NACCO Industries, Inc. (NYSE:NC) Q3 2023 Earnings Call Transcript

NACCO Industries, Inc. (NYSE:NC) Q3 2023 Earnings Call Transcript November 4, 2023

Operator: Thank you for standing by. My name is Deb, and I will be your conference operator today. At this time, I would like to welcome everyone to the NACCO Industries Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. Thank you. I would now like to turn the call over to Christina Kmetko. Please go ahead.

Christina Kmetko: Thank you. Good morning, everyone, and welcome to our 2023 third quarter earnings call. Thank you for joining us this morning. I'm Christina Kmetko, and I'm responsible for Investor Relations at NACCO Industries. Joining me today are J.C. Butler, President and Chief Executive Officer; and Elizabeth Loveman, Senior Vice President and Controller. Yesterday, we published our third quarter 2023 results and filed our 10-Q. This information is available on our website. Today's call is being webcast. The webcast will be on our website later this afternoon and available for approximately 12 months. Our remarks that follow, including answers to your questions, contain forward-looking statements. These statements are subject to several risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements made here today.

A mine entrance, showcasing the precious metals and minerals that this company produces.

These risks include, among others, matters that we've described in our earnings release, 10-Q and other SEC filings. We may not update these forward-looking statements until our next quarterly earnings conference call. We'll also be discussing non-GAAP information that we believe is useful in evaluating the company's operating performance. Reconciliations for these non-GAAP measures can be found in our earnings release and on our website. I'd also like to note that during today's remarks, we'll provide information about the remainder of 2023 as well as a high-level view of our 2024 expectations. We ask that you remember that the 2024 information is preliminary. We are still in the process of reviewing our annual operating plan. We will provide more definitive 2024 information as part of our fourth quarter 2023 earnings release.

With the formalities out of the way, I'll turn the call over to J.C. for some opening remarks. J.C.?

J.C. Butler: Thank you, Christy, and good morning, everyone. Our third quarter 2023 results were much lower than last year, but that was as expected and in line with the outlook we provided last quarter. To understand our results, it's best to discuss the quarter business-by-business. I'll also talk about our future expectations before turning the call back over to Christy. I'll first address the Coal Mining segment. Last quarter, I talked about the temporary operational inefficiencies of Mississippi Lignite Mining Company related to transitioning to a new mine area and contending with some short-term adverse mining conditions caused by increased rainfall, both of which reduced our production and increased our costs. This situation continued into the third quarter and for the same reasons.

We do expect production costs at MLMC to decline significantly in 2024 from recent levels. However, production costs are expected to remain above historical levels through 2024 when a pit extension in the new mine area is complete. To provide some background, we moved to this new mine area because the coal reserves were largely depleted in Mine Area 1, where we've been mining since the late 1990s. We had to open a new mine area with additional reserves to meet our contractual coal delivery requirements, which run to 2032. This was not a surprise. We've known that we'd need to move to a new mine area since we started mining over 20 years ago. The move to a new mine area and the related costs are now behind us. We expect to see modest improvement in the fourth quarter, with results improving further in 2024.

However, the biggest favorable impact will occur in 2025 in future years as operations in this new mine area normalize. You'll recall that we've invested significant capital to develop this mine area. These capital investments have resulted in increased depreciation expense that will continue over the remainder of the contract term. The added depreciation will affect reported operating profit, but this depreciation is excluded from EBITDA, which we think is a better way to look at this part of our business because we don't expect Mississippi Lignite Mining Company to open additional mine areas through the remaining contract term. Shifting to Minerals Management, natural gas and oil prices are significantly lower than the very high prices experienced in 2022.

These lower prices have led to a significant decrease in Minerals Management's third quarter 2023 results compared with the prior year. Natural gas and oil prices are expected to continue to remain below 2022 levels, resulting in a significant decrease in operating profit in the fourth quarter of 2023 compared with 2022. The team at Catapult Mineral Partners is finalizing a $37 million acquisition anticipated to close during the fourth quarter that will provide additional diversification into the oil-rich Permian basin. In 2024, Minerals Management is targeting additional investments of up to $20 million. These investments as well as the development of new wells on existing owned reserves beyond those included in our forecast would be accretive to future results.

Our North American Mining segment generated a moderate operating profit again this quarter compared with a small loss in the prior third year quarter. The aggregates mining part of this segment struggled during 2022, but the challenges we implemented -- but the change -- sorry, the changes we implemented to drive improved future financial results are paying off, and that's encouraging. I'm optimistic North American Mining can build upon this momentum and continue to show improvements in profitability in the future. A decrease in Caddo Creek reclamation income is partly offsetting the improvements in results at North American Mining's aggregates operations. We are no longer recognizing reclamation income at Caddo Creek since we purchased the membership interest in the Marshall Mine in March 2023 where Caddo Creek had been performing mine reclamation work.

Wrapping up my North American mining comments, let me mention Sawtooth Mining, which is the exclusive contract miner for Lithium Americas Thacker Pass Lithium project in Northern Nevada. Construction at Thacker Pass commenced in the first quarter. With that, we began acquiring equipment for the project. We've acquired $23.1 million of equipment to-date. We expect to continue to recognize moderate income through 2025 with higher levels of income anticipated when our customer commences Phase 1 lithium production, which is currently expected to begin in the second half of 2026. Moving to mitigation resources of North America. This team continues to advance existing mitigation projects and build on the substantial foundation and has established over the past several years.

I'm pleased to report that I added an additional mitigation bank during the third quarter. Mitigation resources is still in what I refer to as the startup phase, but I'm very pleased with the level of growth they've achieved since starting five years ago. And I'm even more excited about their prospects. They continue to look for additional projects and expect to achieve near breakeven earnings in 2024 with increasing profitability over the longer term. I said this last quarter and I'll say it again, we expected 2023 to be a year of unfavorable comparisons for a few very specific temporary reasons and the year has played out as we expected. Despite this, I'm still very optimistic about our outlook as we look beyond 2023. I have a lot of confidence in our team, and I'm pleased with the way all of these businesses continued to advance their strategies, including efforts to protect our Coal Mining business.

With that, I'll turn the call back over to Christy to cover our results for the quarter and our outlook in more detail. Christy?

Christina Kmetko: Thank you, J.C. I'll start with some high-level comments on our consolidated third quarter financial results and then add more color on our individual segments. We reported a consolidated net loss of $3.8 million or $0.51 per share loss compared with net income of $10.6 million or $1.45 per share last year. We generated modest EBITDA of approximately $400,000 compared with approximately $22.1 million in 2022. These lower results were primarily due to significant decreases in our Coal Mining and Minerals Management earnings. Looking at the individual segments, our Coal Mining segment had lower results compared with third quarter 2022, reporting an operating loss of $4.7 million and a negative segment adjusted EBITDA of $400,000.

These decreases were primarily due to the substantial decline in Mississippi Lignite Mining Company results as well as lower earnings at our unconsolidated operations due to lower customer requirements at Coteau. Lower employee-related costs partly offset these reduced results. The decrease in Mississippi Lignite Mining Company results was driven by a significant increase in the cost per ton sold due to the inefficiencies and additional costs associated with moving to the mine area -- to the new mine area that J.C. mentioned. A $2.4 million write-down of on-site coal inventory to net realizable value also contributed to the significant increase in the cost per ton. Also, as J.C. discussed, the primary reason behind the decline in Minerals Management's results is significantly lower prices.

To put this more in context, current natural gas prices, as measured by the Henry Hub average natural gas spot price, declined 68% from 2022. And oil prices, as measured by the West Texas intermediate average crude oil spot price, decreased 12% from last year. North American Mining's third quarter 2023 operating profit and segment adjusted EBITDA improved significantly over the prior year. This improvement was primarily due to lower employee-related costs. As in 2022, operating expenses included $800,000 for a voluntary retirement program. North American Mining also realized improved earnings at its aggregates, quarries and at Sawtooth. These improved earnings were partly offset by reduced Caddo Creek income. Looking forward, at our Coal Mining segment, we expect fourth quarter 2023 operating results and segment adjusted EBITDA to improve significantly compared with the 2023 third quarter, but declined substantially from the 2022 fourth quarter.

As J.C. mentioned, we are anticipating lower production costs at Mississippi Lignite Mining Company. However, while production costs are expected to decline from recent levels, they are expected to remain above historical levels through 2024 when the new pit extension in the new mine area is complete. We are also anticipating an increase in tons severed, which will contribute to a reduction in the cost per ton sold and improved profitability at MLMC beginning with the fourth quarter and continuing into 2024. In 2024, we expect coal deliveries to increase moderately from 2023. Strong operating profit and significantly higher segment adjusted EBITDA are also anticipated in 2024 compared with 2023. These increases are primarily the result of significant improvements at MLMC and an increase in earnings of unconsolidated operations.

The improvement in the unconsolidated operations is expected to be driven by increased customer requirements at Coteau and Falkirk as well as a higher per ton management fee at Falkirk beginning in June 2024. At North American Mining, we expect operating profit and segment adjusted EBITDA to increase significantly in both the 2023 fourth quarter and full-year versus the prior year periods. These increases are primarily due to anticipated earnings improvements under existing contracts, including Sawtooth Mining, partially offset by the completion of services at Caddo Creek. Full-year 2024 operating profit and segment adjusted EBITDA are anticipated to increase significantly over last year -- or over -- I'm sorry, 2023 due to improved earnings under certain existing contracts, including Sawtooth Mining and an anticipated reduction in operating expenses.

Any new contracts should be accretive to North American Mining's future results. Finally, at Minerals Management, operating profit and segment adjusted EBITDA for the 2023 fourth quarter and full-year are expected to continue to decrease significantly compared with last year. These decreases are primarily driven by current natural gas and oil price market expectation. In 2024, we expect operating profit and segment adjusted EBITDA to increase moderately over 2023, primarily due to current market expectations and limited forecasted development of additional new wells by third-party lessees. Lower operating expenses are also anticipated to contribute to the profit growth. Future investments, including the $37 million investment anticipated to close before the end of 2023, are expected to be accretive to the current forecast.

Overall, at a consolidated level, we expect that fourth quarter 2023 improvements will produce operating profit and net income versus the losses incurred this quarter. Fourth quarter and full-year 2023 consolidated operating results and adjusted EBITDA, however, are expected to be down from the respective prior year periods due to the expected substantial decreases at the Coal Mining and Minerals Management segments. We expect these reductions to be partially offset by favorable changes in income taxes, leading to modest income for the 2023 full-year. In 2024, we expect a significant increase in consolidated net income and EBITDA over this year. These improvements are primarily due to increased profitability at the Coal Mining segment from improved results at MLMC, Falkirk and Coteau.

Growth at North American Mining and mitigation resources is also expected to contribute to the higher 2024 net income. Lastly, from a liquidity standpoint, we ended the quarter with consolidated cash of $128 million and debt of $22.5 million. We had availability of $122 million under our revolving credit facility. During the quarter, we repurchased approximately 24,800 shares for $800,000 under an existing share repurchase program. For the full-year, we expect cash flow before financing activities to be a moderate use of cash. But in 2024, we expect cash flow before financing activities to be positive, just not to the level generated in 2022. We will now turn to any questions you may have.

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