Enviri Corporation, the environmental solutions provider formerly known as Harsco, recently released its first-quarter earnings transcript for 2024. While analysts focused on the reconsolidation of Harsco Rail and the company's ongoing deleveraging efforts, a subtle but potentially explosive detail slipped under the radar: the performance of Harsco Rail's "base business."

Nick Grasberger, Enviri's Chairman and CEO, stated that, excluding the impact of a few problematic European contracts, the Rail division's base business delivered its "best quarter in many years." He further highlighted that the base business alone, excluding these engineered-to-order (ETO) contracts, generates an estimated $35 million to $40 million in EBITDA.

This seemingly innocuous statement carries profound implications. First, it signifies a remarkable turnaround for the base business. Remember, this is a division that Enviri actively sought to divest. Its performance was considered lackluster, overshadowed by the complexities of the European ETO contracts. Now, with renewed focus and operational improvements, the base business has emerged from the shadows, showcasing a robust and profitable core.

Second, Grasberger's comment underscores the potential value of Harsco Rail as a whole. If the base business can consistently generate $35 million to $40 million in EBITDA, and the troublesome ETO contracts are set to mature in the next few years, Rail's future profitability could far exceed current expectations.

Let's crunch the numbers. Enviri's current guidance for Rail's 2024 EBITDA is $18 million to $20 million, which includes a $4 million corporate cost allocation. This suggests the ETO contracts are currently dragging down overall profitability. However, with these contracts concluding, and the base business potentially growing, it's conceivable that Rail's EBITDA could reach $50 million or more in the next two to three years.

This creates a compelling investment thesis. Enviri's deleveraging strategy currently relies on asset sales and potential divestitures, including, eventually, Harsco Rail. But what if the company holds onto Rail, allowing this hidden gem to fully shine? The base business is already performing exceptionally well, and the ETO contracts are nearing completion. As these headwinds dissipate, Rail could transform into a significant profit and cash flow engine for Enviri.

Such a development would resonate throughout the company. Stronger cash flow from Rail would accelerate deleveraging, reducing interest expense and freeing up capital for further growth initiatives across Enviri's portfolio. Furthermore, a resurgent Rail would boost investor confidence, potentially driving a revaluation of the entire company.

Of course, this is a hypothetical scenario. Enviri may still choose to divest Harsco Rail once the European contract situation stabilizes. However, the company's own statements reveal the potential of the base business, suggesting that Rail may be more valuable as a retained asset than as a divestiture candidate.

Enviri's Investor Day, scheduled for June 20th in Philadelphia, presents a critical opportunity for the company to shed more light on Rail's long-term prospects. Investors should pay close attention to any updates regarding the base business, the European ETO contracts, and the company's overall strategic vision for Rail.

Projected Harsco Rail EBITDA Growth

The following chart illustrates the potential EBITDA growth of Harsco Rail, considering the projected performance of the base business and the conclusion of the problematic ETO contracts.

The market may have overlooked this crucial detail, but Enviri's own words suggest the possibility of a rail renaissance. If the company plays its cards right, this hidden gem could unlock significant value for shareholders and transform Enviri into a true environmental powerhouse.

"Fun Fact: Harsco Rail's track renewal systems can replace up to 1,500 ties and 3,000 feet of rail per day, significantly improving railway efficiency and reducing downtime."