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Edited Transcript of NC earnings conference call or presentation 1-Aug-19 12:30pm GMT

Q2 2019 NACCO Industries Inc Earnings Call

CLEVELAND Aug 1, 2019 (Thomson StreetEvents) -- Edited Transcript of NACCO Industries Inc earnings conference call or presentation Thursday, August 1, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christina Kmetko

NACCO Industries, Inc. - IR Consultant

* John C. Butler

NACCO Industries, Inc. - President, CEO & Director

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Conference Call Participants

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* Mitchell Lolley

Nixon Capital LLC - Equity Investment Analyst

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Presentation

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Operator [1]

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Good morning. My name is Emily, and I will be your conference operator today. At this time, I would like to welcome everyone to the NACCO Industries Second Quarter Earnings Call. (Operator Instructions) Thank you.

Christina Kmetko, you may begin your conference.

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Christina Kmetko, NACCO Industries, Inc. - IR Consultant [2]

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Thank you. Good morning, everyone, and welcome to our 2019 second quarter earnings call. I am Christina Kmetko, and I am responsible for Investor Relations at NACCO Industries. I will be providing a brief overview of our quarterly results and business outlook, and then I will open up the call for your questions.

Joining me today are JC Butler, President and Chief Executive Officer of both NACCO and North American Coal; and Elizabeth Loveman, NACCO's Vice President and Controller.

Yesterday, we published our second quarter 2019 results and filed our 10-Q. Copies of our earnings release and 10-Q are available on our website. For anyone who is not able to listen to today's entire call, an archived version of this webcast will be on our website later this afternoon and available for approximately 12 months.

As we begin, I would like to remind participants that this conference call may contain certain forward-looking statements. These statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements made here today in either our prepared remarks or during the following question-and-answer session. We disclaim any obligation to update these forward-looking statements, which may not be updated until our next quarterly conference call, if at all. Additional information regarding these risks and uncertainties was set forth in our earnings release and in our 10-Q.

Now let me discuss our 2019 second quarter. I will cover our consolidated results first and then provide the highlights for each segment.

On a consolidated basis, our operating profit increased 17.4% to $9.2 million from $7.8 million in the prior year second quarter. Our consolidated net income increased to $8 million or $1.14 per share, up from $6.4 million or $0.92 per share last year. For the year-to-date period, our effective income tax rate was 15.2% compared with 12% in 2018. A significant increase in operating profit at our Minerals Management segment was the biggest driver of the higher net income. Operating profit in the Minerals Management segment increased, because lessees operated more wells in our Ohio mineral reserve, which increased the amount of royalty income we received. This favorability was partially offset by lower operating profit at both the Coal Mining and North American Mining segments.

At our Coal Mining segment, operating profit decreased mainly due to higher employee-related costs and a decrease in earnings of the unconsolidated operations. The decrease in the unconsolidated operations earnings was primarily because of fewer coal tons delivered as a result of customer plant outages. However, an improvement at our consolidated coal operations resulting from both an increase in customer requirements as well as a reduction in cost per ton sold at Mississippi Lignite Mining Company helped to partly offset the decline at the unconsolidated coal operations.

We mentioned in our release that we were able to transfer certain Centennial mine permits to third parties, which resulted in $400,000 loss. While this loss is not significant, we called it out, because the transactions that generate the loss allowed us to reduce the Centennial mine reclamation liability on our balance sheet by $5.4 million and will result in a reduction of future cash outlays.

At our North American Mining segment, we reported an operating loss this quarter compared with modest operating profit in last year's second quarter. The second quarter loss included higher employee-related and business development costs as well as an increase in supplies and repairs and maintenance expenses. These higher costs were partially offset by incremental earnings attributable to a new customer contract. Those are the significant factors affecting the second quarter results.

Now let me turn to our outlook. At the Coal Mining segment, we expect overall deliveries to decrease in the second half of this year and for the 2019 full year from both prior year periods. This decrease is the result of anticipated changes in customer requirements, including the timing and duration of power plant outages as well as comparisons to historically high delivery levels experienced last year at certain of the unconsolidated operations.

I would like to note that in the second half of last year, we received a $3 million contractual settlement, and we recognized $1.8 million in favorable adjustments to mine reclamation liabilities. Excluding these favorable prior year items, we expect operating profit in the second half of 2019 to increase because of a reduction in operating expenses and improve results at our consolidated operations. However, lower income at the unconsolidated coal mining operations resulting from the reduction in tons delivered is expected to partially offset the operating profit improvement.

For the 2019 full year and excluding the favorable 2018 items, operating profit at the Coal Mining segment is expected to decrease modestly as lower income at the unconsolidated operations is expected to be partially offset by improved results at the consolidated operations. Full year 2019 operating expenses are expected to be comparable to 2018 despite the increase in the first half of the year.

At our North American Mining segment, we expect operating profit in the second half of this year to improve over the first half and be comparable to the second half of last year.

Operating profit for the remainder of 2019 is expected to benefit from an increase in earnings associated with new contracts, but continued spending on business development activities and the increased employee-related expenses are forecasted to partly offset the new contract benefits. As a result of the operating loss in the first half of 2019, North American Mining expects full year 2019 operating profit to be significantly lower than 2018.

With regard to business development, North American Mining entered into 2 new contracts during the second quarter of 2019. These new contracts, which should commence in the third quarter, will have a modest impact on earnings in the second half of this year and will contribute moderately beginning in 2020.

Finally, as I mentioned previously, our Minerals Management segment's operating profit increased significantly during the first half of the year. For the remainder of 2019, we expect royalty income to increase substantially over the comparable 2018 period, but at a significantly lower rate than we realized during the first half of 2019. Also, as we mentioned in the earnings release, it is important to note these expectations for royalty income are dependent on a number of factors outside of our control.

Overall, we expect our consolidated 2019 net income to increase significantly compared with last year as a result of the increase in net income experienced in the first half of the year and an anticipated improvement in the remainder of the year. The increase is significant whether or not you include or exclude the previously mentioned favorable 2018 items. We are forecasting an effective income tax rate, excluding discrete items, of approximately 15%.

Lastly, we expect our consolidated cash flow before financing activities to increase over the last year, and we expect capital expenditures to be approximately $28 million for the 2019 full year.

Before I open up the call for questions, let me provide some balance sheet information. We ended the second quarter with consolidated cash on hand of $98.4 million and debt of $12 million.

That concludes my prepared remarks. I will now open up the call for your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Mitchell Lolley with Nixon Capital.

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Mitchell Lolley, Nixon Capital LLC - Equity Investment Analyst [2]

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It looks like momentum at North American Mining continues with 2 new contract wins in the second quarter. And first question I had about that was, are these new contracts in Florida or are they in other states?

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John C. Butler, NACCO Industries, Inc. - President, CEO & Director [3]

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They're in Florida.

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Mitchell Lolley, Nixon Capital LLC - Equity Investment Analyst [4]

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Okay. And are they limestone related or do they pertain to sand or some other mineral?

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John C. Butler, NACCO Industries, Inc. - President, CEO & Director [5]

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Aggregates.

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Mitchell Lolley, Nixon Capital LLC - Equity Investment Analyst [6]

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Okay.

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John C. Butler, NACCO Industries, Inc. - President, CEO & Director [7]

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And -- a vast majority of the aggregates in Florida are limestone. But from time-to-time, these guys also produce some other products out of the material that's mined.

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Mitchell Lolley, Nixon Capital LLC - Equity Investment Analyst [8]

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I see. Would you be willing to share if they are with existing customers or entirely new ones?

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John C. Butler, NACCO Industries, Inc. - President, CEO & Director [9]

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Yes. So these are 2 new customers. And I'll just add, one of them is a 3-year contract with a customer and another one is a 20-year contract with a customer. Quite pleased to see a 20-year contract in this business.

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Mitchell Lolley, Nixon Capital LLC - Equity Investment Analyst [10]

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And J.C., just for fun, I'll ask the same question I do every quarter. You have almost $100 million of cash now sitting on the balance sheet, continues to pile up. What do you guys want to do with it?

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John C. Butler, NACCO Industries, Inc. - President, CEO & Director [11]

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Well, I will give you the same answer that I've given before, but it's worth talking about it again. As I guess is really obvious by looking at our balance sheet, we think it's important to maintain a conservative balance sheet. We run a business with a long-term perspective. We like to sign up 20- and 30- and 40-year contracts. And in order to do that, you need to be able to make long-term decisions. And people with a lot of debt get forced into making short-term decisions, and we don't think that's the place we want to be.

But where do we use the resources that we have? We support our growth initiatives. In the North American Mining business, I know you've studied it long enough to see that we, from time-to-time, buy draglines that we use to secure new contracts. That is -- actually is the case in one of these contracts that we just recently signed. We're going to continue to support growth at North American Mining. You saw that in the release that we're spending money on business development and adding people and systems and infrastructure to support the growth of that business. So money is going there.

Of course, we have to fund CapEx at any of the locations where we're responsible for CapEx. That's primarily at our consolidated coal mining operations. And we continue to pay a dividend. That's -- I think we've paid a dividend since 1956, certainly since 1961 when we were listed on The New York Stock Exchange. We've historically increased in, except in those instances where we've had a spin-off or something else has happened that causes us to reevaluate it. And we've -- when appropriate we've got share repurchase programs in place.

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Mitchell Lolley, Nixon Capital LLC - Equity Investment Analyst [12]

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All right. And lastly, just given that this is a purely public forum, are you willing to disclose how many acres you have in the Utica?

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John C. Butler, NACCO Industries, Inc. - President, CEO & Director [13]

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We have not disclosed that. I will tell you, it's something that we have talked about and we are thinking about, but we've not disclosed that.

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Operator [14]

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(Operator Instructions) There are no further questions at this time. I'll turn the call back to the presenters.

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Christina Kmetko, NACCO Industries, Inc. - IR Consultant [15]

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Great. Thank you very much for joining us today. We do appreciate the interest. And if you have any additional questions, please feel free to give me a call. My number is available on the earnings release. Thanks so much. Have a great day.

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Operator [16]

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Thank you for participating in today's NACCO Industries Second Quarter Earnings Conference Call. The call will be available for replay beginning at 11:30 a.m. Eastern today through 11:59 Eastern on August 8. The conference ID number for the replay is 7883671. The number to dial the replay is 800-585-8367.

This concludes today's conference call, and you may now disconnect.