Q1 2020 Earnings Call
I Koch industries Q1, Twentytwenty earnings call.
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I would now like to hand, the conference over to your speaker today Christina Kmetko. Thank you. Please begin.
Thank you good morning, everyone and welcome to our 2021st quarter earnings call I'm, Christina Kmetko name responsible for Investor Relations at Nacco industries. Thank you for joining US. This morning I Hope you in your families are all healthy insane.
It'll be providing a brief overview of our quarterly results in business outlets and then I will open up the call for your question. Joining me today are JC Butler, President and Chief Executive Officer of both Nacco and North American coal.
And Elizabeth Loveman, Naccos, Vice President controller.
Yesterday, we published our first quarter 2020 result in filed our 10-Q.
I think the bar earnings release in 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 An archived version of this webcast will be on our website.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 month.
Our remarks, it fall out including answers to your questions contain 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.
These risks include among others.
It is that we have described in our earnings release issued last night in in our 10-Q, one other filings with the FCC <unk>.
We disclaim any obligation to update these forward looking statements, which may not be updated until our next quarterly earnings conference call if at all.
In a moment I'll discuss our first quarter results first let me turn the call over to our President and CEO JC Butler for some opening remarks Tc.
Thank you Christine and good morning, everyone.
Start off we'd like to extend our sympathies to everyone.
It's been affected by this global pandemic and we want to sincerely. Thank all of those who are keeping a safe, particularly those in the health care community in first responders or would it would just what an incredible job, they're doing really deserve all of our all of our appreciation.
We were also recognize I'd like to recognize our employees, who are continuing to deliver Colin limestone to our customers. We couldn't be more pleased with how well our workforce supervisors for managing through this unprecedented situation and adapting to their change work environment. We truly appreciate our employees commitment to supporting our culture.
Whereas while also working diligently to keep everyone safe.
As you can imagine keeping everyone shape and reducing the spread of the Corona virus has been our highest priority, but we also have a responsibility deduction to continue to supply our customers with coal and limestone since both are critical infrastructure industries. A majority of our employees had been reporting to work. These last several weeks we've implemented shape car.
It's in accordance with regulatory work regulatory requirements and guidance from health authorities to protect those at work and limit their exposure to covert 19.
Adjusting ship schedules to promote fish, social distancing, we're enhancing cleaning and sanitation of equipment for carriers and common areas and we're promoting recommended hygiene practices and limiting work workplace access.
Of course any of our employees, who can work from home are doing show and we made sure that they have the resources and support to be productive.
The investments we've made over the last several years to upgrade our systems and processes largely through I T investments are paying huge dividends for us we made a lot of these investments to make our systems and processes more scalable to support our growth well. We are finding that these tools have been invaluable as we have shifted to performing work remotely honey.
Credibly. Please recall how all of this is working.
Business standpoint, I think we're very fortunate that we've not been materially affected by the pandemic.
Customer demand has not been affected in material way and we have not thus far had issues with suppliers or vendors of course, you know the extent to which covert 19 impacts the company going forward will depend on a lot of factors.
Both present and future that none of us can predict.
Before Christy reviews, our first quarter 2020 results I'd like to take a moment to discuss yesterday's announcement by great refer energy that it intends to retry or the coal Creek station power plant in the second half a 2020 are Falkirk minus the sole supplier of lignite Coal Creek station and is our second largest coal line.
As we noted in the release fault current contributed approximately $16 million to our operating profit in 2019.
Well, we are clearly disappointed in Jerry's decision. We believe the coal Creek station is inefficient economic an attractive generation assets. The continued long term operation of that facility isn't the best interest to our employees and certainly for the local and state economy as well.
Wherever energy's this announcement indicated a willingness to consider opportunities to sell coal Creek station and we are actively engage the exploration of options that could have successful allow for transfer of ownership of the power plant to one or more third parties.
I want to be clear that we don't have a solution here and I can't make any guarantees that we will but I can assure you that we're committed to working with all stakeholders to try to find a solution.
GRT safe statements as they don't plan to close the plant until the second half 2022.
Which gives us time to pursue options to keep the power plant and the might open.
Now, let me turn the call back over to Christy to cover our results for the quarter Christie.
Thanks DC.
On a consolidated basis, our first quarter consolidated net income decreased six decreased to $6.2 million or 88 cents per share from $15 million for $2.15 per share last year.
The largest driver the decrease was a significant reduction in the earnings of the minerals management segment at 2018 benefited from a large number of new gas wells put into commission during 2018 and early 2019, because new wells have high initial production rates and following natural decline before settling into relatively stable.
On term production earnings in the first quarter of 2020 were substantially lower than the first quarter 2018.
I call segment also contributed to the decline in net income the coal mining segments operating profit was substantially lower than in the prior year.
First quarter, primarily due to a decrease in results at Mississippi Lignite mining company driven by an increase in the cost per ton delivered a reduction in tons delivered at the unconsolidated operations as it was on the changes in customer demand and an increase in operating expenses.
A significant improvement in operating profit North American mining, primarily due to new mining contracts and an increase in times deliver to existing customers, partly offset the reduced operating profit in cold and minerals management.
Now, let me explain what is happening with income taxes.
The pared back and asked did two in response to the Cobot 19 pandemic contains temporary changes regarding the utilization of net operating losses, Yeah estimated annual effective income tax rate for 2020 includes the benefit of utilizing provisions of the cures Act and resulted in a tax benefit for the 20.
Tony first quarter, despite having pre tax income for the full year, we anticipate that the effective tax will approximate zero.
Those are the significant factors affecting first quarter results now, let me turn to our outlook.
Coal mining segment, we anticipate coal deliveries and operating profit to be comparable to 29 team.
Excluding a 2.5 million dollar unfavorable adjustment to mine reclamation liabilities last year at Centennial natural resources.
Tony Tony operating profit is expected to decrease from the prior year as it was a lot of the lower first quarter results.
Your name.
An expected increase in operating expenses.
The decrease in operating profit is expected to be partly offset by an anticipated improvement in Mississippi lignite mining company results.
However, the evolving covenant team pandemic, historically low natural gas prices and the continued increase in renewable generation, particularly when could reduce customer demand, which would unfavorably affects the 2020 outlook food business.
North American mining, it's nice limestone deliveries to increase in full year operating results to improve significantly over 2019, primarily from earnings generated by new limestone lining contract.
As I noted previously plenty 19 results included significant royalty income generated by a large number of new gas wells put into commission during 2018 and early in 2019.
Because new wells have high initial production rates and follow this natural decline curve before settling into stable long term production Realty income and Tony Tony is expected to decrease be substantially lower than prior year levels. The significant portion of this decrease expected in the first half the 2020 as comparisons homemade historic.
Hi income levels in the first half of 2019.
Before I open up the call for questions. Let me quickly provide some balance sheet and cash flow information.
Ended the quarter with consolidated cash of $93.7 million and debt of $34.6 million.
Uncertainty surrounding the cobot 19, pandemic, we suspended our share repurchase activity and mark.
We expect cash flow before financing activities in 2020 to be a cash they use of cash due to a significant increase in capital expenditures and payments made in the first quarter related to divert deferred compensation and other payroll liability.
This concludes our prepared remarks I will now open up the call for your question.
As a reminder to ask a question you only to press star one on your telephone to withdraw your question press the pound or cash key Stan please stand by well, we compile our Q1 day roster.
Your first question comes from the line of Andrew comp.
Line is open.
[noise] Hello, everyone. Good morning, Thanks, a lot for allow me to jump on asking questions.
Great JV good morning.
Good morning. So you said in your earning release that coal Creek station and you reiterated that at the beginning of the call.
Is it a fission economic and attractive generation asset.
And however, the feel of Gregor energy and the interview you had said that we're not talking about selling coal creek for a material price.
All of our discussions have been basically giving the plants is somebody and we've had no takers. So I'm just kind of curious about that and if you really believed coal creek can be economically viable in some other owners hand, and if so why do you think regular energy is convinced basements is based on the statement that.
Effectively worthless.
Huh.
I mean I'd say.
Hi, Joe one too.
You know get into a public disagreement with a customer.
So let me think about this.
I believe we believe that.
It is a very efficient power plant. This power plant has over the last several years been dispatched at above 90% of its capacity level, which is an extremely high dispatch rate for for.
Power plant.
In order to do so.
Plants got to be pretty competitive in pretty economic in order to dispatch at that level.
So we think theres some past evidence of its ability to compete I think theres also differing views.
If you do some research you can read about this there are differing views in the industry and the utility industry about carbon risk and theyre differing views with respect to the need for.
Owned.
Dispatchable generation.
Renewables or intermittent things like coal nuclear and combined cycle natural gas are.
Considered dispatchable generation, TJX and turn them on and off as you as you choose.
And so there are differing views in the industry with respect to the importance.
Of having dispatchable the need to have dispatchable generation available.
And those views can vary widely between utilities.
And.
Those are those are among the reasons and I think you know drive differing views about the importance of having.
Having a power plant like this in your fleet.
Other thing I'd add is there also differing views with regards to.
The value of capacity in energy markets and look I'm I got to point out I'm, not an energy guy right where miners.
We we spend a lot of time.
Trying to learn as much as we can.
In the electricity market Theres, both energy and capacity.
Generators are required to have.
At least some sort of access to capacity and it needs to be an excess of peak demand.
So there are markets for selling energy in their markets for selling capacity.
There are.
I think growing views that the market for capacity is increasing in value and we'll continue to increase in value as more and more dispatchable generation has taken off load or taken offline right closing closing.
Dispatch will power plants.
There is.
You see some of the some of the.
Some of the operators like MISO or SPP and others, you're starting to see them talking about the fact that they're going to award.
Give less credit for capacity to renewables and more credit to Dispatchable energy because theres, they're growing concerned about the decreasing amount of dispatchable.
Pass the available in the market.
So that's sort of driving differing views between utilities about the future value or future cost of.
Buying capacity on the open market.
Does that got your question.
Yes sure yes. Thank you for venture that and then the next I only have two more and one of them is.
The March Investor presentation, you have a slide in there that was showing that nacco owns 44860 gross acres of oil and gas interest.
Just kind of curious what was behind your decision to disclose the exact number of acres.
But it's I mean, it's a growing part of our businesses.
I'm sure you've seen.
It's a question that we have received from a number of people.
And we just decided that we've spent some time studying other companies disclosures for companies that actually.
Actively their sole businesses owning.
LTE interest.
The mineral interest and we decided that it made sense to put a number out there. So people can get some sort of.
Indication of what it is that we own I'd I'd point out so thats a gross acre number.
That doesn't necessarily represent our net mineral acres, which is a different number based on what sort of royalty percentage, we get in and other other things.
But.
The decision to put it out there was really responding.
Two inquiries about the size of this of our of our reserve base.
Got it and then my final question is.
Kendall minimal partners I'm kind of curious to actually make the decision to buy stock accountable. As this decision made at the category level or is the final by decision made at the parent company level and then how do you think we should think about a stock investment made by catapult.
Do you think of purchases the stocks in the energy industry as being just another buy and hold sort of way up diversify nacco over time like will these be long term almost permanent stake or will someone at catapult be actively managing a stock portfolio, unlike that quarter by quarter basis.
We.
We are not setting up a trading floor.
Absolutely not.
Your question about where decisions made.
Sure and differentiating between catapult or parent company.
I will I mean, I want to make sure you know that we have an incredibly flat organization structure.
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Just as flattish you can possibly imagine and any kind of decisions like that are made jointly.
So.
I was very actively involved in that decision.
It's a new vis vis vis.
This catapults piece of dark minerals management business is a new thing for us their primary focus as we've described is going to be with respect to buying.
Mineral interest managing the mineral interests that we own.
First and then we think that there's.
It's really a viable business here to expand that business through opening additional minerals diversifying into into other basins.
Diversifying the mix of oil and gas.
In doing so and really the primary focus is acquiring.
A diverse portfolio of mineral interest not stocks.
Your question about short term long term I mean, I said, we're not going to have a trading floor.
I mean, if you.
I think it's pretty consistent when you read our our information that we are long term.
Folks.
We made this investment and it is a small and material investment in a public company.
As.
Whereas sort of a unique I think we're somewhat of a unique period in time when the values of some of these companies have just been crushed.
Yes, if you look at what they own.
They own a exactly what catapult is trying to do is developed a diverse portfolio of mineral interests and so.
Buying.
Small interest in a public company.
Really just allowed us to accelerate the diversification of catapult.
[noise] by making small acquisition it allowed us to get.
Sort of one step removed I'll admit but diversification into a lot more basins at all and diversify our oil and gas mix.
In a single acquisition as opposed to buying those mineral interest ourself.
So we view, we I mean, we spent a lot of time studying a company we've we've.
We think they've got.
A similar approach that we do in that they have a pretty conservative view of capital structure. They take a very long term view of their business.
And day from what we can tell they've got a pretty disciplined approach to overhead.
All of those things fit pretty well with us and we decided.
This was not something that we were ahead of our radar screen until we saw what was happening in the market decided this was a this was a good way.
Have a different kind of diversification.
In catapult that really the same thing just diversifying our patients and our mix of oil and gas that answer your question.
Yes, absolutely. Thank you so musher answering my question.
No problem your next.
Your next question comes from the line of trade Hedinger. Your line is open.
Hello. Thank you for taking this question for me today good morning.
Morning.
I just wanted to ask first about dragline a lot of the expansion in the limestone business is regarding the acquisition of dragline. So would you be willing to provide some detail about the cost per dragline on average and the expected life of each dragline that you require.
Sure.
So the business the business inside North American mining right now is one where we.
I have developed really.
In industry, leading and somewhat unique expertise in operating drag lines.
Mine lime rock underwater dragline to be clear is not underwater the lime rock is.
Now that the.
Just did.
The size of the drag line.
I mean drag lines are very there's some very small drag lines.
Have a bucket that can pick up maybe five cubic yards and we operate drag lines at our coal business that have buckets that can pick up 125 cubic yards. So the the concept of an average price of a drag line.
Is from a few million dollars to in excess of $100 million.
Now the largest ones don't really get used in the lime rock business and in fact, a majority of the drag lines that are used or sort of in that five to 35.
Cubic yard bucket range.
So there to the lower end.
I will tell you that in a number of instances, we don't own the drag lines.
There are plenty inquiries that we operate where the customer owns the drag line.
We have some contracts, where theres a management fee, where we collect just a fee for the work that started there somewhere you get a fixed fee.
When we pay all the costs and.
Profits and a more traditional.
Weigh.
And in either of those the customer could on the drag line or we could on the drag line. So we're not in every instance, too we own the drag line. We have found success in recent years expanding that business by having drag lines available either in our direct ownership or maybe you have it.
Option on a drag line or maybe have just a lead on a drag line that would be a good fit for our customers application.
We do from time to time to time acquired them and sort of put him in inventory.
Because we've got a good sense that that we're going to be able to turn that into a new contract. In every instance, these drag lines are used for.
We're buying a drag line with an eye towards putting it into contract and turning it into profitable venture that delivers.
At attractive return on the capital any capital that we might have invested and delivered eyespot profit margin as well.
So the average cost of a drag line.
I mean, I'm going to say it would go from.
$3 million too.
10 million to 20 million for the kind of what we're talking for the larger drag lines, though.
In the range that I just described the 20 million dollar cost might be a very inexpensive drag line and then you spend.
You know a significant amount of money, taking it apart and transporting it.
To the Corey and then Reassembling it.
Updating the technology and all that stuff. So when you think about cost of a drag line, it's maybe the drag lunch cheap, but the relocations expensive for the smaller ones, it's not that expensive to relocate them and rebuild.
Is that helpful or could I you want me to elaborate in another way.
No. That's very helpful. I think the piece that.
Im trying to get out is when we're thinking about the line stone business you talked a lot about how long term focused you are and I was just trying to have an idea for.
Thats great information on the cost have an idea.
How quickly do we have to replace them are these 20 or drag lines.
So we operate some drag lines that we have been operating for 40 years.
As a drag line.
And that's in our core business right, where weve, obviously been operating longer than we have enough leibrock business.
We have a philosophy that any tool that you use whether it's a drag line a truck piece of excavation equipment.
Or the hand tools that using the mechanics shop.
They are their tools there they're important parts of your of our factory. If you want to think of it that way and so we are absolutely meticulous about maintenance.
Quite obsessive about our maintenance practices and and methods.
So a piece of equipment I mean, it's expensive it should be.
Taken care of what the proper preventative maintenance through the proper repairs they're needed.
The watchful of anything that might look like.
Weakness.
I mean, it's no different than.
On an automobile if you here if you hear that break start to squeeze you probably should replace them and not just run them until they are they're shot.
So a drag line.
You know drag lines can run for decades.
The the concept of replacing a drag line is typically done more so with respect.
Especially the lime rock business, it's done.
More so with respect to wanting a larger drag line to better meet your capacity means.
Larger dragline can support a larger bucket, which means you can produce more per hour.
It's really more about changing drag lines to change capacity than it is because they were out they don't if you maintain them. They don't wear out if you don't maintain them.
It's much more expensive and you're going to end up replacing it and in some instances we have brought in drag lines to replace.
You know dragline, so just been worn out.
Does that address your question.
Yes, that's very helpful.
So yes, thats very helpful. One other question.
Would you be willing to give additional detail on the.
It appears to be $30 million ish spending and cash flow on the long term incentive comp and the payroll liability our little to trace the 13.4 million of long term incentive comp been missing the outstanding around 17 million.
When I was tracing the tend to use back to about 2019 Q1. So I'm just wondering if you could give additional detail and maybe what that.
Accounts payable liability was focused on is that this normal employee compensation and executive comp is that pension liability something along those lines. Thanks, Yes, if you don't mind I'm going to hand that off to Liz. We typically are all sitting at the same table.
And this for these calls but.
We're in Ohio, which is still spot.
Remote work so we're not together some of the hand that off to lids.
Thanks, Jason So I think your question as you can see the deferred comp that was $13.5 million approximately we paid out and we don't you can also see if you look at the.
Balance sheet the payment of the accrued payroll from 19.6 million in December to 16 for 6.5 million today.
So the remainder of is just normal.
Movement of cash.
It's really nothing else material to talk about that is that what you're looking for did you have another might not answering your question.
I think really the reason for the question is wondering if this is an expense that we should expect on an annual basis in terms of cash flow or is this a cash flow expense that is more one time.
Or doesn't repeat on a five year basis or something along those lines no. That's would be more one time, so the deferred comp.
With expense several years ago, and where that was at the settlement about liability.
Understood. Thanks.
Yes same thing with the long term pay it was the pay out of a long term plan. So we.
We do a piece of that was more than our current so there will always be some current piece, but the majority of vessels, but more of a onetime in nature.
Okay. So it's just based on you had some cash available.
On to offset that cash payment or it was just can do for the cash payment.
Peanut crop.
Yes.
Because we had.
I think.
What I heard you say as we decide to do this because we had cash sitting around decided to pay it out.
It's not we terminated some deferred comp plans about the time that we did the Hamilton Beach spin off and created new.
Long term incentive plans and this was some of this was related to the payout.
Of those plans as per their terms this wasn't something that we.
Decided LG into 2019, beginning in 2020, let's pay these out this was.
Sort of as per the termination of plans we pay these out.
And if you look back you can see we move that from long term current about 12 months before it was due to so we it was planned it was a planned payment.
Okay, I had been able to trace that show up in the current but just miss the transfer thanks for answering I'll step back into the Q.
Great. Thank you.
Again, if you'd like to ask a question. Please press star one on your telephone keypad.
There are no further questions at this time I will turn the call back over to the presenters.
Thank you very much and we do appreciate everybody joining us today JC did you want to make any final.
Comments before we sign off.
No Christine just to thank the colors for the questions.
Yes again. Thank you if you didn't have any follow up question you can reach me and the number that is on our earnings release. Thank you and have a great day in stay safe.
Ladies and gentlemen, a replay of today's event will be available later today by dialing 855, Fivenine to 056 and entering conference I'd number 7535388.
This replay will be available until midnight 15 may 2020.
Ladies and gentlemen. This concludes today's conference call you may now disconnect.
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