Q3 2019 Earnings Call

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After the speaker's remarks, there will be a question and answer session. If he would like to ask a question. During this time simply press Star then the number one on your telephone keypad. If he would like to withdraw your question press. The pound key. Thank you Ms. Christina Kmetko you may begin your conference.

Thank you.

Good morning, everyone and welcome to our 2019 third quarter earnings call I'm, Christina Kmetko I'm responsible for Investor Relations. It go industry I'll be providing a brief overview of our quarterly results and business outlook and then I will open up the coffee your question.

Joining me today are JC Butler, President and Chief Executive Officer, both go in North American coal and Elizabeth Loveman, Naccos, Vice President controller.

Yesterday, we published our third quarter 2000 nature results and thought our 10-Q copies of our earnings release. Okay. Thank you 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 An archived version of this webcast will be on our website.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.

Again, I would like to remind participants of this conference call may contain certain forward looking statements. These statements are subject to a number of risks and uncertainties.

Could cause actual results to differ materially from those expressed on a forward looking statements made here today and either our prepared remarks during the following question 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.

For information regarding these risks and uncertainties with set forth in our earnings release and in our 10-Q now let me discuss our 2019 third quarter I will cover our consolidated results first and then provide highlights for each segment.

On a consolidated basis, although revenues increased to 32.6 million from $31.4 million in the prior year third quarter, our third quarter 2019, operating profit decreased $8.7 million from $10.5 million a year ago. Despite the decrease in operating profit consolidated net income increased.

$10.3 million or $1.47 per share.

$9.2 million or Dollarsthirty three per share last year.

The improvement in net income was mainly due to the receipt of a 2.7 million dollar pre tax payment associated with the prior India venture.

This payment was reported on the income statement below operating profit within our and within other income for the year to date period, our effective income tax rate was 14.1 person compared with 12.7% in 2018.

Reduced operating profit of both our coal mining North American mining segments contributed to the operating profit decline.

This decline was partly offset by higher earnings at our minerals management segment.

Lessees operated more wells on a on Ohio mineral reserves, resulting in an increase in the amount of royalty income received.

And our coal mining segment. The operating profit decrease is mainly due to a reduction in the earnings from unconsolidated operations and higher employee related costs, including an increase of $700000 to the estimated non cash equity component of incentive compensation, which was driven by the significant increase in our stock price during the third quarter.

The decrease in the unconsolidated operations earnings was primarily because of fewer Colton delivered as a result of customer plant outages.

I don't North American mining segment, we reported an operating loss this quarter compared with modest operating profit in last year's third quarter. The third quarter loss was primarily driven by higher employee related business development costs.

Those are the significant factors affecting the third quarter results.

Let me turn into our outlook.

I will provide some insight on our expectations for the fourth quarter and for your 2019 as well as provide a high level overview of our current expectations for 2020.

While we are providing this first look at 2020 more color on 2020 will be provided as part of the fourth quarter and full year 2018 earnings away as we are still file finalizing our 2020 annual operating plan.

At coal mining segment, we expect overall colibri decrease in the fourth quarter and for the 2019 full year from prior year period.

This decrease is the result of anticipated changes in customer requirements.

Moving the timing and duration of power plant outages as all comparisons at historically high delivered levels experienced last year at certain of the unconsolidated operations.

As mentioned in previous quarters in the fourth quarter of 2018, we received a 3 million dollar contractual sediment and recognize $1.8 million in favorable adjustments to mine reclamation liability.

Excluding these favorable prior year items, we expect fourth quarter 2019 operating profit increased modestly because of a reduction in operating expenses and improve results at our consolidated operations.

However, lower income at the on consolidated coal mining operations, resulting from the reduction in tons delivered is expected to partially offset these improvements.

For the 2019 full year and excluding the favorable 2018 items operating profit at the coal mining segment is expected to decrease as anticipated lower income at the unconsolidated operations from reduced customer requirements and higher operating expenses are expected to be only partially offset by improved results.

At the consolidated operations.

Looking into 2020 weeks that coal deliveries to increase compared with 2019, primarily the on consolidated operations because of unexpected increasing customer requirements.

Our customers are forecasting a reduction in plan power plant outage days in 2020.

We expect 2020 coal mining operating profit increased substantially over 2018 predominately in the first half of the year.

Anticipated increases mainly because of an expected significant increase in income at the consolidated operations in the first half of the or an improved earnings at the unconsolidated coal mining operations throughout 2020.

To provide more clarity, we have disclosed capital expenditures by segment and the coal mining segment, we expect capital expenditures to be $7.4 million in the fourth quarter and $13.9 million for the full year.

In 2020, we expect capital expenditures to be approximately $30 million.

Elevated levels of capital expenditures are expected through 2021, primarily as a result of spending at Mississippi Lignite mining company associated with the development of a new mine area.

And our North American mining segment, we expect operating profit in the 2019 fourth quarter be significantly lower than the prior year quarter, primarily due to the absence of a $600000 gain on sale of assets recognized in the 2018 fourth quarter.

Well down from the prior year fourth quarter operating profit is expected to improve over the results in each of the first three quarters.

2019.

That said, we expect North American mining full year results to decrease compared with last year as the improved fourth quarter results will not offset the cumulative losses incurred in the first nine months of this year.

We expect 2024 your operating results in North American mining to improve significantly over this year as results are expected to benefit from earnings associated with new limestone money contracts.

With regard to business development, we're pleased to report that North American mining through a new subsidiaries thought to finance entered into an agreement to service the exclusive contract miner for the Sacher path lithium project in northern Nevada.

That could pass which is 100% owned by lithium Nevada Corp.

Is believed to be the largest known lithium deposit in the United States.

Sawtooth will design construct operate and maintain the cracker past surface mine, which will supply lithium nevada's lithium bearing claims done or requirements. The mining agreement provides lithium Nevada will reimburse thought too for operating mine reclamation costs and pay Saatchi the management fee per metric ton of lithium delivered during a 29.

Uh huh.

In Nevada estimate said it will secure all major permits by the end of 2020 Cummins plant construction 2021 and commenced production of lithium products in 2023 more teed up more details are available in our earnings release, but at this time, we are limited and the information we can provide as this project is still in its early stages.

We expect capital expenditure that North American mining be 6.79 in the fourth quarter and approximately 13 million for the full year.

In 2020, we expect capital expenditures of $10 million.

These expenditures are primarily for the acquisition relocation and refurbishment of dragline.

I'm going off management segment operating profit increased significantly during the first nine months of the or in the fourth quarter and then the full year, we expect operating profit decreased from the prior year period.

The 2020 decrease is expected to occur primarily in the first half of the year. That's comparisons are made historically high earnings levels in the first half of 2019.

These decreases are based on natural gas price expectations and the natural production decline that occurs during the life of a well new wells have high initial production rates and follow a natural decline before settling into a relatively stable long term production.

Claim rates can vary due to factors like wild up well link formation pressure on facility design.

Also as we mentioned in the earnings away. It is important to note. These expectations for royalty income are dependent on a number of factors outside of our control.

To summarize overall, we expect both consolidated operating profit and consolidated net income in the fourth quarter to decrease significantly compared with the prior year, mainly because of the favorable prior year items I've already discussed excluding these favorable items operating profit is expected to decrease.

However, despite this decrease net income is expected to increase primarily due to anticipated lower effective income tax rate in the 2019 fourth quarter compared with last year.

As it was all the song favorable results in the first nine months of 2018, we expect the full year consolidated net income to increase significantly compared with last year.

We're also forecasting and effective income tax rate, excluding discrete items of approximately 15%.

Finally, we expect 2020 consolidated net income decreased moderately compared with this year, primarily in the first half of 2020.

Full year effective income tax rate for 2020 is expected to be between 10% and 12% excluding discrete items.

Before I open up the call for questions. Let me quickly provide some balance sheet and cash flow information.

We ended the third quarter was consolidated cash on hand up $115.1 million and debt of 7.7 million with regard to cash flow. We expect our fourth quarter 2019, consolidated cash flow before financing activities to be substantially lower than in the prior year quarter. However, despite the fourth quarter decline we expect full.

Your 2019 cash flow before financing activity to increase over 2018.

In 2020, we expect cash flow before financing activities to result in a modest use of cash as result of anticipated increase capital expenditures and payment of deferred compensation another payroll liabilities.

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

At this time, if he would like to ask your question. Please press Star then the number one on your telephone keypad against that is stored than the number one we will pause for just a moment to come home acuity roster.

And your first question comes from the line of and true cool with focus compound Inc.

Hey, guys. Thanks for taking my call.

HM money, yes, so 2020 is going to be a year of higher than normal capex. So I'm curious what does the normal capex year look like looking past. The next two years of higher Capex would you expect most years from 2022 on to be the same dollar amount of Capex would you say.

25% less capex, 50% less capex I'm kind of curious for some clarity on that.

[laughter] show this is truly what were the and thanks for your question. So products. You know is driven really by what's going on at our consolidated coal mining operations and North American mining.

At least as it always where there's we're organized today.

[noise] any capex it happens our unconsolidated mines doesn't show up our Capex one because its funded by the customers. So when you when you think of those groups.

What's driving higher cap ex right now is moving into a new wide area.

Im LMC norm or main consolidated money the operation.

That's going to go on I think we say in there for a couple of years started in 19, it's going on in 20 and 21 and then it's going to drop back to levels that are more consistent at least to get that operation with what we've seen in prior years now I've got to caution you that you know the equipment that you use it a mine site.

Big stuff and it.

Oh periodically has to be replaced so you couldn't go along.

Quote on quote normal level, and then come up on a year when it's time to replace a couple haul trucks that can cost you know eight $910 million to replace that equipment.

So I don't know that you can really say, what's a normal level because I would consider when the church Richie answer their life. When it's time to replace them. That's normal although it is going to caution bumpiness from the cash flows.

North American mining I'd say, given the growth trajectory that business, it's a little harder to predict we do from time to time acquire a drag lines that we put into inventory we may in the future acquire other pieces of equipment, we would put into inventory that we can use with new projects.

We do that show the went away.

From a broader potential customer or even an existing customer who could benefit by having.

Different equipment in their Corey that we could kill operate for them. It allows us to more quickly get in and and provide them with a solution.

And you know the really to future Capex you in that business is going to be dependent on what happens with our growth.

So if you want to go out as far as 24.

2024 2025.

You know I can't tell you with confidence what that business is going to look like at that point I hope, it's gonna be quite a bit bigger than it is now.

So the capex requirements could be higher I'm, sorry, I don't know that I can really predict where it's going to be at that point.

Yes, the other one other point I'd point out North American mining aside from the.

Aggregates business is you know, we announced our lithium new lithium contract.

We as part of that arrangement, we are obligated to fund.

The first fleet of equipment will be used at the mine and that's up to $50 million, so that'll be coming up.

20, 320, 422, just depends on the timing of that project.

Got it thanks for for for answering the question and then if I could ask a couple more in last year's proxy statement.

Some bonus payments were tied to Mississippi lignite mining adjusted return on tangible capital employed.

And you say you don't disclose at my one sees return on tangible capital employed because the number is competitively sensitive so without disclosing the actual number can you explain why I'm all Mcs adjusted return on tangible capital employed is important for shareholders and why you use it as the performance metric for management.

Well I mean, the reason it to them I mean returns.

Total capital employed is essentially the money that we make off of the business measured on sort of a cash flow basis.

Compared to the capital that we have employed.

It was managers of the business.

You know, we invest money at more expected to earn an acceptable return.

On the capital it's important.

Good return on total capital deployed has been used for gosh.

I mean I've been around for 25 years, and it's been almost 25 years and it's been in use in one way shape or form and in our incentive plans.

As long as I remember its a pretty standard measurement of are you.

Being good responsible stewards of the capital.

We have put to use it also provides you know.

A lot of people at the company.

That are that are.

You know participants in the incentive comp programs to focus on that.

Its mining as a capital intensive business and so having the you know the people that are making decisions about the capital investments that will be made it at M. LMC.

Having think about.

How do you defer capital how do we minimize capital how do we think about ways to you know do mine development with less cost. It gets capitalized all those are good things because its reducing the amount of shareholder.

Capital, but we've got imported and then the trick is how do we maximized <unk> returns that come from that.

So to answer your question.

No that that does that's my question and then if I could answer or ask one more since the value of lithium per ton as many multiples of the value of lignite per tonne. What are your management fee per ton at their capacity many multiples of the management fee per Todd.

Now charge at your lignite mine.

So a few.

If you study kind of how we talk about ourselves at our annual report letter and or web site. We are really a service business, we provide mining as a service.

For people right, but I don't mean that like.

You know.

We're playing engine manufacturers upright engines as a service I mean, we we do this business as a service we get paid a fee for the providing the expertise to come run of mine for somebody.

So the value of the product that's produced.

I don't think really has a big influence over the services that were providing.

The service that we're going to provide to lithium Americas at the fact that back or past project is very similar to the services that we provided one of our coal mines, where we're managing the whole mine from permitting to you know initial pre strip do all the mining to all the reclamation.

Take care of all of that so it's a ship. It's a service it's very very similar to what we're doing the mining up instead of coal mining operation English and the fees will be calculated in a similar what.

Got it thanks, a lot for answering my questions.

Thank you.

And again to ask a question.

To start the number one on your telephone keypad.

Again that is stronger than the number one.

And there no further questions at this time I would now turn the call back over to the speakers for any closing remarks.

Thank you again for joining us today, we do appreciate your interest if you do have any follow up questions. Please reach out to me my number is available on the earnings release. Thanks, So much and have a wonderful day.

Thank you for participating in todays Nico industries third quarter earnings Conference call. This call will be available for replay beginning at 11 30 M. Eastern today through 11 59 P.M. Eastern on November 7th 2019, The conference I'd number for the replay is three eight for nine three.

Zero seven.

Again, the I conference I'd number for the replay is 384.

Nine 307, the number to die for the replay is one 805 858367 again that is one 800.

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This does concludes today's conference you may now disconnect.