Q4 2019 Earnings Call

[music], ladies and gentlemen, thank you for standing by and welcome to the Nacco Industries Q4, and full year 2018 earnings conference call.

At this time all participants are in listen only mode. After the speakers presentation. There will be a question and answer session to ask a question. During this session you'll need to press star one I know telephone. Please be advised today's conference is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to.

I see the Kmetko Investor Relations. Please go ahead.

Thank you very much good morning, everyone and welcome to our 2019 fourth quarter full year earnings call I'm, Christina Kmetko and I'm responsible for Investor Relations at Nacco industries I'll 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, both Nacco, and North American coal and Elizabeth Loveman, Naccos, Vice President controller.

Yesterday, we published our fourth quarter and full year 2019 results and filed our 10-K copies of our earnings release of 10-K are available on our website 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 An archived version of this webcast will be on our website.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 at 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 are doing 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 certainties.

Fourth in our earnings release, and then our 10-K.

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

On a consolidated basis, well our full year 2019, net income solidly increased rising to 39.6 million from 34.8 million last year, a quarter did not fair as well.

Fourth quarter consolidated net income decreased to $6.4 million or 91 cents per share from $11 million or $1.57 cents per share last year.

There are a number of contributing factors to this decline would your best explained by segment.

In our coal mining segment operating profit decreased substantially from the prior year fourth quarter, primarily driven by Centennial natural resources in Mississippi Lignite mining company at Centennial Natural resources, we recorded a $2 million unfavorable adjustment to mine reclamation liabilities in the 2019 fourth quarter, whereas last.

Yeah, we recorded a favorable 1.8 million dollar adjustment.

And Mississippi Lignite mining company, there were fewer deliveries in the fourth quarter of 2019 and in 2018 because of a decrease in the number of days the customers power plant with dispatched also the prior year fourth quarter results included favorable 3 million dollar contractual settlement that did not reoccur in 2019.

These items as well the decrease in earnings at on consolidated operations, because the fewer tons delivered.

The significant decrease in the coal segment in the coal segment operating profit.

As discussed in our release, the minerals management segment and to a lesser extent the North America mining segment also had reduced operating profit.

A tax benefit on the quarter earnings partly offset the reduce the reduced fourth quarter operating profit the taxes are better understood on a full year basis.

Our effective income tax rate for the 2019 full year was 8.7 per cent compared with 17.5% in 2018.

In 2019 effective income tax rate included a 2.5 million dollar tax benefit which resulted primarily from changes in prior your estimates and the settlement of certain tax items from ongoing examination.

The 2018 effective income tax rate included $1.2 million of tax expense from the recording of an additional valuation allowance. If you exclude these items our effective income tax rate would've been approximately 14.5% for 2018 and 14.7% last year.

Those are the significant factors affecting the fourth quarter results now, let me turn to our outlook.

At the coal mining segment, we expect overall deliveries to increase modestly over 2019 at both the consolidated and unconsolidated operations because of it anticipated increase on customer requirements. Our customers are forecasting a reduction in plant power plant outage days and an increase in the debt number of days dispatched.

This coming year.

That 2020 coal mining operating profit increase over 2019. This anticipated increase is primarily the result of unexpected increase in gross profit and Mississippi lignite mining company and the absence of the 2 million dollar unfavorable adjustment to mine reclamation liabilities that was taken in the fourth quarter of 2019.

We also expect modest improvement in earnings that are on consolidated coal mining operations. These improvements are anticipated to be partly offset by an increase in operating expenses from interest paid as higher professional fees and I T expenses.

And the coal mining segment capital expenditures are expected to be approximately $24 million into in 2020, we expect elevated levels of capital expenditures through 2021, primarily because of spending at Mississippi lignite mining company associated with the development of a new mine area I.

At our North American mining segment, we anticipate limestone deliveries to increased and full year operating results to improve significantly over 2019 as results are expected to benefit from earnings associated with new limestone mining contracts.

We expect the improvement in operating profit to be partly offset by an increase in operating expenses because of higher employee related costs associated with the new mining operations.

We expect capital expenditures in North American mining to be $9 million and 2020. These expenditures are primarily for the acquisition relocation and refurbishment of dragline.

Our minerals management experienced a significant increase in royalty income in 2019, compared with 28 team primarily because of a significant increase in the number of gas wells operated by third parties to extract natural gas from Ohio, Oh, Hi, O Utica shale mineral reserves.

Because new well have high initial production rates fall and natural decline before settling into relatively stable long term production. We expect royalty income in 2020 to decrease and be substantially lower than the 2019 level.

This decrease is anticipated to occur primarily in the first half of the year, particularly in the first quarter as comparisons are made to historically high revenue levels on the first half of 2019 associated with increased production levels in the early stages of production from new wells.

The reduction in royalty income is based on natural gas price expectations fewer expected new wells and the natural production decline that occurred early in the likable.

Decline rates can vary due to factors like wild up well links formation pressure on facility design also as we mentioned in the earnings release. It is important to note. These exit these expectations for royalty income are dependent on a number of factors outside of our control.

To summarize overall, we anticipate 2020 consolidated net income decreased compared with 2019 predominately in the first half of the year.

It is mainly because of the anticipated production in minerals management operating profit as well as the absence of $2.7 million pre tax that was received in 2019 associated with the prior India venture.

And the absence of the previously mentioned two and a half million dollar tax benefit recognized this quarter.

2024, your effective income tax rate is expected to be between 10% and 12%.

Based on the estimated mix of earnings and it excluding discrete items.

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

We ended the year with consolidated cash on hand of $122.9 million and debt of 24.9 million.

With regard to cash flow, we anticipate cash flow before financing activities and 2022 decreased significantly from 2019 as a result of expected increased 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.

Ladies and gentlemen, Tosca question. Please press Star then the number one on your telephone keypad to withdraw your question press the pound Keith. Your first question comes from Andrew I come with the focus compounding your line is open.

[laughter], Hey, How's it going thanks for taking my question.

Gordon So morning, So north American mining has grown a lot in terms of by the news.

But not yet reportable fields and it's been a lot on capex. So internally I'm, assuming you can make decisions and stuff like business development studying BARDA do drag line et cetera, based on what kind of customer retention rates. You think this kind of work will help.

They used to like of dragline stuff like that but I, just hurley shareholders, obviously can't see that kind of information. So I was wondering if you could talk about whether you look at things like internally to return where do you expect it eventually return capital you think North American mining didn't have and if so what are the key factors for you decide to get that apart.

Capital at a margin creates value overtime.

Great Great question.

So the yes, just to talk about individual projects that we look at you know obviously this business is a.

Portal and we think will be a substantial part of the company. It's part of the water for the reasons that we.

Turn this business into a segment a year ago 2019.

You know as we look at new projects, obviously, we've got a couple of different business models. One of them is purely a service model.

Where we were really providing a service griffey and there's very little capital.

Involved in that.

The nature of the model of those contracts service based contracts is the customers pay all direct costs. They they provide the capital we do have some administrative costs that you don't goes into overseeing the bi or the Corey to some extent extend.

So there's a pretty simple to look out because it's.

It's really fee based and then we just have to consider water our additional overhead whatever additional overhead spending will be required for that project and you can see the fee income that comes out of it we tend to look at those.

I'm sort of an NPV basis to say, okay. If we go through this project work.

You know three years five years, whatever that whatever the term is.

What do we think about that and and given the nature of the project how do we feel that the customer attention.

We typically you have had very high retention is.

All aspects of this business so we feel.

Pretty good about our ability to take care of our cost where is it and.

I'll be there for a long time, even beyond the terms of the contract when you get to the other model, which has a fixed price model, that's where we are spending money on you know a drag line or potentially some other pieces of equipment and we evaluate all those so far we've looked at them from an NPV and.

Yeah, our basis were true.

Three similar formulas just looking at it a couple of different ways and we also measure.

We looked at Roxy you can't you know Razzies, which has returned on total capital employed and it's a it's a total balance sheet view, so that you're not just looking at EQT equity you're looking at your total investment and do we believed that we can earn an acceptable return.

On the money, we might be investing in any.

Any given project, but again, we do the same thing about retention then and then.

I'm also how the contract is structured to really make sure that if we're going to put investment in a drag line work, where other piece of equipment, but it's we're gonna be there long enough to have that the a worthwhile investment.

So yeah, we're very financial were very numerical as we analyze these projects.

Were you know we will do projects that we think makes sense to grow the business. There are some that we looked at that we don't think make sense. So we're taking a pretty disciplined approach to that.

The growth now the other piece of this business that you said.

We can't investors PNC is the investments that we've been making really more as expense items and then capital investments, but those are in business development. We have over the last couple of years and really quite a lot last year added some people out of the rest of the company.

[music].

Transferred people into the North American lighting business in regards to support business development, but also to provide sort of the administrative.

Infrastructure that you need to scale up this business.

And that everything from additional people in.

The financial area to HR reached horses and things like that as.

As art.

Our customers.

Number of customers grow as our number of locations grow as our geography spreads you know you need to have the proper infrastructure in place. So you can really manage this was a business.

Again, we look at those pretty carefully about.

You know how are we spending money and we think this is a wise way to do this and based on our confidence of our ability to grow this business, we feel pretty good about the investments we've made and we feel I think we feel very good about progress we've made a.

In business development over the last.

Several years.

In 29 P. is of course, you know the big highlight was adding the lithium mine into that equation.

Sure and I guess in relation to that the lithium might how do you think about the long term earnings potential the durability that risk and stuff like that of lithium might differ from a lignite mine.

You know could you just compare lithium and lignite for us in terms of how you think about running one kind of mine versus running.

Different one I mean, obviously, you're planning to be mining three different materials pretty soon lignite lime and lithium.

Can you just talked about how the risks and returns different for you and if they do or is it more so from that was perspective.

It's really similar running one kind of mine as a service versus running another guy.

Yeah [noise].

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You will see at our annual report.

In the letter that too much for the annual report that's going to come out very soon that worry you know, we historically have been known as a coal mining company and the reality is we're a mining company we happened to have a tremendous amount of experience in coal.

The skills that we use in a surface mine of surface lignite mine are very very similar to the skills.

We use that we will use of the lithium.

You will move the overburden.

You removed the ore body.

Whether that's what the them or coal or anything else, we delivered to your customer in that if you work on reclamation of course, there's permitting upfront.

You know equipment selection and workforce management at all that stuff.

Which is important but it's it's very very similar show.

And to use the same skilled transfer into the lines to lighting business [noise].

Primarily what we've done in limestone and operate.

Maintain drag lines at the wet quarries worries that or you know your mining lime rock underwater.

Skills that we have they're all came out of our historical lighting business.

We operate.

More drag line than anybody else in North America.

And.

So we refine those skills, we use that to mine lime rock really no differently. The way, we operate drag lines in our coal mining business.

It's the same when you might you lithium and frankly we're.

Studying all the other things that are mine.

Surface mine in the United States to see what else might make sense for us to add to our portfolio.

Again, you know, we really I think the way to think unless there's a mining company and there's lots of other things we can like now from a with standpoint.

You know it's because.

There's no hiding the risk in lighting pole today.

Politically unpopular.

I haven't heard of lithium mining being politically unpopular.

Back to you know there's just tremendous.

Opportunities you see it news from research that I read.

For lithium to really grow as you know, there's still electrification of transportation markets transportation to the United States around the world.

Our customer lithium Americas I went to the public company.

You know they they.

State in their filings that you know this would be the large this is the largest known lithium reserve in North America and this is gonna be no from state substantial supplier of lithium into the U.S. North American market, So I mean that.

Let's see those seem like pretty positive dynamics from a risk standpoint.

Sure.

And I think tranche answering that and relating to the mineral interests are you now, saying I'm quoting considering the acquisition of additional mineral interests or similar investments in the energy industry as part of the growth of mineral management with an initial focus on smaller diversifying acquisitions.

Near term casual yields so I'm sure you don't want to tell us exactly what you're looking at.

The by this you mean you'd be looking to spend cash and buying noncore properties that you could then lease out for royalties like what you've done with your legacy properties in Ohio, being we felt for natural gas.

And then I guess, when you say or similar investments in the energy industry does this mean you'd actually consider like diversifying into something as far as like owning solar assets. If you like the cash flow yields enough on something like that.

Well I mean, it's in the minerals segment. So I don't know that I would consider solar to be you know <unk> growth in the minerals segment.

Sure.

Typically around the minerals.

You know we're looking at just as you described.

Quiring you'd never tourists that we could lease out to others or perhaps it'd be a mineral interest it's already didn't really.

And you know, we're buying a position in individual property or we could be buying a position in a portfolio of properties. There are people that put those together and from time to time there are available for purchase.

So it's really.

For the most parts and I'd say in the in the initial stages, it's going to.

The just as you describe acquiring.

Mineral interests that are.

Not dissimilar to our positions at Ohio.

Got it.

And then I guess I'll have a one last question that I can hop back in Q.

Yeah, you have authorization to buyback over 23 million more of your own shares.

And you don't have a little over 120 million a cash at the parent company, but you do have some that you have some long term liabilities for asset retirement or you have a pension plan and stuff like that that you've always had but now you also have a commitment to provide up to 50 million to start up attacker pass.

Project, and you're talking about doing some possible acquisitions of mineral rights.

You're probably planning for the possibility that one of your biggest customers stopped taking coal deliveries from you at some point.

You're guiding for negative free cash for this year and you do still played to pay a dividend so without saying what a cheap enough stock prices you think your cash levels today versus all these things you want to be prepared for is close to the point, where even if your stock falls to a level. You think is ridiculously cheap you wouldn't necessarily buy in EMEA.

The full amount of shares simply because there's a certain amount of cash you always want to add on hand, no matter what.

Yes, basically how should shareholders speaking about whether nacco needs to be run with a significant amount of cash on hand at all times simply because of the industry. It then it because you don't want a lack of cash Trevor limit your long term plan three growth that diversified you away from coal.

Burst it using some of your cash to buy back stock.

A lot to layers that question.

Yes so.

I guess.

First off.

And you know we say there's been a number of places both authorities release and report letter and elsewhere.

We've got to we take a very conservative view of our balance sheet.

You just overtime companies end up making sure. They had beginning to short term decision, making mode. Because they don't have a balance sheet that allows them to really thinking about the long term.

And we do not want to be in that situation.

So if you then balance that with.

You know.

Pretty substantial growth ambitions.

Growth and diversification ambitions and the fact that you know a sizable part of our business is in coal which has its own RIS.

You know, we think pretty carefully about how we manage the balance sheet and we want to make sure. It from a business standpoint that we are doing the right thing.

We were 107 years old you know, we intend to be around when were 200.

You're doing a much more diverse group of.

Thanks.

As you think about paying dividends and we've paid dividends gosh.

Ladies I think our history goes back to maybe in the early in the late fifties pretty consistently paid a dividend. So that's something that's obviously important to us we want to make sure. We continue to do that a share repurchases.

You know like we've been doing share repurchases.

Certainly for the last.

15 years, maybe 20 years.

But when you do so selectively we're not a company that just runs a program that says we're going to buy X number of shares.

You know every month.

So.

You know do we do how do we think about.

Hey price would we buy it when we get in a situation, where we might not buy shares well I mean sure of course, that's possible if we start to see.

The the money that we might be spending on capital or risk increase.

We can always decide not to buy shares.

But historically we've been.

You know we've been opportunistic buyers when we think it's in the best interest of the of the company.

Got it thanks, Yes, Yep Yep. Thanks, a lot first my question how back in Q.

[noise] again to ask a question. Please press star one on your telephone keypad.

[laughter].

[laughter].

And we have no further questions queued up at this time, it kinda copper copper supercenters.

Thank you for joining us today JC did you have any follow up comments you wanted to Mike.

Well I do not thanks Christy.

Okay.

Thank you very much for joining us if you do have any further questions you can reach out to me. Thanks, So much and have great day.

Thank you for participating in today's Nacco industries, Q4, and full year 2019 earnings conference call. This call will be available for replay beginning at 12 o'clock eastern today through until 11 picking on Cam Eastern time on March 12, 2020, the conference I'd number for the replay is self.

1753979 again the conference I'd number for the replay 77539.

Seven nine number today for the replay as one 800 585.

Eight three.

Six five.

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

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