) contracts that have hammered the profitability of what could otherwise be a solidly profitable business with underlying margins in the low-to-mid-teens.
Enviri had been shopping the business for some time, but recently announced that it had discontinued the process after not receiving any offers that properly valued the business. Given that management has already taken accounting charges against many of the bad contracts, I don’t think it’s likely to hurt the overall business that much, and I think it’s worth keeping the business until reported results can coax would-be buyers toward a price that better reflects its actual worth.
The Outlook
I expect 2024 to be a little underwhelming with pressures on all of the businesses limiting some of the upside to management’s ongoing improvement initiatives. I do expect revenue to accelerate some in 2025 and 2026, though, on a better macro outlook and improved volumes for its two largest businesses.
Between increased sales of higher-value derivative products and improved scale efficiencies, I expect a roughly half-point improvement in EBITDA margin this year (to 13.5%) and further improvement to 15% in 2026/27 and 16% in 2030. Management is targeting more improvement than that, but I think conservatism is still appropriate. I do also expect improvement in free cash flow performance, with the company getting back into mid-single-digit FCF margins that should improve some over time.
All told, I’m looking for long-term revenue growth of 3% to 4% to drive high single-digit long-term FCF growth, but I note that consistent FCF production has been a challenge here over the years. With CleanEarth now a significant part of the business and running better, that should be less of an issue, but time will tell.
Between discounted cash flow and a margin/return-driven EV/EBITDA (a 7.25x forward EBITDA), I believe Enviri can trade in the neighborhood of $13/share.
I will also note that the company is still heavily indebted, and by management’s own admission this is constraining reinvestment into growth projects. I expect deleveraging to be the top priority for free cash flow and it will likely be several years before meaningful returns of capital are possible.
The Bottom Line
Relative to that last article, I believe Enviri is at last showing more of what the business can really be. I like the ongoing opportunities to generate revenue growth and margins from products derived from waste streams, and I like the overall leverage to trends like zero waste in manufacturing and retailing. I don’t expect the same pace of improvement going forward, but I do see enough gas in the tank to support a meaningfully higher share price, but that may take a few quarters given that headwinds in 2024 could slow the pace of improvement for a bit.
