Q3 2020 NACCO Industries Inc Earnings Call
[music].
You for standing by and welcome to the Nacco Industries third quarter earnings Conference call. At this time all participants are in a listen only mode. After the speakers presentation. There will be a question answer session to ask a question during the session you'll need to press star one on your telephone. Please be advised that todays conference is being recorded if you require any further assistance.
Please press Star Zero I'd now like to turn the call over to Ms. Christina Kmetko. Please go ahead.
Thank you good morning, everyone and welcome to our 2023rd quarter earnings call I am Christina Kmetko and I am responsible for Investor Relations at Nacco industries. Thank you for joining us. This morning, I'll be providing a brief overview of our quarterly results and business outlook 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 and controller Yeah.
Yesterday, we published our third quarter 2020 results and filed our 10-Q copies of our earnings release and 10-Q are available on our website for.
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 An archived version of this webcast will be on our website.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.
Our remarks that follow including answers to your questions contain forward looking statements. These.
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 other matters that we have described in our earnings release issued last night and in our 10-Q and other filings with the SEC.
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.
Let me discuss our 2023rd quarter I will cover our consolidated results first and then provide the highlights for each segment.
On a consolidated basis, our third quarter consolidated operating profit improved 8.5% to $9.4 million up from $8.7 million in 2019.
This improvement was driven by a number of factors that are just seeing a reduction in our unallocated employee related costs higher.
Higher earnings at both our coal mining and North American mining segments.
Also contributed to this improvement.
The segment's earnings were most were more than offset by a significant reduction in the earnings of the minerals management segment.
Despite the improvement in our operating profit our consolidated net income decreased 8 million dollar for dollar and 14 cents per share from $10.3 million or $1.47 cents per share last year in the third quarter of 2019, we received an initial $2.7 million settlement award associated with the former.
India venture in 2020, we received the final settlement of $1 million.
The $1.7 million difference in these award amounts combined with a higher effective income tax rate more than offset the improved operating profit discussed previously.
Turning to the coast turning to our segments. The coal mining segments operating profit increased moderately over the prior year driven by improved earnings at Mississippi, Lignite mining company and lower employee related costs, partially offset by reduced earnings of unconsolidated coal mining operations from lower customer demand.
And the termination of the Camino real fuels contract on July one 2020 that we discussed last quarter at.
North American mining revenues and operating profit improved due to more tons delivered and favorable changes in the mix of customer requirements.
At our minerals management segment similar to the first half of the year earnings were down substantially as the prior year benefited from a large number of new gas wells put into commission during 2018 in early 2019.
This decrease was expected because of the natural decline will go through before settling into relatively stable long term production.
Lower commodity prices. This year have also contributed to the reduction in the minerals management operating profit.
Those are the significant factors affecting the third quarter results now, let me turn to our outlook.
Ill provide some insight on our expectations for the fourth quarter and full year 2020, as well as provide a high level overview of our current expectations for 2021.
While we are providing this first look at 2021 more color will be provided with the fourth quarter and full year 2020 earnings release once we have finalized our 2020 annual operating plan.
At our coal mining segment, we expect the fourth quarter 2020 coal deliveries to become comparable to the prior year fourth quarter.
Operating profit on the other hand is expected to decrease mainly due to an anticipated reduction in results at Mississippi Lignite mining company.
From an expected increase in the cost per ton delivered and a reduction in earnings at the unconsolidated mining operations.
For the full year coal deliveries and operating profit are expected to be lower than 2019, mainly because owning that our unconsolidated mining operations.
Our expected to decline as a result of the termination of the Camino real fuels contract agreement and reduced customer requirements.
Changes in power plant does that contributed to the reduction in customer requirements. The.
The power plant served by our Sabine mine has been dispatched at a much lower rate this year than in 2019.
During the third quarter being mined customer reduced equipment coal requirements to be between $1.4 million and 1.7 million tons annually compared with 2.6 million tons delivered in 2018.
Also on September Thirtyth 2020.
Our Caddo Creek resources customer entered into an agreement for the sale of their activated carbon manufacturing business, including the Marshall mine, which is operated by Caddo Creek buyer announced its intent to close the mine, which delivered 200000 tons in 2018 CAD.
Caddo Creek has been contracted to perform the mine reclamation.
Looking into 2021, we expect coal deliveries to be comparable to 2020 based on current expectations of customer requirements, but.
But despite this operating profit for the segment is expected to decrease compared with 2020.
An expected increase in operating expenses.
In an anticipated reduction in earnings at the unconsolidated coal mining operations are the primary drivers of this decrease.
The lower earnings at the unconsolidated operations are mainly because of a reduction in fee based earnings.
At the close Liberty mine as our mine reclamation activities have been reduced.
At our consolidated mining operations 2021 results are expected to be comparable between years.
And anticipated decrease in earnings at Mississippi, Lignite mining company due to an increase in the cost per ton of coal delivered.
Versus in 2021 versus 2020 is expected to be offset by a lower operating loss at centennial.
At our North American mining segment, we expect fourth quarter 2020 lines done deliveries to increase moderately over the fourth quarter of 2019, resulting in an overall modest increase in tons delivered for the full year compared to last year.
Fourth quarter operating profit is expected to improve substantially over last year's fourth quarter as a result of favorable changes in the mix of customer requirements.
This improvement is expected to be less significant than what we saw in the first three quarters of this year.
As a result of the significant increases already realized in the first part of the year compared with last year full year 2020 operating profit is expected to increase significantly over 2019.
In 2021, we expect North American mining operating profit to be comparable to this year with its existing customer contracts. However.
We are pursuing a number of growth initiatives that if successful would be accretive to future earnings.
As I noted previously last year's Middle management results included significant royalty income, particularly in the first half of the year generated by a large number of new gas wells put into commission during 2018 and early in 2019, given expected lower natural gas prices to your expected new wells lower commodity.
Prices in the natural production decline that occurred early in the life of a well, we expect fourth quarter and full year 2020 royalty income to be substantially lower than 2019 levels.
Given these factors royalty income from existing assets is also expected to be down substantially.
In 2021 compared with this year are.
Well you can get the capital expenditure numbers from our 10-Q for the other two segments let.
Let me spend a minute talking about our investment plans for minerals management.
We are targeting investments in mineral and royalty interest of approximately $15 million in the fourth quarter of 2020, and approximately $10 million next year, although the timing of the fourth quarter investments could slip into 2021.
While we expect these investments to be accretive to earnings each investments contribution will be will be dependent on the timing size and stage of minimal development of the world the acquired so.
To summarize overall, we expect both consolidated operating profit and consolidated net income in the fourth quarter of 2020 to be increased significantly compared with the prior year period. Once you exclude the impact of a $2 million unfavorable mine reclamation adjustment taken in last years fourth quarter.
Lower results in our coal mining segment and an increase in income tax expense, partially offset by lower unallocated employee related costs are driving this decrease.
We also expect a significant decrease in the full year 2020 consolidated operating profit in net income.
Primarily due to the substantial decrease in operating profit at minerals management in the first nine months of this year.
And the anticipated reduction in full year earnings at the coal mining segment we.
We are forecasting an effective income tax rate in the range of 5% to 7%.
Finally, we expect 2021 consolidated net income to decrease significantly from this year because of the decrease in the coal mining segments operating profit and a reduction in earnings at the minerals management segment, excluding any benefit from future acquisitions of additional royalty on mineral incher.
The full year 2021 effective income tax rate is expected to be negative 5%.
A negative 7% based on the current forecasted mix of earnings.
Moving away from results expectations, Let me briefly provide some cash flow information. We ended the third quarter with consolidated cash of $97.6 million in debt of $23.1 million compared with consolidated cash of $95.5 million in debt of $28.4 million at the end of the second quarter.
Okay.
In addition at the end of this quarter, we had availability of $138 million under our $150 million revolving credit facility we.
We believe that a conservative capital structure.
On liquidity, our important given our strategic initiatives to grow and diversify as well as the changing trends occurring in energy markets.
We expect cash flow before financing activity to be significant use of cash is substantial capital expenditures and payments made in the first half of 2020 related to deferred compensation and other payroll liabilities.
Over in 2021, we expect cash flow before financing activities to improve and provide a solid generation of cash versus the use of cash. This year. The 2021, its still not expected to reach the level the levels realized in 2019.
That concludes my specific outlook remarks, but before I open up the call for questions. Let me mention a couple of other items that could affect the company going forward.
As we mentioned in our earnings release, we commenced a voluntary retirement program for certain corporate employees in the fourth quarter.
Expect the program to be substantially completed by December 31, 2020.
But until the program is complete and we understand the level of participation the amount of savings and related onetime separation costs cannot be determined.
Lastly, let me take a minute to discuss the pandemic. It is still very much a part of our daily lives may become more so as we see cases, increasing again in the United States our.
Our mining operations have not been directly affected by the pandemic to date, the extent to which we are impacted going forward will depend on numerous factors and future developments, which are highly uncertain and unpredictable and could cause a significant and rapid deterioration in our results our supply chain channels and customer demand.
Until proven treatments and vaccines for COVID-19 are available we will work diligently to limit the exposure of our employees to cope with 19, we would also like to thank our workforce for their commitment to supporting our customers. While also working diligently to keep one another safe.
Let me open up the call for your questions.
If youd like to ask a question at this time. Please press Star then the number one on your telephone keypad. If you would like to withdraw your question press the pound key.
First question comes from Andrew Coombs with focus compounding.
Hi, everyone. Thank you for taking my call.
I want to start with.
The voluntary retirement program I was wondering if you could talk a little bit about that.
How long have you been considering a program like this and were there any specific guidance that led to this decision or is this more of a response to the shifts in public opinion towards coal.
Changes in the economics of wind diverse coal future regulations, you think or might be expecting.
Maybe if you could talk a little bit about that that would be great.
Sure. Thanks, Thanks for calling in thanks for the question.
[music].
Hi, Josh I would say that you know.
We're always paying a lot of attention to our overhead costs.
You know I generally think it's a good rule of led by whether it's a business or your personal life anybody's personal life.
So it's something that we watch pretty carefully we measure it we look at it.
Study and think about it.
And I would say that its which certainly is partly related to challenges that we see in the coal segment.
Earlier in the year wash Camino real.
Because of.
A termination event between our customer and their customer.
And.
To a much lesser extent caddo as now going into reclamation, but thats kind of immaterial.
And we've got lower production levels. It should be I mean, there is no question that there's you know there are challenges in the chemicals segment.
But I'd also point out you and others.
I'm sure you've noticed the changing nature of our business right. We've had a lot of growth over the last several years in our newer businesses north.
North American mining growing very rapidly.
We've got we're seeing initial growth in our minerals management business.
Certainly anticipate more of that and we were started this new minerals management business called or.
Sorry mitigation business called mitigation resources in North America.
The growth in those businesses will change the the needs that we have.
From an overhead.
Gionee kind of.
Standpoint.
[music].
And so as we think about those dynamics. We also look at the investments that we've made over the last several years in new tools and seeing better.
Better utilization.
We get out of these new software platforms.
And it sort of is that I was providing us with an opportunity to.
You know, we see that we can operate from an overhead standpoint more efficiently lower cost I always think Thats you know thats a good thing to do.
So I would say your question started with it we've been thinking about it for a long time, but she were sort of always thinking about our overhead structure and show. This seem like now was was a confluence of factors that said no.
It's probably a pretty good time to think about doing that.
Got it.
[music].
Great.
My next question would be you are planning to invest $25 million in mineral and royalty interest. During 2020 in 2021 are these most likely to be us oil right as opposed to anything for end or anything that's mainly natural gas.
And is your reading for making these kinds.
I think thats been purely about diversifying away from being just Utica natural gas or would you say the price decline in oil over the last year played a part in where you've chosen to focus your investments yes.
So it's it's I mean it is this is one of our.
Core growth platforms.
Charles Management business, we as you know have.
A vast majority of our legacy investments are were made decades ago really in the Marcellus and Utica.
Largely natural gas.
And I think as we've stated publicly but certainly it said, we're looking to diversify what we own and the mineral space.
So that will.
You know were heavily weighted towards natural gas now so that means we will probably be investing in.
Well as opposed to natural gas.
I will tell you that we're focused in the United States not offshore at all.
And we view this as a core part of diversification.
Hi, I wouldn't say that I think what are the things you mentioned was diversification away from coal I wouldn't say it's away from coal.
Hi, just look at our company and say Gosh, you know any business does better when it's got a diversified portfolio of customers and suppliers and business models and skill sets and sources of income and show the activities that we've been pursuing pretty aggressively over the last.
Several years and we intend to continue to pursue reflect that.
Desire to grow and diversify trait create additional platforms that we think can be successful contributors.
Two our.
To our our business.
Got it and then fine.
Finally, I guess.
Maybe the question is how do you want investors to think of Nacco are you a mining services company are you an energy stock are you will call company.
Basically what industry would you tell an investor they're buying into when they purchase nacco shares and I will jump back into queue. Thank you so much.
Yep. Thank you for the question I will tell you. It's a question that we are spending some time on right now thinking.
Thinking about how to do a better job of describing who and what we are.
You know I mean, historically, we've said nacco industries. It appear well, we all know historically Nacco industries was the parent company for North American coal and high Street retail in the Hamilton Beach High steel in Hamilton Beach are now separate companies. So today, North Nacco industries as the parent public parent of North America.
Paul at North American coal as.
Hey group of growing businesses inside it including its legacy core operations.
So his business is that we are growing are becoming more like.
Siblings than children, if you think of typical or chart kind of structure.
And we're thinking about what all that means with respect to how to think about nacco.
The way I mean short of.
And eloquent way to describe it that will hopefully we'll be able to produce here in the next several months.
The way I'd describe it as where a very strong strong.
Legacy coal business we're.
We're really into mining services business, because the nature of our.
Management fee contracts were which are.
All but one of our coal mining contracts really are structured in a way, where we're providing mining services.
We only have one mine, where we're actually in the business of selling coal.
Making our profits off the margin.
The you know the lime rock business started as you know.
Very small business, helping people with their.
Maintenance and operation of drag lines, it's now turned into a very sizable business. We're.
We're now the largest operator of drag lines.
For any purpose in the United States.
And.
It's turned into a kind of a really nice growth platform or providing mining services.
Not only to aggregates, but we're doing some sand work and as you know we're going to be developing a lithium mine.
With the with a management fee approach, so again in mining services and.
Then we have our other two businesses that are.
You know the minerals management space, which is.
Really a royalty business invest.
Invest in minerals collect royalties to very low overhead investment kind of business and we've got our our mitigation business that grew out of our strength in.
In our reclamation work and environmental work at our coal mining operations, but we've turned that into a business. So I'd say you know in some ways, we're headed back towards having a portfolio of businesses in the natural resources and mining services industries, but.
But how exactly to describe that in a.
Sink eloquent way I mean, that's something we're trying to figure out and Andrew that's going to include rethinking.
Thing from.
You know, how we think about marketing materials, we're going to talk about potential new partners.
To how our web sites or design, but it's a very topical question that you've identified and hopefully that helped.
Describe at least what our thinking is at the moment.
Once again to ask a question. Please press star one and we have a question from Sri linear with DIY investing.
Hi, Thank you for the opportunity to close and ask the question.
I wanted to first question about North American mining.
Now that the North American mining Division has positive operating earnings you expect to see operating leverage from the future revenue growth opportunities that you're pursuing or do you expect earnings to grow linearly with future revenue growth.
Well as you know of course, the answer has always it depends.
Depends on the mix of new business that we bring in.
And.
The the profit growth profile of any new project, but I would say in general we.
We believe that we have made.
The investments that we need to make in the administrative platform kind of the backbone of the north American mining and business.
I think the largest of those investments are probably already been made.
And we have.
The infrastructure that we need to continue to drive that business forward. So I would expect that we're going to see in general probably pretty good operating leverage as we continue to grow that business.
We think we can add to it.
Quite a bit without.
Meaningful additional overhead costs.
We'll say we've got a headquarters in the Miami area, we have a secondary.
Sure.
Warehouse from service Center in Central Florida, I mean, if we find that where are establishing another pocket of business somewhere in the United States.
We may end up putting another satellite.
Facility to serve a number of customers.
But that that really would be.
That would probably come after we were establishing.
Toehold in another part of the U.S. it wouldn't be investment that we'd make ahead of time. So I think yes, I think theres pretty I think there are good opportunities for.
For the operating leverage that you mentioned in that business, albeit there may be some stair steps along the way.
Understood. Thank you.
Our next questions about the minerals mining <unk> minerals management investments that you're talking about making you mentioned, making somewhere in the range of $25 million and investments over the next year.
Can you speak at all to the types of return on investment that you're seeking from those sorts of investments.
Either in terms of ROI payback period.
[music].
I mean, we havent, we have not disclosed our.
Our specific targets.
And.
Each as we look at each type of mineral that we might acquire and thats with regards to whether it's gas or oil.
Which basin is it in but I would also what stage of development.
We may invest in some undeveloped mineral reserves that we think have.
Reasonable likelihood of future development, we may invest in some recently drilled wells that are yet to be completed we may invest in some that are were drilled and completed several years ago and they are lower than that.
There are there further out of their decline curve.
So each of those is going to have its own return profile, but I would say that the business model that we are trying to build and we think that we're going to be successful in building is one that is going to deliver.
Returns on capital that will be.
Certainly in the teens.
And Thats, what thats going to take some time to build.
We have a bit our legacy operations, we have very very little invested in them because the investments were made long time ago. We've recently added we now have three people in this business that are really driving us forward.
We've made some investments in some technology and software tools to help them and it's really now building out the platform.
That eventually will get us to a business, where we've got we think a very nice returns.
So are those direct.
Investment in minerals or is it more similar to the $2 million investment where you purchased public security.
Yes, it did.
$2 million purchase public securities.
You know it was a unique point in time when.
Certainly.
Public company stocks in the in the royalty space had been beaten up so.
So we feel that we were able to get a jumpstart in our diversification efforts by making that investment but that is not our primary interest.
Our intent is to buy.
Mineral interests or royalty interests.
Which is really very similar to a mineral interest it's just one step removed.
We intend to do that directly as opposed to doing that through.
Investments in public companies that are doing exactly the same thing or thinking about doing that first investment was really an opportunistic jumpstart as we saw it.
Okay, and so just to be clear.
Minerals management I mean, if you work through that insight oil reserves, you don't have any plans to develop those reserves are so.
But simply to earn royalties on partnering with.
Another developer.
Correct.
Sorry.
Or is that just the reserves.
I'm sorry can you just say that last part again.
So the question more structured like are you are becoming like an oil NP company or you just holding the reserves.
And to seek the royalties basically we are owning the reserves to seek the royalties.
Yes.
In some instances those will already be at least in some instances the rally already be leased and developed in some instances they might that be leased yet.
Understood. Thank you.
Yes, thank you for the questions.
Once again to ask a question. Please press Star then the number one on your telephone keypad.
And we do not have any telephone questions. At this time I will turn the call over to the presenters.
Thank you very much for joining us JC did you have any follow up.
Including remarks, you wanted to make.
No Christy I just want to thank the callers for their questions.
Great. Thank you again for joining US today, we do appreciate your interest in if you have any follow up questions. My information is available.
On our earnings release, please feel free to give me a call. Thanks, so much and have a great day.
Thank you for participating in today's conference call. This call will be available for replay beginning at 11 30 and eastern time today November 3rd.
Through 11 59 Eastern time November 10th 2020, the conference I'd for the replay is 1574 089 once again the conference I'd for the replay is 1574 089, the number to dial for the replay is 800 585 Athree six seven.
Once again the number is 800 585 Athree six seven this concludes today's conference call you may now disconnect.
[music].