Enviri Q2 FY26 earnings call NVRI

Enviri has made the strategic decision to exit its Deutsche Bahn and Network Rail ETO contracts, which were identified as carrying significant technical and financial risks. This move is a top priority to derisk the rail business and improve its financial and cash flow profile. An agreement has been signed with GBM, the primary subcontractor for Deutsche Bahn, to sell relevant assets and transfer supplier obligations, with compensation expected in upcoming quarters. Discussions are ongoing with Network Rail, with a proposal to upgrade their existing stone blower fleet.

The exit of the ETO contracts resulted in a negative revenue adjustment of $136 million in Q2 FY26, previously reported using percentage of completion accounting. Total unusual P&L items amounted to $247 million, including $75 million in noncash impairment charges and $133 million for incremental liabilities related to the contract exits. The total accrued liability for these contracts is $190 million. Funds from the Clean Earth sale were set aside to cover these obligations, ensuring no increased leverage or burden on shareholders.

The company is actively pursuing comprehensive self-help improvement initiatives across both Harsco Environmental and Rail businesses. These include strengthening the operating platform, optimizing supply chain and manufacturing, refining commercial strategies, and rightsizing engineering and administrative expenses. Strategic restructuring actions, such as closing the Ludington, Michigan manufacturing operation and implementing programs in European and South Carolina operations, are underway. These actions are expected to drive significant margin improvement and productivity gains.

Harsco Environmental showed positive momentum with a 3% revenue increase and 15% adjusted EBITDA growth year-over-year. This was driven by improved services and product volumes, better pricing, and operational enhancements. While facing volume headwinds in Northern Europe, China, and anticipated pressure in the Middle East, the ratification of Europe steel tariffs and quota changes is expected to provide a modest uplift in 2027. The business is focused on structural cost improvements and optimizing service delivery.

With the ETO contracts behind it, Harsco Rail is refocusing exclusively on its core maintenance of way business and other offerings. The aftermarket segment is a key area of emphasis, with revenues growing double digits in Q2 FY26. Despite original equipment demand remaining low, the business is driving efficiencies and cost reductions. Historically, aftermarket constitutes about 40% of Rail's revenues, a percentage that is increasing due to lower OE sales and the removal of ETO contract revenues.

Enviri ended the quarter with net debt of approximately $290 million and a net leverage ratio of 1.9x, a significant improvement from the recent past. Total cash on the balance sheet is roughly $400 million, with $50 million identified as restricted cash (down from $175 million previously). Adjusted free cash flow for the quarter was negative $9 million, but this represents a year-over-year and quarter-over-quarter improvement, driven by reduced debt and improved working capital in Rail's base business.