Q4 2023 NACCO Industries Inc Earnings Call
Participants
Christina Kmetko; IR; NACCO Industries, Inc.
J.C. Butler; President, CEO; NACCO Industries, Inc.
Doug Weiss; Analyst; DSW Investment, LLC
Presentation
Operator
Good morning, ladies and gentlemen, and welcome to the NACCO Industries fourth quarter and full year 2020 earnings conference call. (Operator Instructions) This call is being recorded on Thursday, March 7, 2024, and I would now like to turn the conference over to Christina Kmetko, Investor Relations. Please go ahead.
Christina Kmetko
Thank you. Good morning, everyone, and welcome to our fourth quarter and full year 2023 earnings call. Thank you for joining us this morning. I'm Christina Kmetko, and I'm responsible for Investor Relations at NACCO. Joining me today are J.C. Butler, President and Chief Executive Officer; and Elizabeth Loveman, Senior Vice President and Controller. And yesterday we published our 2023 fourth quarter and full year results and filed our 10-K. This information is available on our website.
Today's call is also being webcast, and 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 These risks include, among others, matters that we described in our earnings release, 10-K and other SEC filings. We may not update these forward-looking statements until our next quarterly conference call.
Will 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.
With the formalities out of the way, I'll turn the call over to J.C. for some opening remarks. Jc?
J.C. Butler
Thank you, Christine. Good morning to everyone. As we put 2023 behind us. I'm pleased to be looking forward to 2024. We expected 2023 to be challenging, and it ended up being more difficult than we expected that said, challenges are what make us stronger.
And I definitely believe that we are entering 2024 in a very strong position. Our teams have delivered on our two key strategies to protect the core and grow and diversify, and we emerge from 2023 with a solid foundation for future growth. The unfavorable comparisons we experienced throughout 2023 should turn favorable in 2024 and lead to continuing improvement in the future.
Before I get into our fourth quarter highlights, I'd like to recognize our outstanding employees. I'm extremely proud of the way these talented, dedicated and motivated individuals have worked to make our operations run efficiently despite any challenges they may face. They continue to find new and exciting ways support to support our existing customers while growing and diversifying our company.
I want to thank each of them for the hard work and many contributions that they put forth to strengthen us today and to secure new opportunities for our future. I am honored each and every day to work alongside such an amazing team. The most notable item this quarter is the impairment at Mississippi Lignite Mining Company.
In mid-December, MLMC. received a force majeure notice from its customer. This notice was the result of an issue affecting one of the two boilers at the Red Hills power plant. This one unit is still not functioning and the time line for resolution is uncertain. This issue is expected to result in a significant decline in customer demand during 2024, while the power plant is running on just one unit.
Without getting into all the accounting details, I'll just say it was this anticipated reduction in demand that contributed to the Company, taking a noncash impairment charge of $65.9 million during the 2023 fourth quarter. The combination of this noncash impairment charge and substantially lower operating results at our coal mining and minerals management segments resulted in substantial consolidated operating and net losses for the fourth quarter and full year.
Christy will go into more detail about our fourth quarter earnings and provide an overview of our outlook in a minute. But first, let me talk about some of our accomplishments during the year. I'll start with the Coal Mining segment. During 2023, MLMC. successfully completed the move to a new mine area and overcame unfair favorable mining conditions to remove the last remaining coal from the prior mine area. This move to a new mine area was a multiyear project.
We've known that a move to a new mine area would be required since the mine was built back in the late 1990s. So this was no surprise there soon. A new mine area is just across the state highway from the prior mine area. So it will not change the economics of hauling the coal in a meaningful way, but we did have to get the equipment to the new mine area. You'll see a photo of the drag line walking across the state highway in our upcoming Annual Report.
As anticipated, MLMC.'s costs began to improve after the move to the new mine area which contributed to improved fourth quarter results compared to the third quarter. While this move was challenging and expensive, it sets us up nicely for the future. We expect production costs at MLMC. to decline significantly in 2024 from recent levels. These costs, however, are expected to remain above historical levels through 2024 until the boiler issue at the power plant is resolved and a pit extension in the new mine area is complete.
Shifting to Minerals Management, the Catapult mineral partners team, which oversees our Minerals Management segment successfully negotiated and closed on a $37 million acquisition in the Midlands section of the Permian Basin. This acquisition of oil and gas mineral interests is Catapult's largest acquisition to date.
The Catapult team has done a great job of growing and diversifying our portfolio of mineral interests over the last few years. Prior to 2020, our income related to oil and gas mineral interests was highly concentrated in the Appalachian Basin, largely focused on natural gas. We still have these legacy interest and profit from owning them, but we now own oil and gas interest in other major basins across the country as well.
We're also now more diversified in terms of operators and stages of development, ranging from reducing well producing wells to undeveloped mineral interest. We think this business is well positioned for the future based on work done thus far, and we continue to invest.
In 2024, Minerals Management is targeting additional investments of up to $20 million future investments as well as development of new wells on existing owned reserves. Beyond those included on our current forecast would be accretive to future results. In 2023, North American Mining made significant progress on operational and strategic projects to improve profitability. While its fourth quarter operating results were down from the prior year.
Full year, operating profit was up 52% compared with 2022. I think this improvement in results is a very positive sign that the team is making meaningful progress toward building North American mining into a very successful business platform for us. North American mining continues to grow. Our North American mining team succeeded in winning a bid for a secure contract extension with its largest customer and secured a new 15-year contract to mine phosphate phosphate building on its goal to diversify into additional minerals.
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 attack or past commenced in the 2023 first quarter with that, we began requiring equipment for the project and have acquired $23 million of equipment to date. We expect to continue to recognize moderate income prior to the commencement of Phase one lithium production.
Moving to our mitigation resources of North America business. This team continues to advance existing mitigation projects and build on the substantial foundation established over the past several years. I'm very pleased with the level of growth Mitigation Resources has achieved since first starting five years ago, and I'm very enthusiastic about their progress prospects during 2023.
This business invested in people and data analytics to make even more informed decisions about which markets to target. We anticipate that Mitigation Resources will further expand and develop its business model in 2024 with a focus on generating a modest operating profit by 2025 and G. and achieving sustainable profitability in future years.
Our team continues to look for ways to create additional value by utilizing our core mining competence competencies, including reclamation and permitting. Among the ways we are doing that is through development of utility-scale solar projects on reclaimed mining properties in 2023, we formed region resources to pursue such projects, including the potential to potential development of a solar farm on reclaimed land at Mississippi Lignite Mining Company.
I continue to be very optimistic about our outlook as we look past 2023, I have a lot of confidence in our team, and I'm pleased with the way all of these businesses continue to advance their strategies, including efforts to protect our core mining business. With that, I'll turn the call back over to Christie to cover our results for the quarter. And our outlook in more detail, interesting application.
Christina Kmetko
I'll start with some high-level comments on our consolidated fourth quarter financial results and then add detail on our individual segments. We reported a consolidated net loss of $44 million or $5.88 per share loss compared with net income of $13.8 million or $1.84 per share last year. As Jason mentioned, our fourth quarter results include a $65.9 million pretax asset impairment charge. I'd note that while the impairment relates solely to Mississippi Lignite Mining Company.
We recorded $60.9 million in the coal segment and $5.1 million at minerals management because certain land assets were included within that business, we generated consolidated adjusted EBITDA of $7.1 million compared with $23.6 million in 2022. While adjusted EBITDA excludes the impairment charge, these lower results were primarily due to significant decreases in our coal mining and mineral domain and Minerals Management earnings.
Our coal mining segment reported an operating loss of $62.3 million which includes the impairment charge of $60.8 million. This compares to a loss of $4.7 million in third quarter 2023 and operating profit of $3.7 million in Q4 2020. We generated segment adjusted EBITDA of $3.2 million this past quarter compared to $8.1 million last year.
The decrease in segment. Adjusted EBITDA was primarily due to the substantial decline in Mississippi Lignite Mining Company results, as well as a decrease in earnings in our unconsolidated operations because of lower customer requirements. Higher employee related expenses also contributed to the decline decrease in Mississippi Lignite Mining Company results was primarily the result of fewer tons delivered in part due to the issue affecting the power plants.
The decrease in tons delivered contributed to an increase in the cost per ton sold and a $900,000 write-down of coal inventory to net realizable value including the impairment. The primary reason behind the decline in minerals Management's results is significantly lower natural gas and oil prices. With this more in context, current natural gas prices as measured by the Henry Hub.
Average natural gas spot price declined 51% from 2022. And oil prices as measured by the West Texas Intermediate averaged crude oil spot price decreased 5% from the prior year. At North American Mining improved fourth quarter 2023 earnings and cited in North American Mining's active quarry were more than offset by a $500,000 loss on sale of the driveline, $400,000 of higher outside service costs compared with 2022 related to business development activities and the impact of the substantial completion of services category in 2022.
As a result, North American Mining's fourth quarter 2023 operating loss of $600,000 increased over the prior year segment adjusted EBITDA was positive and comparable to 2022 despite the higher operating loss because results at the mining operations improved when the impact of depreciation expense was excluded.
Looking forward. At our Coal Mining segment, we expect strong 2024 for operating profit compared with the significant 2023 loss and substantially higher segment adjusted EBITDA. These anticipated increases are primarily due to an improvement in results at Mississippi Lignite Mining Company and higher earnings at Falcon tail. We are expecting M&C to incur a loss in 2024, but it is expected to be significantly less than in 2023.
As Jason mentioned, we are anticipating lower production costs. However, while production costs are projected to decline significantly from recent levels they are expected to remain above historical levels through 2024 when a pit extension in the new mine area is complete. Lower depreciation and amortization expense as a result of the lower depreciable value of MLMC.'s assets after the impairment is expected to contribute to the improved results.
An extended delay and repairs to the Red Hawk power plant could significantly affect the Company's 2024 outlook and anticipated increase in 2024 for earnings at the unconsolidated coal mining operations is driven primarily by an expectation for increased customer requirements at Canton Halkirk as well as a higher profit per ton management fee at Falco beginning in June 2024, when temporary price concessions.
We expect operating profit to be higher in the second half of '24 compared with the first half due to anticipated improvements at MRMC increased demand at the unconsolidated coal mining operations and the end of the Falco price concessions in June of '24 as a result of the impact of the new and modified contracts JC mentioned, we expect North American mining to achieve consecutive quarterly growth in operating profit and segment adjusted EBITDA in 2024, leading to significantly improved full year results over '23.
Finally, in Minerals Management, we expect 2024 for operating profit and segment adjusted EBITDA decreased moderately compared with the prior year. Excluding the 2023 impairment charge, the forecasted reduction in profitability is primarily driven by current market expectations for natural gas and oil prices and modest expectations for development of additional new wells by third-party lessees.
Our operating expenses are expected to partially offset the anticipated profit decline overall at a consolidated level, we expect to generate net income in '24 versus the '23 net loss. Adjusted EBITDA is also expected to increase significantly over 2023, and these improvements are primarily due to increased profitability at the Coal Mining segment from improved results at Mississippi Lignite Mining Company poker game content growth at North American Mining is also expected to contribute to the higher '24 net income.
Lastly, from a liquidity standpoint, we ended the quarter with consolidated cash of $85 million and debt of $36 million. We had availability of $105 million under our revolving credit facility. During the fourth quarter, we repurchased approximately 66,000 shares for $2.3 million under an existing share repurchase program. In '24, we expect cash flow before financing activities to be a moderate use of cash.
We will now turn to any questions you may have.
Question and Answer Session
Operator
(Operator Instructions) Doug wise from DSW Investments.
Doug Weiss
Is it possible to say how much some sort of additional costs are per quarter for the on the work you're doing on the Karma on them. Mississippi lignite coal mine.
J.C. Butler
I'm not sure I understand the question.
Doug Weiss
So in other words, if you're sort of operating dual mines and moving the equipment and so forth, once that process is completed, how much on how much costs will just drop out of the quarters?
J.C. Butler
It was I'll give this a shot and see what you think I am so on I mean, I'm not going to give you an exact dollar amount, but I would say that our costs are going to return to where they were prior to you know us incurring these additional costs to move into the new mine area.
We'd sort of doubled up on costs and it was less efficient while we were doing this. But I think once we get established over there and obviously you're delivering for volumes, meaningful volumes when the plant's up and running, again, I think, will recur returned to historical cost levels was the Zephyr.
Christina Kmetko
I would agree. I would also say you were you mentioned we were operating at two mine areas. We've already moved over to the new mine area. We're not operating at the previous mine area.
Doug Weiss
Okay. Okay. Great. Pick up, right.
J.C. Butler
Where we're kind of Pit extensions.
Doug Weiss
Yes.
J.C. Butler
Just to clarify, the prior mine area, which we call mine area one is now in reclamation. And you know, the costs when we're in reclamation is really more of a balance sheet exercise than it is a income statement exercise because we've accumulated reserves to cover reclamation of that mine area. So as we expand costs, those really just come out of our reserve.
So at this point, the costs are really all all attributable to normal operations in the new mine area. They're just not at the efficiency levels we expect because we're delivering it. We're mining at half rate because the power plants only running on one unit and we're getting this initial pit extended length, we want it to be.
Doug Weiss
Okay. Tom, then the have you do you have any visibility on when that second boiler will come up.
J.C. Butler
You know, our our guys at the mine site are in regular communication with the power plant as typical at all of our operations and they are they are certainly discussing the time line, it's really entirely in our customers' control. But I would say I think they are we know from everything we can tell they're handling this very professionally.
And you know, I expect they're going to get this thing back up and running during the year. But I'm I'm not going to put any dates out there. I think it's really up to our customer to decide if they're going to talk about that publicly. But it's it's expected to be during during the course of 2024.
Doug Weiss
Okay. Okay. And in the coal division, the SG&A expense, does that should I think about that being applied to all your coal operations or just the consolidated full operations? In other words to the unconsolidated already include SG&A, that's that's US income statement or is it is does it all flow into your income statement?
J.C. Butler
It's kind of a combination of the two with respect to the unconsolidated mines, which you know is really a majority of the of the Coal Mining segment. We the way the contracts work is we do receive some compensation in our fees and to cover some overhead costs that we incur. You can't really see that split out because it's all just a part of the fee. But the fees that we receive are some of those are targeted directly towards SG&A costs that we incur in that segment.
And so there's no internally we can see that there's a netting and you know that that covers a lot of those expenses. But externally, you can't really see that now some of the some of the coal segment SG&A is related to our consolidated operations at Red Hills as well.
So I'd really say you kind of have to just spread it across that. I think I think of the cold segment as a unit think of as a business and those SG&A costs now are all attributable to that segment. However, some of those are by contract. We're doing the work like we're providing IT platforms and H. in HR and benefits BakBone and we're getting a G&A fee to cover that.
Doug Weiss
Okay. Okay. Makes sense. And just in terms of what the other boiler is offline is how do you think about the volume in those quarters? Or is it because it looked like they're already operating sub capacity? So is it actually a 50% reduction or is it less than that because they were already not at full capacity?
J.C. Butler
Well, I mean, it's the two the two units are similar and so they're the same size, right? It's a 50/50 kind of proposition, um, you know, I think, well, I know that the plant is operating at 50% of the level that it would probably be operating if both both boilers were operating.
Doug Weiss
Okay. Okay.
J.C. Butler
No, because if the plant's going to be dispatched, they're going to probably dispatch it fully. And if it's not going to be special dispatch, it's not. So I think it's kind of I think it's for the most part, a 50 50 proposition.
Doug Weiss
Okay. Okay. Got it. So congratulations on that. On the new phosphate contract. Is it possible to give some sense of how large that could be.
J.C. Butler
As you know, it is not the major contract, but I think it's a very important step in our growth of that business free for years. We mined Lime Rock in Florida using draglines underwater or draglines. Digging lime rock that's underwater. It's dragging on, of course, was above the surface from the app so, you know, we've expanded into lithium. I think that's a very exciting development for us.
We've expanded outside of Florida where mining other minerals were doing sand and gravel and other things we've, for a long time had had our sights on trying to get into phosphate mining. And we discovered an opportunity that really was several years in the making that we think gives us a nice nice entry into mining yet.
Another another Minera Florida is a huge, a contributor to global phosphate production. So I think this this new contract is a pretty exciting one for us. It is a dry, it's a dragline operation, but of course, it's dry and we're very, very pleased to start up, get that started up sometime this year.
Doug Weiss
Okay, great. And how much of the CapEx that you've given in your disclosures is on for Dr. pass this year?
J.C. Butler
And I don't know that was.
Christina Kmetko
We did not call out specifically the backup path, but we did last year for 2023 when it was material. So I think you can deduce from that that it's not a material amount this year.
Doug Weiss
Okay. And I do not know.
J.C. Butler
Sorry, I was just on your CapEx question. I would just add that there is a part of the CapEx I'm not going to say how much, but there is a part of our 2024 CapEx that is CapEx from 2023 that wasn't spent. We're always looking for ways that we can defer capital spending.
It's I know it's always a smart thing to do. If you can figure out how to either spend less capital or spend it later from a present value standpoint makes good sense. So there's a piece of our 2024 CapEx. That's a carryover from 2023.
Doug Weiss
Okay. Got it. Untied capacity. My sense is that's the kind of new scope of work for you. If you think how do you kind of add the operational capabilities you need to do that? How different is it from the work you're doing the dragline work you're doing? And are there operational risks there that you're sort of planning for?
J.C. Butler
I mean, there is it's really very, very, very similar to the work that we do in our coal mining operations, we're going to run a full fleet of equipment. It's more similar to our coal mining operations. It is the Lime Rock business where we are really operating very specific pieces of equipment in kind of a specialized sort of thing at the packer Pass project.
We're going to we're doing all the work related to mining it is very, very, very similar, almost identical to the work that we do. There's virtually no operating risk for us. We're operating the same types of equipment we use. It's a very similar contract structure. We apply the same disciplines that we do. You know, what are our other operations. So we don't really see any operational risk in this operational and another reason why it's so exciting.
Doug Weiss
Right. And then I know you're reimbursed for the capital equipment. Do you keep that equipment after the project is complete?
J.C. Butler
We do.
Doug Weiss
Okay. Then just a really quick bookkeeping question here. The EBITDA you report in your headline results of around seven plus million is slightly different than on your sub table where you break out EBITDA and it's sort of six plus million is could you say that what I'm what the plug is between those two numbers and I can follow to if it's not an easy one to add .
Christina Kmetko
We're looking. I think the [6.4] is segment adjusted EBITDA, is that the number you are referring to and that you have? And the [7.1] is on page 10 of the release that's consolidated adjusted EBITDA. So we have two different EBITDA metrics. One is segment adjusted in our segment adjusted operating profit, whereas the consolidated adjusted is more of that traditional EBITDA.
Doug Weiss
Okay.
Christina Kmetko
(technical difficulty) 7.1 is on page 10 of the release.
Doug Weiss
So. Okay. And just last question, there's no one you get any insurance recovery related to the force majeure.
J.C. Butler
And it's the Red Hills mine, Mississippi Leon income yet. So that's that's to be determined. I mean, we obviously cover business interruption insurance and we have a team of people that are that are working on that. I don't we're certainly not at the point we want to disclose what we think we're going to receive with respect to recoveries. But I will tell you that we've got a we have a team of people that are very focused on that right now.
Doug Weiss
Okay, great. Well, thank you for all the answers.
J.C. Butler
And like you said, Doug, I really appreciate the questions and your interest in the Company. Thanks. Thanks for calling.
Doug Weiss
Have a good day.
Operator
Thank you. And once again, if you would like to ask a question, simply press star followed by the number one on your telephone keypad.
Christina Kmetko
Yes, I don't think we're going to have any more questions. So thank you everybody for dialing in that I close with just a few reminders. A replay of our call will be available online later this morning. Also post a transcript on our website when it becomes available.
If you have any questions, please reach out to me. You can reach me at the phone number on the press release and I hope you enjoy the rest of your day. And now I'll turn it back to ready to conclude the call.
Operator
Thank you, Christie. And ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.
